Improvements proposed to AASB 8 Operating Segments
On 29 March 2017, the International Accounting Standards Board (IASB) issued Exposure Draft ED/2017/2 Improvements to IFRS 8 Operating Segments (ED 278 in Australia) which proposes various amendments to IFRS 8 Operating Segments as part of its post-implementation review of IFRS 8, including:
- Clarifying the function of the chief operating decision maker (CODM)
- Adding examples of similar economic characteristics when assessing whether the aggregation criteria have been met
- Requiring an explanation if segments differ between the financial statements and other parts of the annual reporting package
- Clarifying that information on reconciling items must be given with sufficient detail to enable users to understand the nature of the reconciling items
- Amending AASB 134 Interim Financial Reporting to require companies changing segments to provide restated segment information for all prior interim periods earlier than they currently do
- Requiring disclosure of the title and role of the CODM, and
- Clarifying that segment information in addition to that reviewed by, or regularly provided to, the CODM can be disclosed if it meets the core principles.
Some of these proposed changes are discussed in more detail below.
Clarifying the function of the chief operating decision maker (CODM)
The current wording of AASB 8, paragraph 7, implies that the function of the CODM is merely strategic, i.e. to allocate resources to operating segments and to assess their performance.
The proposals in this Exposure Draft amend paragraph 7 to clarify that the function of the CODM is more operational in nature, i.e. the CODM:
- Makes operating decisions and decisions about allocation of resources to segments, and
- Assesses performance of segments.
New paragraph 7A has been added to clarify that whether the CODM is an individual (e.g. the CEO) or a group (e.g. the board or management committee) depends on how the entity is managed and corporate governance requirements.
The proposals also clarify the position of non-executive directors who do not participate in all operating decision making, but are part of a group (such as the board or management committee) that make operating decisions and decisions about allocating resources and assessing performance.
More examples of ‘similar economic characteristics’
Paragraph 12 currently requires that two or more segments have similar economic characteristics if they exhibit similar long-term financial performance. It provides only one example of similar ‘average gross margins’ as a measure of long-term financial performance.
Many respondents to the post-implementation review noted that applying the aggregation criteria to operating segments requires judgement, and that providing only one example of what is meant by having ‘similar long-term financial performance’ is not sufficient, because there could be other measures that are more appropriate.
Paragraph 12A has been added to clarify that a range of measures could indicate that the long-term financial performance of operating segments is similar, for example, similar:
- Long-term revenue growth
- Long-term return on assets, or
- Long-term average gross margins.
Segments should be the same between the financial statements and other parts of the annual reporting package (if not, why not disclosure)
Although the Australian Securities and Investments Commission (ASIC) and other regulators routinely query companies where the description of segments in their financial statements (under AASB 8) is different to those described in the Operating and Financial Review (OFR), many entities still disclose segments differently in the OFR and other investor presentations.
Paragraph 19A therefore clarifies that entities are expected to identify the same reportable segments in the financial statements, the OFR and other investor presentations and documents published around the same time as the annual report (press releases, preliminary announcements, investor presentations, filings, etc.), and if not, this fact and reasons are to be disclosed.
Fuller explanations about material reconciling items
Although the requirements in paragraph 28 have always been clear that material reconciling items must be separately identified and described, feedback from the post-implementation review indicated that users and regulators were not always getting sufficient information.
The proposals therefore require fuller explanations about material reconciling items. Paragraph 28A has been added to clarify that material reconciling items must be described in sufficient detail to enable users to understand their nature.
Earlier restatement of segment information for prior interim periods under AASB 134
Currently, if an entity changes its reportable segments, the restated comparative interim information from the prior period is only disclosed when the current interim period is reported. For example, an entity changing its segment reporting structure in Q1 2017 would only include restated comparative segment information for Q1 2016 in its interim financial statements prepared under AASB 134.
The addition of paragraph 45A in AASB 134 proposes that where an entity changes its reportable segments under AASB 8, it must restate and disclose the segment information for each previously reported interim period from both the current financial year and prior periods, unless the information is not available and the cost to develop it would be excessive.
Reportable segments change on 1 January 2017 for an entity that reports quarterly.
Segment reporting will be presented on the new basis for:
- 1 January to 31 March 2017 (current interim period)
- 1 January 2016 to 31 March 2016 (Q1 2016)
- 1 April 2016 to 30 June 2016 (Q2 2016)
- 1 July 2016 to 30 September 2016 (Q3 2016), and
- 1 October 2016 to 31 December 2016 (Q4 2016).
Currently, only Q1 2016 restated comparatives would be included with Q1 2017. Q2 2016 restated comparatives would only be presented with Q2 2017, etc.
It should be noted that these changes are unlikely to have a major impact in Australia where traditionally only half-year interim financial statements are required (i.e. half-year financial statements are not usually prepared for the second half of the year).
Proposed application dates and transition
The Exposure Draft does not include a proposed application date for these amendments but notes that retrospective restatement is required, i.e. comparatives must be restated as required by AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
The closing date for comments is 23 June 2017 to the AASB and 31 July 2017 to the IASB.