High-quality management accounts are essential for evaluating a variety of business classes, geographical sectors, markets, and economic environments. Furthermore, they facilitate the allocation of resources to Operating Segments. Operating Segments under IFRS 8 require entities to disclose information regarding their products and services, segment revenue, assets, and total profit or loss in the segmental information.
audit firms in Dubai insights into IFRS 8 series for audit firms in Dubai consider some key implementation issues and cover an in-depth guide in certain problematic areas.
What is the IFRS 8 series?
As of 30th November 2006, IFRS 8 has been issued by the International Accounting Standards Board to ensure the clarity, reliance, and reliability of financial statements in audit firms in Dubai and UAE.
In order to evaluate the financial statement, IFRS8 requires that information about the financial performance of an entity, its revenue generated, its internal audit process, and its overall cash flow rate be disclosed to the chief executive officer or chief operating officer (CODM).
CODM
Certain decisions about resource allocation, monitoring performance, and approving the operating segment’s clarity are typically the role of a CODM. As a function, the Chief of Decision Maker does not refer to an individual, but rather to the process of determining how to meet the IFRS 8 operating segments. For many entities, identifying the CODM is quite difficult since it requires checking reports on the entity’s management structure. Typically, the CODM is a group of individuals including the board of directors, external and internal auditors, the segment managers, and the chief operating executive as the main supervising body.
Who can apply for IFRS 8?
IFRS 8 can be issued if a public entity or a non-for-profit organization meets the following conditions:
- The entity has issued equity securities or is obligated to refund conduit debt securities that are traded in the public or domestic market
- Discrete consolidated financial statements to issue any debt or equity instrument insecurities in a public market
So, if your entity comprises the above-mentioned situations, the IFRS 8 rules and procedures become applicable to perform.
Identification of an Operating Segment
By engaging in business activities, a component becomes an operating segment if it generates revenue, has yet to generate revenue or is capable of incurring payments currently or in the future.
Under IFRS 8, a component of an entity is identified as an operating segment if:
- It engages in business activities to earn revenues and incur expenses relating to transactions (with other components under the same entity)
- The operating results of the component are regularly reviewed by the CODM to carry out decisions for resource allocation and assessing performance
- Discrete financial information for the component is made available
A possible operating segment that engages in business activities is a pre-operating startup operation or corporate headquarters.
Many operating segments provide too much information that isn’t useful or isn’t collected at the appropriate point.
It’s possible that some corporate functions earn revenue that’s incidental to the entity’s business activities or that doesn’t earn any revenue at all. Therefore, they would not be included in the operating segment. In addition, it is important for the CODM to identify segment information as well as other factors such as the nature of the business activity and the presence of managers who are responsible for managing it.
Reportable Segments and Aggregation
Reportable segments are aggregations of operating segments that provide a report by an individual entity and meet specified criteria:
- If the reported segments exceed 10 % or above of the total combined revenue of all operating segments
- The absolute measure of the reported revenue is 10 % or above of the combined reported profit that did or did not report a loss
- Its assets are 10 per cent or above the combined assets
Not all reporting segments are to be presented in aggregated form and can only report information about an operating segment separately if it is under the above-mentioned quantitative thresholds.
The principle of aggregation is to add significance to segments having similar characteristics and ending up with the same outcome which otherwise wouldn’t be if reported separately. Two or more operating segments may be aggregated if it is consistent with IFRS 8 Principles and similar in each of the following ways:
- The type of products and services
- Type of customer for their product and services
- Methods used to describe the products and services provided to customers
- The nature of production activity
What is the minimum External revenue that can be identified as a reportable segment?
Additional operating segments shall be identified as reporting segments if the total external revenue reported is below 75% of the entity’s total revenue.
In case the CODM receives only one operating segment, then it means the condition of IFRS 8 is not mean and must be taken seriously.
Disclosure requirements
The possibility of accepting or identifying segmental information and reportable segments from every entity is a crucial step and the usefulness of this information is varied by the CODM.
IFRS 8 requires an entity to disclose both narrative and quantitative information:
- Information on the Operating Segment’s identification and the derivation of types of products and services from its revenue
- The aggregation criteria for aggregating two or more reportable segments made by the management
- Information about profit & loss, revenue, and expense, the transaction with other segments, depreciation, and amortization for each reportable segment
- Information about total assets and liabilities for every reportable segment including the number of investments in joint ventures
How audit firms in Dubai can help?
In order to prepare for an IFRS audit, organizations should become familiar with IFRS 8. A business’s internal audit process can be prepared by understanding the provisions of IFRS 8.
As an audit firm in Dubai, we offer guidance on the provisions of IFRS 8 and assist you with implementing the standards.
