Segment Reporting. A look Ghanaian Firms. Previously published on BFT Ghana on the 12th of September 2011

Segment Reporting

What are the key changes to segmental reporting following the issue of IFRS 8?

As per 2009 financial statements, IFRS reporters across the globe applied the new standard, IFRS 8 Segmental Reporting, to report segment information. IFRS 8 introduces a ‘management approach’ to identifying and measuring the financial performance of a company’s operating segments. Reported segment information will now be based on the information used internally by management.

This standard replaces IAS 14, which required firms to classify reportable segments by business (related products and services) and geography. IAS 14 distinguished between primary segments and secondary segments. Under IFRS 8, there is no longer a primary and secondary segment format. Once a company has determined that its operating segments are based on its products and services, it does not have to provide geographical segment information.

Comparing IAS 14 and IFRS 8

Key Item	IAS 14	IFRS 8
Operating segments	Business or geography based  components subject to risk and return	Business activities that may earn revenue or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker and for which discrete financial information is available
Information on operating segments	Reported information based on  financial information  presented in the consolidated financial statements	Reported information is based on information that management uses to run the business
Basis of measurement of segment disclosure	Disclosures are based on IFRS-compliant  financial  information	Disclosures are based on management information reported to the chief operating decision maker (CODM)
Disclosure	Disclosure of segment revenue, segment expense, segment result, segment assets and liabilities	Requires an explanation of how segment profit or loss, segment assets and segment liabilities are measured for each operating segment. Interest revenue and interest expense  must be disclosed separately for each reportable segment
Reconciliation to consolidated financial statements	Required	Required
Application	Mandatory	Adopted at management discretion
Key decision makers	Not relevant	Chief operating decision makers

Although similar to the Ghana National Accounting Standard number 15. Reporting Financial Information by Segments, there are also dissimilarities as GNAS 15 did not require disclosure of segment information by identifying primary or secondary segments. GNAS 15 did however require that industry segments and geographical segments be used as a basis for grouping the operations of an entity. I summarize the differences between IAS 14 and IFRS 8 below. 

The key difference between the old IAS 14 and the new IFRS 8 is that whereas IAS 14 gave guidance on the definition of both segments and items provided, IFRS 8 leaves it up to management to decide on the definition of operating segment and the financial information provided. Although companies can provide non-GAAP metrics on a segmental level to reflect the way the business is managed, segment financial information must be reconciled to the consolidated financial statements.

To illustrate its application in practice, I examine the financial statements of Unilever Ghana Limited. In the 2008 annual report, the company stated that it operates in Ghana and therefore views it as one unit. It did however state that its main lines of business is Food and Home & Personal Care. Given that the company is viewed as a single unit, they did not believe that providing segment information will provide a useful basis for decision making purposes as doing so will involve the subjective allocation of costs.

Upon transition to IFRS, SG-SSB was unable to easily comply with the reporting requirements of IFRS 8 as it needed to reorganize its operations to reflect the various reporting segments. In 2009 the bank stated that its business lines included, Retail Banking, Corporate Banking, SME Banking, Treasury/International Banking, and leasing. Although these business lines qualify for the basis of presentation of segment reporting, management believed a geographical presentation better reflects its operations and hence, in 2009, segment reports were presented according to regions in Ghana. However, in the 2010 annual report, SG-SSB adopted the business segment approach contrary to the geographical approach earlier on used in 2009.

To illustrate this point with a numerical example, I replicate the segment report of The Trust Bank. The Bank presents its segments reports according to business lines namely Financial Institutions and Money Market (FIM), Medium Enterprises and Corporates (MEC) and Commercial and Consumer Banking (CCB).

Segment Reporting at TTB (2008)

Business Line	FIM	MEC	CCB	OTHER	TOTAL
Net interest income	3,382,735	12,674,370	6,918,898	1,015,789	23,991,791
Non funded income	3,552,778	4,797,528	4,214,826	812,841	13,377,974
Operating income	6,935,513	17,471,898	11,133,724	1,828,630	37,369,765
Operating expenses	(4,230,964)	(4,034,829)	-11,031,942	(386,021)	(19,683,755)
Operating profit before impairment,
Losses and taxation	2,704,549	13,437,069	101,783	1,442,609	17,686,010
Impairment loss	(6,208)	(2,940,455)	(1,420,216)	(184,929)	(4,551,808)
Operating profit	2,698,341	10,496,614	(1,318,433)	1,257,680	13,134,202
Other income	-	-	-
Profit before taxation	2,698,341	10,496,614	(1,318,433)	1,257,680	13,134,202
Taxation - corporate tax	-	-	-	(3,573,798)	(3,573,798)
Profit after taxation	2,698,341	10,496,614	(1,318,433)	(2,316,118)	9,560,404
Total assets	32,835,333	131,096,531	7,567,612	81,506,555	253,006,031
Total liabilities	32,835,333	131,096,531	7,567,612	52,104,298	223,603,774
Total shareholders’ funds					29,402,257
Source: TTB Annual Report 2008 Note 41 Segment Reporting.

Central to the use of IFRS 8 is that it requires companies to adopt the management approach in segmental reporting. Generally, the information to be reported would be what management uses internally for evaluating the operating segments’ performance and allocating resources to operating segments. The perceived advantage of this management approach is to enable investors to review a company’s operations from the same perspective as management. 

Although I appreciate the value of understanding the management’s view, I do expect this to limit comparability going forward as different management teams within a sector can have varying views on what constitutes a segment.