Enhancing Transparency: The Importance of Segment Performance Measurement Under IFRS 8

IFRS 8 provides a framework that aligns external reporting with internal management practices through its emphasis on segment performance measurement. By requiring disclosures based on what is reported to the CODM, IFRS 8 enhances the relevance of financial information while necessitating clear communication about how these figures are derived. As we navigate through complex financial landscapes, adhering to these principles ensures that what gets measured indeed gets managed effectively.

1. Enhancing Transparency: The Importance of Segment
Performance Measurement Under IFRS 8
In the realm of accounting, the clarity of financial reporting is paramount. As the renowned
accountant and author, Peter Drucker, once said, "What gets measured gets managed." This principle
is particularly relevant in the context of IFRS 8 Operating Segments, which emphasizes a
management approach to segment reporting. This article delves into how segment performance is
measured under IFRS 8, the financial metrics that must be reported, and their relationship with
internal management reports.

Understanding Segment Performance Measurement under IFRS 8
IFRS 8 mandates that segment performance be reported based on the information that is regularly
reviewed by the Chief Operating Decision Maker (CODM). This management approach allows
organizations to tailor their reporting to reflect internal decision-making processes, enhancing
relevance and utility for stakeholders.
Key Financial Metrics Reported
1. Segment Profit or Loss:
o Every entity must disclose a measure of segment profit or loss, as this is a critical
metric for assessing performance. The measure reported should align with what the
CODM utilizes for resource allocation and performance assessment. For instance, if
the CODM uses earnings before interest and taxes (EBIT) as a performance measure,
this should be disclosed in the financial statements

2. 2. Segment Assets:
o A measure of segment assets must be disclosed if it is regularly provided to the
CODM. This could include cash, inventory, and accounts receivable. The disclosure
should reflect only those assets that are actively monitored by management
3. Segment Liabilities:
o Similar to assets, segment liabilities should be reported only if they are regularly
reviewed by the CODM. This ensures that stakeholders have a complete view of the
financial obligations associated with each segment
4. Other Relevant Metrics:
o Additional disclosures may include revenues from external customers, inter-segment
revenues, interest income and expense, depreciation and amortization expenses,
and material non-cash items
These metrics provide a comprehensive picture of each segment's financial health.
Relationship to Internal Management Reports
The metrics reported under IFRS 8 are intrinsically linked to internal management reports. The data
presented in external financial statements must reconcile with internal performance measures used
by management. This reconciliation process is crucial as it helps stakeholders understand how
reported figures align with operational realities.For example, if a company's internal report shows a
segment's profit excluding certain non-recurring expenses (like restructuring costs), this exclusion
must be clearly communicated in external reports to avoid confusion among investors and analysts
Importance of Clear Disclosure
The IASB recognized that while the management approach enhances relevance, it can lead to
reduced comparability between entities. Therefore, clear disclosures regarding how segments are
identified and how their performance metrics are calculated are essential. Companies must provide
narrative explanations alongside quantitative data to ensure users can adequately interpret the
information presented.As Benjamin Graham aptly stated, "The investor's chief problem—and even
his worst enemy—is likely to be himself." This highlights the need for transparency in reporting to
mitigate misinterpretations that may arise from complex financial data.
Practical Implications for Financial Statements
When preparing financial statements under IFRS 8, companies must ensure that:
 The segment profit or loss reflects all income and expenses as defined by what is presented
to the CODM.
 Segment assets include only those items actively monitored by management.
 Any adjustments made for reporting purposes are documented and reconciled back to the
primary financial statements.
For instance, if a company operates in multiple geographic regions and reports its performance
based on regional EBIT figures, it should disclose these figures clearly in its consolidated income
statement while also providing a reconciliation of these figures back to total operating income

3. How does IFRS 8 impact the way companies report segment performance
Impact on Segment Reporting
1. Increased Relevance of Reported Information
One of the primary impacts of IFRS 8 is the increased relevance of segment information. By aligning
disclosures with internal management reports, companies can present data that reflects their
operational realities. As noted by Grant Thornton, "IFRS 8's management approach has the effect
that reportable segments and segment information will vary according to the information used by
the CODM"
This means that companies can tailor their reporting to better inform stakeholders about their
performance and resource allocation decisions.
2. Variability in Segment Identification
Under IFRS 8, the identification of operating segments can vary significantly between companies,
even within the same industry. The standard does not prescribe specific criteria for segment
identification but rather allows entities to define segments based on how management views and
operates the business. This flexibility can lead to inconsistencies in segment reporting, making it
essential for companies to provide clear disclosures about how they have determined their
segments. As a result, users must be informed about the basis of organization and types of products
or services associated with each segment
3. Disclosure Requirements
IFRS 8 requires companies to disclose both narrative and quantitative information about their
segments. Key disclosures include:
 Profit or Loss Measures: Companies must report a measure of segment profit or loss that
reflects what is used by the CODM for performance assessment.
 Assets and Liabilities: Disclosure of segment assets and liabilities is required only if these
measures are regularly reviewed by the CODM.
 Reconciliation: Companies must reconcile segment measures to amounts reported in the
primary financial statements, enhancing transparency
This requirement for reconciliation is critical as it helps stakeholders understand how internal
measures align with external reporting.
4. Potential Reduction in Comparability
While IFRS 8 aims to enhance relevance, it can inadvertently reduce comparability across entities due
to its flexible nature. Different companies may report different metrics and use varying bases for
their calculations, which complicates cross-company analysis. The International Accounting
Standards Board (IASB) acknowledged this trade-off when developing IFRS 8, stating that "the cost of
reduced comparability was outweighed by the benefits of increased relevance"
This highlights a fundamental challenge for users of financial statements who seek to compare
performance metrics across firms.
5. Impact on Financial Statements

4. The adoption of IFRS 8 can lead to changes in how financial statements are structured. For instance,
companies may present more segments than before, reflecting a broader view of their operations.
However, studies have shown that while there may be an increase in the average number of
segments reported, there could also be significant decreases in detailed disclosures regarding assets
and liabilities per segment
This shift necessitates careful consideration by both preparers and users of financial statements.
Management Approach' in IFRS 8 influence the identification of reportable segments
1. Flexibility in Segment Definition
Under IFRS 8, an operating segment is defined as a component of an entity that engages in business
activities, earns revenues, incurs expenses, and whose operating results are regularly reviewed by
the Chief Operating Decision Maker (CODM)
This definition allows for a more flexible identification of segments compared to the previous
standard (IAS 14), which mandated stricter criteria based on products, services, or geographical
areas.
2. Alignment with Internal Reporting
The management approach emphasizes the importance of internal reporting structures in segment
identification. Companies are required to report segments based on the information provided to the
CODM, which means that segments may be identified based on how management organizes its
operations rather than external reporting requirements. As noted by Grant Thornton, "reportable
segments and segment information will vary according to the information used by the CODM"
This can lead to a broader range of identified segments, including those that may not traditionally
qualify under more rigid definitions.
3. Quantitative Thresholds for Reportability
Once an operating segment is identified, IFRS 8 requires that it meets certain quantitative thresholds
to be classified as a reportable segment. These thresholds include:
 Revenue: The segment's reported revenue must be 10% or more of the combined revenue of
all operating segments.
 Profit or Loss: The segment's reported profit or loss must be significant relative to the overall
results.
 Assets: The segment's assets must constitute 10% or more of total assets across all
segments
These thresholds ensure that only significant segments are reported while allowing for flexibility in
how these segments are defined based on internal management practices.
4. Disclosures Required for Transparency
IFRS 8 mandates comprehensive disclosures about how segments are identified and measured.
Companies must provide details on factors used to identify reportable segments, including the basis
of organization and types of products or services from which each segment derives its revenues

5. This requirement ensures that users of financial statements understand the rationale behind
segment identification and can assess comparability across different entities.
5. Potential for Increased Number of Segments
The management approach may lead to companies identifying more operating segments than under
previous standards. For example, even cost centers or new business activities with minimal revenue
could qualify as operating segments if discrete financial information is prepared and reviewed by the
CODM
This broader identification can enhance transparency but may also complicate financial reporting.

Conclusion
In conclusion, IFRS 8 provides a framework that aligns external reporting with internal management
practices through its emphasis on segment performance measurement. By requiring disclosures
based on what is reported to the CODM, IFRS 8 enhances the relevance of financial information
while necessitating clear communication about how these figures are derived. As we navigate
through complex financial landscapes, adhering to these principles ensures that what gets measured
indeed gets managed effectively.