IFRS 8 – Segment reporting

Executive summary Segment reporting: Segment reporting disclosures under ASC 280 and IFRS 8 are essentially the same. Both follow a “management approach” in identifying segments and the components of the disclosures are very similar.

Progress on convergence Segment reporting – no convergence projects at this time.

Segment reporting Scope US GAAP IFRS The requirements for segment reporting are applicable to entities with publicly traded debt or equity or entities that are in the process of issuing publicly traded securities. Similar

Segment reporting Identifying operating and reporting segments US GAAP IFRS An operating segment is defined as a component of an enterprise that: Engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise). Whose operating results are regularly reviewed by the enterprise’s chief operating decision-maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance. For which discrete financial information is available. Similar

Segment reporting Identifying operating and reporting segments US GAAP IFRS A “management approach” is used to identify the reportable segments. This approach determines segments based on the way management organizes the entity for making operating decisions and assessing performance. Similar Two or more operating segments can be aggregated into one operating segment only if certain criteria are met. These criteria are the same for both US GAAP and IFRS. Similar

Segment reporting Identifying operating and reporting segments US GAAP IFRS The determination of which operating segments are reportable is based on quantitative thresholds. An operating segment is reportable if it meets any of the following three criteria: The revenue for the segment is 10% or more of the combined revenue. The absolute value of profit/loss is 10% or more of the greater (in absolute value) of (a) the combined profit of all operating segments that don’t report a loss, or (b) the combined loss of all operating segments that did report a loss. The assets of the segment are 10% or more of the combined assets. Similar

Segment reporting Identifying operating and reporting segments US GAAP IFRS Total revenue attributable to reporting segments must be at least 75% of the combined revenue. Similar

Segment reporting Identifying operating and reporting segments Both US GAAP and IFRS acknowledge that business may use a matrix form of management. In matrix management, business components are reviewed by the CODM on more than one dimension, such as geographical areas and product/service lines. US GAAP The determination of segments must be based on the product/service line per ASC 280-10-50-9 in a matrix form of organization. IFRS The determination of segments should be done in the way that is most consistent with the core principle stated in IFRS 8, which is, “… to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.”

Segment reporting Identifying operating and reporting segments Diagram from ASC 280-10-55-26 and paragraph IG7 of IFRS 8.

Determination of reporting segment Example 1 The IT Software Services Corporation (IT), a US public company, has grown rapidly over the last 40 years and currently operates in 40 different countries around the world. IT has an Executive Committee that manages the operations through a matrix organizational structure. ITs four business or product lines are as follows: 1. Personal IT Software – home or small office applications 2. Commercial IT Software – large manufacturing software applications 3. Healthcare IT Software – hospital applications and doctors’ office applications 4. Financial Services IT Software – large banks and investment bank applications

Determination of segment reporting example The Company also manages its operations through eight geographic regions as follows: 1. US – East 2. US – South 3. US – West 4. Europe – Western 5. Europe – Eastern 6. Middle East and Africa 7. Asia – China/Japan 8. Asia – India/Southeast Asia and Australia The Executive Committee, which reports to the Board of Directors, evaluates operations from both a line-of-business or product view and also from a geographic view. Resource allocations are also determined from a line-of-business or product standpoint, as well as a geographic standpoint. Ultimately, the chief decision-maker makes resource allocations based on a product-line basis.

Determination of segment reporting example 2010 sales: Product line Geographic area Personal Commercial Healthcare Financial services Total US – East $ 15,000 $ 35,000 $ 20,000 $ 45,000 $115,000 US – South 18,000 20,000 25,000 40,000 103,000 US – West 22,000 45,000 30,000 10,000 107,000 Europe – Western 15,000 35,000 80,000 Europe – Eastern 8,000 17,000 4,000 37,000 Middle East and Africa 2,000 Asia – China/Japan 12,000 19,000 86,000 Asia – India/Southeast Asia and Australia 74,000 $125,000 $200,000 $174,000 $625,000

Determination of segment reporting example 2010 profit and assets: Geographic area Net Profit Estimated assets at December 31, 2010 US – East $ 15,000 15% $ 20,000 10% US – South 17,000 17 36,000 18 US – West 70,000 35 Europe – Western 10,000 10 16,000 8 Europe – Eastern 9,000 9 Middle East and Africa 5,000 5 14,000 7 Asia – China/Japan 15,000 15 Asia – India/Southeast Asia and Australia 12,000 _12 __7 Total $ 100,000 100% $ 200,000

Determination of segment reporting example What segment information would be disclosed under US GAAP? What segment information would be disclosed under IFRS?

Determination of segment reporting example Example 1 solution: US GAAP: The segment information that would be disclosed under US GAAP would be by line of business or product line and would disclose the four product lines of personal, commercial, healthcare and financial services since each of these accounts for more than 10% of the total revenues. IFRS: The segment information that would be disclosed under IFRS, assuming resource allocations are made on a geographic basis by the chief decision-maker, would, at a minimum, include six of the eight geographic areas. All geographic areas, except the European – Eastern and Middle East and Africa, account for more than 10% of the total revenue so they would all be reportable segments. Neither the European – Eastern or Middle East and Africa meets the criteria for reportable segments based on assets or profits. In addition, the six reportable segments combined meet the requirement that 75% of revenues be reported. Thus, these six segments should be reported. As a practical matter, IT would probably decide to disclose all geographic segments for ease of presentation and transparency.

Segment reporting Accounting principles US GAAP IFRS The accounting principles that a company uses for its segment disclosures do not need to be consistent with the principles it uses for the consolidated financial statements. Similar

Segment reporting Reporting requirements US GAAP IFRS Disclosure of the measure of revenue, profit/loss and total assets for each reportable segment is required. Similar A reconciliation is required between the total of all reported segments and the amounts reported in the financial statements. Similar

Segment reporting Reporting requirements US GAAP The disclosure of segment liabilities does not have to be reported, even if they are reviewed by the CODM. However, an entity can elect to voluntarily make this disclosure and many US-based companies do in fact disclose this information. IFRS It is required that segment liabilities be disclosed if those amounts are regularly provided to the CODM.

Segment reporting Reporting requirements summary US GAAP General information of segment Segment profit and loss amounts Revenues – external and internal Interest revenues and expenses Depreciation Unusual items Net income of equity investee Income taxes IFRS General information of segment Segment profit and loss amounts Revenues – external and internal Interest revenues and expenses Depreciation Material items of income and expense Associates and joint venture equity income Income taxes

Segment reporting Reporting requirements summary US GAAP Extraordinary items Reconciliation of segment amounts to financial statement totals Measurement basis Segment assets IFRS Material noncash items Reconciliation of segment amounts to financial statement totals Measurement basis Segment assets Segment liabilities