Segment reporting: More detailed disclosures about material income and expenses

Since the publication of the IFRS Interpretation Committee’s agenda decision in July 2024, entities required to disclose segment information under IFRS 8 Operating Segments may be required to disclose more granular information regarding material segment income and expenses.

While the agenda decision does not add new disclosure requirements to IFRS 8, it clarifies what paragraph 23(f) requires regarding material items of income and expense disclosed in accordance with paragraph 97 of IAS 1 Presentation of Financial Statements.

Which entities must report segment information in their financial statements?

Segment disclosures are only required by entities:

• Whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
• That file, or are in the process of filing, financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

If entities choose to voluntarily disclose segment information, they can only describe it as segment information if it complies with all requirements in IFRS 8.

What income and expenses are considered material under paragraph 23(f)?

Paragraph 97 of IAS 1 requires that when items of income or expense are material, an entity shall disclose their nature and amount separately in the financial statements.
When an entity has to present segment information for each reportable segment, paragraph 23(f) of IFRS 8 requires disclosure, for each reportable segment, of material items of income and expense items which are:

• Included in the measure of segment profit or loss reviewed by the chief operating decision maker (CODM), or otherwise regularly provided to the CODM (even if not included in the measure of segment profit or loss), and
• Disclosed in accordance with paragraph 97 of IAS 1.

Paragraph 23(f) of IFRS 8 is effectively a ‘catch-all’ to require disclosure of material income and expense items in reportable segments that are not otherwise covered by paragraphs 23(a) to (e) of IFRS 8.

What’s the issue?

Preparers were confused as to what the paragraph 23(f) disclosure requirement means in practice. That is, if an income or expense item is material in relation to the financial statements as a whole, does it mean that:

• The item must be split down and disclosed for each reportable segment, or
• Such items are only disclosed for a reportable segment if they are material in relation to the reportable segment?

Preparers were also unsure whether paragraph 23(f) disclosure should include income and expense items disclosed under IFRS® Accounting Standards other than IFRS 8 (e.g. cost of goods sold disclosed under IAS 2 Inventories or employee benefits disclosed under IAS 1) for each reportable segment.

What did the IFRS Interpretations Committee conclude?

There are five key takeaways from the IFRS Interpretations Committee’s July 2024 agenda decision:

1. Material items of income and expense to be disclosed as specified items under paragraph 23(f) of IFRS 8 are not limited to only unusual or non-recurring items.
2. Entities do not have to disclose, for each reportable segment, every line item of income and expense in the statement of profit or loss or otherwise disclosed in the notes.
3. The starting point for determining which material income and expense items to disclose in reportable segment information is basically all material income and expense items disclosed in the financial statements as a whole. Entities must then assess if any portion of this material income or expense item is material to a particular reportable segment.
4. An item of income or expense which is not material to the financial statements as a whole should nevertheless be disclosed under paragraph 23(f) of IFRS 8 for a reportable segment if it is material to an individual reportable segment.
5. Determining how much detail needs to be included for paragraph 23(f) disclosure is a matter of judgement that the entity should document (the agenda decision contains a detailed discussion on assessing materiality).

What does this mean for entities preparing segment information under IFRS 8?

Many listed entities previously only disclosed income and expense items under paragraph 23(f) of IFRS 8 if they related to unusual or non-recurring items that were not already disclosed as per other sub-sections of paragraph 23 (this would typically include things like restructuring costs, impairments, etc.). Entities may also not have considered whether income and expense items disclosed under other IFRS Standards were material to individual reportable segments.

The following examples illustrate how some expenses may be material for certain segments but not others.

Example 1 – Toy manufacturer

Entity ABC manufactures children’s toys. It has five reportable geographic segments, with the same manufacturing processes occurring in each geographical location.

Cost of sales is a material expense and is disclosed in Entity ABC’s financial statements in accordance with paragraph 36(d) of IAS 2 and paragraph 97 of IAS 1.

Entity ABC’s measure of segment profit or loss is earnings before interest, taxes, depreciation and amortisation (EBITDA) – therefore, cost of sales is included in the measure of segment profit or loss reported to the CODM.

Entity ABC has previously not disclosed the cost of sales as a material expense item for each reportable segment.

Analysis

Following the July 2024 agenda decision, it is likely that Entity ABC should be disclosing the cost of sales as a material expense for each of its five geographic segments. This is because:

• Cost of sales is a major expense component of segment profit or loss (EBITDA) and is therefore quantitatively material to each reportable segment of Entity ABC
• Cost of sales is also qualitatively material to a manufacturing entity, with users interested in cost management and margins.

Example 2 - Software company

Entity XYZ is a software company. It has two business units:

• Business Unit A develops bespoke software for customers. It employs 100 software developers.
• Business Unit B is a licensed reseller of an off-the-shelf web-based accounting package for small businesses. Sales of the product are made online via a dedicated section on Entity XYZ’s website.

Both Business Units A and B are reportable segments.

Relative to sales revenue, employee benefits expense is a material expense for Business Unit A ($1,500,000) but not for Business Unit B ($50,000).

Total employee benefit costs of $1,550,000 are disclosed in Entity XYZ’s statement of profit or loss (with expenses classified on a ‘by nature’ basis).

Entity XYZ’s measure of segment profit or loss is earnings before interest, taxes, depreciation and amortisation (EBITDA) – therefore, employee benefit expenses are included in the measure of segment profit or loss reported to the CODM.

Entity XYZ has previously not disclosed employee benefits expense as a material expense item for reportable segments.

Analysis

Following the July 2024 agenda decision, it is likely that Entity XYZ should be disclosing employee benefits as a material expense for the Business Unit A reportable segment (software developer) but not for Business Unit B (online software reseller). This is because employee benefits are qualitatively and quantitatively material for Business Unit A. Refer to Practice Statement 2: Making Materiality Judgements for additional guidance on making materiality judgements.

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