Background

The IFRS IC received a submission asking about the application of IFRS 8:23 which requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment. The submitter asked i) whether an entity is required to disclose the specified amounts in IFRS 8:23(a)-(i) for each reportable segment if those amounts are not reviewed separately by the chief operating decision maker (CODM); ii) whether an entity is required to disclose the specified amounts in IFRS 8:23(f) for each reportable segment if the entity presents or discloses those specified amounts applying a requirement in IFRS Accounting Standards other than IAS 1:97; and iii) how an entity determines ‘material items’ in IFRS 8:23(f).

Staff analysis

The staff sent an information request to members of the International Forum of Accounting Standard Setters, securities regulators and large accounting firms. To assist respondents in answering the questions, the staff included implied fact patterns that they developed based on those questions:

Fact Pattern 1: An entity does not disclose the specified amounts in IFRS 8:23(a)-(i) for each reportable segment. Those specified amounts are included in the measure of segment profit or loss reviewed by the CODM but are not considered by the entity to be reviewed separately by management (or by the CODM).

• Fact Pattern 2: An entity does not disclose the specified amounts in IFRS 8:23(f) for each reportable segment because the entity presents or discloses those specified amounts in its financial statements applying a requirement in IFRS Accounting Standards other than IAS 1:97.
• Fact Pattern 3: An entity applies “material items” in IFRS 8:23(f) as:

• Only those items that are material on a qualitative basis, such as unusual items (Fact Pattern 3a)
• Not including items or amounts that are an aggregation of individually quantitatively immaterial items (Fact Pattern 3b)
• Only those items that are material at a segment level (Fact Pattern 3c)

Most respondents said Fact Pattern 1 is not common or they could not determine whether it is common, and it has no material effect. Some respondents said that they observed diversity in practice. Many respondents provided their view that, if the specified amounts in IFRS 8:23(a)-(i) are included in a measure of segment profit or loss reviewed by the CODM or are otherwise ‘regularly provided’ to the CODM, even if not included in the measure of segment profit or loss, those specified amounts are required to be disclosed for each reportable segment. The staff agreed with the respondents’ view because the placement of “or” in the paragraph is important. The specified amounts are not required to be ‘separately reviewed’ by the CODM for those amounts to be separately disclosed. Accordingly, an entity is required to disclose the specified amounts for which either of the conditions in IFRS 8:23 is met.

Regarding the requirements in IFRS 8:23(f), most respondents said that Fact Patterns 2-3 are not common, or they could not determine whether it was common, and they do not have a material effect. The respondents shared their views on the different fact patterns as below:

Fact Pattern 2: A number of respondents provided a range of responses about how to consider the reference in IFRS 8:23(f) to IAS 1:97. The majority said that an entity is not required to disclose the specified amount under IFRS 8:23(f) if those specified amounts are in its financial statements applying a requirement in IFRS Accounting Standards other than IAS 1:97.

Fact Pattern 3a: Many respondents to the information request said that “material” in the context of IFRS 8:23(f) is assessed based on both qualitative and quantitative factors. However, a few respondents considered, when applying IAS 1:97 in combination of IAS 1:98, only qualitative material should be disclosed.

Fact Pattern 3b: Most respondents did not share observations about whether “material items” in IFRS 8:23(f) include amounts that are an aggregation of individually quantitatively immaterial items.

Fact Pattern 3c: Many respondents said materiality is assessed at the reporting entity level.  

The staff analysed Fact Patterns 2-3 together as to the main aspect of the questions for the meaning of “material items of income and expense” in the context of IAS 1:97 as referenced in IFRS 8:23(f). The staff observed that, in applying IFRS 8:23(f), an entity applies IAS 1:7 and assesses whether the disclosure of information is material in the context of its financial statements taken as a whole. Therefore, an entity assesses whether an “item of income and expense” represents material information based on the financial statements taken as a whole. With regard to aggregation of information, in applying IFRS 8:23(f) and determining material items of income and expense to disclose, an entity applies the requirements in IAS 1:29-31 when considering how to aggregate information in the financial statements.

With respect to Fact Pattern 3a, the staff did not agree with the view of respondents that material items of income and expense in IFRS 8:23(f) are those that arise from only a qualitatively material event or circumstance, because a qualitative-only assessment of materiality does not align with the definition of “material” in IAS 1:7. Therefore, the entity considers both qualitative and quantitative factors, representing the nature or magnitude of information (or both) in assessing whether an item of income and expense is material.

With respect to Fact Pattern 2, IAS 1:97 sets out the overarching principle for when separate disclosure of an “item of income or expense” is required in the financial statements and are not necessarily ‘top-up’ requirements. However, IAS 1 sets out overarching principles that an entity needs to consider providing users of financial statements with the information they need to understand the entity’s financial statements. Therefore, an entity cannot omit material items on the basis that those items are presented or disclosed applying a requirement in IFRS Accounting Standards other than IAS 1:97.

Based on the analysis, the staff considered that the principles and requirements in IFRS 8 provide an adequate basis for an entity to determine required disclosures applying IFRS 8:23(f). Therefore, this matter does not satisfy the criterion in the Due Process Handbook to be added as a standard-setting project.

Staff recommendation

The staff recommended that the IFRS IC does not to add a standard-setting project to the work plan and instead publishes a tentative agenda decision outlining how an entity applies IFRS 8:23.

IFRS IC discussion

IFRS IC members had a lively discussion on this agenda paper, and they had diverse views on it. The focus of their discussion was the interpretation and application of IFRS 8:23(f).

Some IFRS IC members considered the paper well written and the analysis in the paper as helpful to users to understand the application of IFRS 8:23. They agreed that there is diversity in practice in respect of what kind of information should be disclosed under IFRS 8:23. The analysis makes it clear that the disclosure under IFRS 8:23(f) for material items should be at the financial statement level as a whole and not at the segment level. Granular information is provided in the segment disclosures of some entities, and it is therefore a good idea to clarify this in the agenda decision.

However, some IFRS IC members were of the view that the paper could bring confusion and result in diversity in the interpretation of the agenda decision. One IFRS IC member expressed concerns on the logic of the agenda decision. He said that the agenda decision is not answering the questions submitted and even the IFRS IC members had different interpretations of the requirements. He agreed that “material” should be based on quantitative and quantitative consideration. He also agreed that entities cannot directly refer to US GAAP for “unusual items”. However, given it is not clear which items are in IAS 1:97, it might be reasonable to consider US GAAP where “unusual items” are well defined. In contrast, a few IFRS IC members did not think this analogy was appropriate given IAS 1:97 refers to IAS 1:98, which distinguishes it from US GAAP because the items listed in IAS 1:98 do not all look like “unusual items” as defined in US GAAP.

Several IFRS IC members commented that if an entity chooses to disclose additional items under IAS 1:97 in the notes to the financial statements, it would mean that these items are considered material. Therefore, readers may misinterpret that all items included in the financial statements (including the notes) represent material items under IFRS 8:23(f) and should be presented in a segment. A number of IFRS IC members did not disagree with the technical analysis regarding the interpretation of IFRS 8:23(f), but they shared the same concern that all items could be interpreted to be disclosed because there is a lack of clarify for the interaction of IFRS 8:23(f) and IAS 1:97. It would be helpful to point out that the “material” items are referring to the financial statements as a whole and not only those items disclosed under IAS 1:97. Therefore, one of the IFRS IC members suggested removing the reference to IAS 1:97 from IFRS 8:23(f) if they are referring to the “material” items generically under IAS 1. However, several IFRS IC members did not consider it problematic to refer to IAS 1:97 and at the same time, they did not interpret IFRS 8:23(f) as requiring disclosure of all items in  the relevant notes to the financial statements if they are considered material under IAS 1:97. One of the IFRS IC members suggested to add a sentence to explain in order to bridge the expectation gap.

Moreover, one IFRS IC member raised the concern that there is ambiguity about whether ‘material’ should be by function or nature or both. Some of these entities may interpret that both items material by function (in a scenario when profit or loss is presented by function) and by nature (those items identified as material by nature and disclosed in the notes) would be required to be disclosed in segmental information.

Several IFRS IC members considered that standard-setting is needed due to the great diversity in practice and there being no consensus on what items are required to be disclosed under IFRS 8:23(f), even for the IFRS IC members.

On the other hand, the remaining IFRS IC members did not consider the standards are broken but acknowledged that there is diversity in interpretation. One of these members said that although the analysis in the agenda paper is not what the market is doing, it is the appropriate interpretation of IFRS 8:23. These IFRS IC members considered standard-setting not to be a productive path and preferred publishing an agenda decision instead.

With so many concerns raised by the IFRS IC members on the agenda decision, the Chair said that even if the tentative agenda decision was published, it would not stop the IASB from considering a standard-setting project like it had done before (e.g. supplier finance arrangement).

IFRS IC decision

7 out of 13 IFRS IC members agreed with publishing the tentative agenda decision, the remaining IFRS IC members considered standard-setting is required.