IFRS 8 and segment information: how can groups meet standard requirements?
There is a real concern with IFRS 8 when it has to be implemented in consolidation software for multi-segment entities. If fact, it is difficult to apply the standard to the letter: it is particularly restrictive and is not well-suited to the objectives of finance teams. How can you make the best of it and use the consolidation tool to improve the quality of the segment information provided?
Two opposite approaches
Two different approaches are available to groups when they need to collect and provide segment information:
- The first consists in using the information available from analytical accounting. Data consolidation is done using the information available by segment and by entity. As a result, intercos also have an associated segment dimension to eliminate them from the segment to which they are related.
- The second approach, the reconciliation approach, is much less reliable. Accounting data is consolidated then assigned based on allocation keys provided by the entities (a given segment accounts for 20% of the business, etc.) or, more simply, general accounting data is consolidated and segment distribution is allocated statistically to the major classes. This allocation is often approximate and, therefore, in contradiction with the need for quality information.
Use your consolidation software to provide quality information!
All consolidation applications should enable you to implement the first approach, the most reliable one in our opinion. In this case, processing is no longer done by legal entity, but by reporting entity or based on analytical parameters. To ensure that the information provided to investors is as accurate as possible, the approach must be fully segmented and detailed: intercos must be broken down by analytical category as do adjustments, eliminations, etc., in other words, all consolidation process transactions.
Reporting entities vs. analytical dimensions: the key to making the right choice
For the team in charge of producing the consolidated accounts and IFRS 8 information, the strategy consists in choosing between implementing reporting entities (each entity being mono-segmental) and the implementation of analytical dimensions. Which process will provide the most accurate picture?
The choice obeys the GIGO principle (Garbage In – Garbage Out) and must, therefore, be conditioned on whether or not source data is available. In itself, the choice between reporting entities and analytical dimension must also abide by this precept. Specifically, if data broken down by segment exist for all accounts, then distinct reporting entities should be created. If the contrary is true, a dimension for some accounts should be sufficient. However, be careful not to make a hasty decision. Below are several additional possibilities.
Generally speaking, balance sheet data, equity, etc. are not often detailed by segment. For example, is it absolutely necessary to generate data based on an arbitrary key if the information required isn’t available?
Obtain quality information…
Each segment must correspond to a real activity. To ensure quality results, the creation of a corporate segment (which often doesn’t correspond to a real activity) should be avoided. It will be used as a “catchall” (often also called the “other” or “to be allocated” segment). Fictitious activities for adjustments and eliminations should also be avoided.
… and square the circle
The best solution consists in taking the most detailed information available, however, without exaggerating: subsidiaries should only report what they are able to provide. Asking subsidiaries to provide data they don’t have will force them to take dangerous short-cuts (allocation keys, plugs, etc.) and the data obtained will no longer reflect reality, stripping them of any meaning. In our opinion, it’s better to focus on quality data rather than on the appearance of completeness.