This document discusses key requirements for entities adopting International Financial Reporting Standards (IFRS) for the first time. It covers determining the date of transition to IFRS, selecting the applicable IFRS standards, recognizing any gains or losses from the transition, and disclosure requirements including reconciliations of equity and net income under previous GAAP to IFRS. Entities must explain all changes from previous GAAP accounting policies and any material differences in cash flow statements. The transition provides an opportunity to correct prior period errors or revalue certain assets.

1. SEGMENT REPORTING
Introduction
An IFRS 8 Operating segment requires disclosure of information about
operating segments.
The purpose is to enable users of the financial statements to evaluate the
nature and financial effects of the business activities in which it engages
and the economic environments in which it operates.
IFRS 8 defines an operating segment as a component of an entity:
 That engages in business activities from which it may earn revenues
and incur expenses
 Whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance
 For which discrete financial information is available.
Reportable segments
An entity’s reportable segments (its operating segments) are those that are
used in its internal management reports. Therefore management identifies
the operating segments.
 Start-up operations may be operating segments even before they
begin to earn revenue.
 A part of an entity that only sells goods to other parts of the entity is
a reportable segment if management treats it as one.

2.  Corporate headquarters and other similar departments do not earn
revenue and are therefore not operating segments. An entity’s
pension plan is not an operating segment.
 Management may use more than one set of segment information. For
example, an entity can analyse information by classes of business
(different products or services) and by geographical areas.
 If management uses more than one set of segment information, it
should identify a single set of components on which to base the
segmental disclosures. The basis of reporting information should be
the one that best enables users to understand the business and the
environment in which it operates.
 Operating segments can be combined into one reportable segment
provided that they have similar characteristics.
Quantitative thresholds
Any segment that meets any of the following quantitative threshold: should
be treated as a reportable segment
 Its reported revenue, including both sales to external customers and
inter-segment sales, is ten per cent or more of the combined revenue
of all operating segments
 Its reported profit or loss is ten per cent or more of the greater, in
absolute amount, of:
 The combined reported profit of all operating segments that did
not report a loss and
 The combined reported loss of all operating segments that
reported a loss.

3.  Its assets are ten per cent or more of the combined assets of all
operating segments.
At least 75% of the entity’s external revenue should be included in
reportable segments. So if the quantitative test results in segmental
disclosure of less than this 75%, other segments should be identified as
reportable segments until this 75% is reached.
Information about other business activities and operating segments that
are not reportable are combined into an ‘all other segments’ category.
There is no precise limit to the number of segments that can be disclosed,
but if there are more than ten, the resulting information may become too
detailed
Although IFRS 8 defines a reportable segment in terms of size, size is not
the only criterion to be taken into account. There is some scope for
subjectivity.
Illustration
Diverse carries out a number of different business activities. Summarized
information is given below.
Revenue Profit Total
Before tax assets
Manufacture and sale of $m $m $m
computer hardware
Development and supply of 83 32 34
bespoke software:
to users of the company’s
hardware products 22 12 6
to other users 5 3 1
Technical support and training 10 2 4

4. Contract work on information
technology products 30 10 10
150 50 55
Which of the company’s activities should be identified as
separate/reportable operating segments?
Illustration solution
Manufacture and sale of computer hardware and contract work on
information technology products are clearly reportable segments by virtue
of size. Each of these two operations exceeds all three ‘ten per cent
thresholds’.
On the face of it, it appears that development of bespoke software is a
third segment. It would make logical sense for both parts of this operation
to be reported together, as supply to users of other hardware forms only
three per cent of total revenue and six per cent of total profit before tax.
Although technical support and training falls below all three ‘ten per cent
thresholds’, it should be disclosed as a fourth reportable segment if (as
seems likely) management treat it as a separate segment because it has
different characteristics from the rest of the business.
INDENTIFYING REPORTABLE SEGMENT
The ‘managerial approach’
The ‘managerial’ approach bases both the segments reported and the
information reported about them on the information used internally for
decision making. This means that management defines the reportable
segments.
Arguments for the ‘managerial approach’ include the following.
 Segments based on an entity’s internal structure are less subjective
than those identified by the ‘risks and returns’ approach.

5.  It highlights the risks and opportunities that management believes
are important.
 It provides information with predictive value because it enables uses
of the financial statements to see the entity through the eyes of
management.
 The cost of providing the information is low (because it should
already have been provided for management’s use).
 It will produce segment information that is consistent with the way in
which management discuss their business in other parts of the
annual report (e.g. in the Chairman’s Statement and the Operating
and Financial Review).
Arguments against the ‘managerial approach’ include the following.
 Segments based on internal reporting structures are unlikely to be
comparable between entities and may not be comparable from year
to year for an individual entity. (For example, organization structures,
or the way in which they are perceived, may change as a result of
new managers being appointed.)
 The information is likely to be commercially sensitive (because
entities are organized strategically).
 In theory, segmental information could be given other than by
products or services or geographically. This might be more difficult to
analyze.
 Using the managerial approach could lead to segments with different
risks and returns being combined.
 Analysts define their area of expertise by industry segment, usually
based on product or service.

6. Disclosing reportable segment
General information
IFRS 8 requires disclosure of the following.
 Factors used to identify the entity’s reportable segments, including
the basis of organization (for example, whether segments are based
on products and services, geographical areas or a combination of
these).
 The types of products and services from which each reportable
segment derives its revenues.
Information about profit it or loss and other segment items
For each reportable segment an entity should report:
 a measure of profit or loss
 a measure of total assets
 a measure of total liabilities (if such an amount is regularly used in
decision making).
IFRS 8 does not define segment revenue, segment result (profit or loss) or
segment assets.
 Therefore, the following amounts must be disclosed if they are
included in segment profit or loss:
 revenues from external customers
 revenues from inter-segment transactions
 interest revenue
 interest expense
 depreciation and amortization
 material items of income and expense (exceptional items)
 interests in the profit or loss of associates and joint ventures
accounted for by the equity method
 income tax expense

7.  material non-cash items other than depreciation or amortization.
 Interest revenue can be disclosed net of interest expense only if a
majority of the segment’s revenues are from interest and net interest
revenue is used in decision making.
 The following amounts must be disclosed if they are included in
segment assets:
 investments in associates and joint ventures accounted for by the
equity method
 amounts of additions to non-current assets other than financial
instruments.
 An entity must provide reconciliations of the totals disclosed in the
segment report to the amounts reported in the financial statements
as follows:
 segment revenue
 segment profit or loss (before tax and discontinued operations
unless these items are allocated to segments)
 segment assets
 segment liabilities (if reported)
 any other material item of segment information disclosed.
Entity Wide disclosure
IFRS 8 also requires the following disclosures about the entity as a whole,
even if it only has one reportable segment.

8.  The revenues from external customers for each product and service
or each group of similar products and services.
 Revenues from external customers split between the entity’s country
of domicile and all foreign countries in total.
 Non-current assets split between those located in the entity’s country
of domicile and all foreign countries in total.
 Revenue from a single external customer which amounts to ten per
cent or more of an entity’s revenue. The identity of the customer
does not need to be disclosed.
Measurement
IFRS 8 requires segmental reports to be based on the information reported
to and used by management, even where this is prepared on a different
basis from the rest of the financial statements.
Therefore, an entity must provide explanations of the measurement of
segment profit or loss, segment assets and segment liabilities, including:
 the basis of accounting for any transactions between reportable
segments
 the nature of differences between the measurement of segment
profit or loss, assets and liabilities and the amounts reported in the
financial statements. Differences could result from accounting policies
and/or policies for the allocation of common costs and jointly used
assets to segments
 the nature of any changes from prior periods in measurement
methods
 the nature and effect of any asymmetrical allocations to segments
(for example, where an entity allocates depreciation expense but not
the related non-current assets).

9. Preparing segmental reports
The illustration provides a useful format to follow when preparing a
segmental report.
Format
Segment Segment Segment Segment All Totals
Other
A B C D
$000 $000 $000 $000 $000 $000
Revenues from
External 5,000 9,500 12,000 5,000 1,000 32,500
customers
Revenues from
inter-segment
- 3,000 1,500 - - 4,500
transactions
interest revenue 800 1,000 1,500 1,000 - 4,300
interest expense 600 700 1,100 - - 2,400
Depreciation
and
amortization 100 50 1,500 900 - 2,500
Exceptional - - - 200 - 200
costs
Segment profit 70, 900 2,300 500 100 3,870
Impairment of 200 - - - - 200
assets
Segment assets 5,000 3,000 12,000 57,000 2,000 79,000
Additions to non- 700 500 800 600 - 2,600
current assets
Segment 3,000 1,800 8,000 30,000 - 42,800
Liabilities

10. Notes
1) The ‘all other’ column shows amounts relating to segments that fall
below the quantitative thresholds.
2) Impairment of assets is disclosed as a material non-cash item.
3) Comparatives should be provided. These should be restated if an
entity changes the structure of its internal organization so that its
reportable segments change, unless the information is not available
and the cost of preparing it would be excessive.
Problem areas in segmental reporting
Segmental reports can provide useful information, but they also have
important limitations.
 IFRS 8 states that segments should reflect the way in which the
entity is managed. This means that segments are defined by the
directors. Arguably, this provides too much flexibility. It also means
that segmental information is only useful for comparing the
performance of the same entity over time, not for comparing the
performance of different entities.
 Common costs may be allocated to different segments on whatever
basis the directors believe is reasonable. This can lead to arbitrary
allocation of these costs.
 A segment’s operating results can be distorted by trading with other
segments on non-commercial terms.
 These limitations have applied to most systems of segmental
reporting, regardless of the accounting standard being applied. IFRS
8 requires disclosure of some information about the way in which
common costs are allocated and the basis of accounting for inter-segment
transactions.

11. IFRS 1 Firstime Adoptions
Introduction
 IFRS I First-time adoption of international financial reporting standards
sets out the procedures to follow when an entity adopts IFRS in its
published financial statements for the first time.
 Before adopting IFRS it will have applied its own national standards. This
is called previous GAAP.
Definition
A first-time adopter is an entity that, for the first time, makes an explicit
and unreserved statement that its annual financial statements comply with
IFRS.
There are five issues that need to be addressed when adopting IFRS.
1. Date of transition
Definition
The date of transition is the beginning of the earliest period for which an
entity presents full comparative information under IFRS in its first IFRS
financial statement i.e.
 IFRS should be applied from the first day of the first set of financial
statements published in compliance with IFRS. This is called the
opening IFRS statement of financial position.
 IFRS require comparative statements to be published. The opening
IFRS statement of financial position for an entity adopting IFRS for
the first time in its 31 December 2012 financial statements and
presenting one year of comparative information will bet 1st January,

12. 2011. This is the transaction date-the first day of the earliest
comparative period.
 The opening IFRS statement of financial position itself need not be
published, but it will provide the opening balances for the
comparative period (i.e. statement of financial position as at 1st
January, 2011.
 If full comparative financial statements for preceding periods are
published, then these too must comply with IFRS.
 If only selected information is disclosed about preceding periods,
then these need not comply with IFRS. However, this noncompliance
must be disclosed.
2. Which IFRS?
 The entity should use the same accounting policies for all the
periods presented; these policies should be based solely on IFRS
in force at the reporting date. (The term IFRS includes any lAS
and Interpretations still in force.)
 A major problem for entities preparing for the change-over is that
IFRSs themselves keep changing.
 Entities will have to collect information enabling them to prepare
statements under previous GAAP, current IFRS and any proposed
new standards or amendments.
 IFRS I states that the opening IFRS statement of financial position
must:
 recognize all assets and liabilities required by IFRS
 not recognize assets and liabilities not permitted by IFRS
 reclassify all assets, liabilities and equity components in
accordance with IFRS
 measure all assets and liabilities in accordance with IFRS.

13. 3. Reporting gain and losses
Any gains or losses arising on the adoption of IFRS should be
recognized directly in retained earnings,
4. Explanations and disclosures
 Entities must explain how the transition to IFRS affects their
reported financial performance, financial position and cash flows.
Two main disclosures are required, which reconcile equity and
profits.
(a) The entity’s equity as reported under previous GAAP must be
reconciled to the equity reported under IFRS at two dates.
i. The date of transition. This is the opening reporting date.
ii. The last statement of financial position prepared under
previous GAAP.
(b) The last annual reported under previous GAAP must be
reconciled to the same year’s total comprehensive income
prepared under IFRS.
 Any material differences between the previous GAAP and the IFRS
cash flows must also be explained.
 When preparing its first IFRS statements, an entity may identify
errors made in previous years, or make or reverse impairments of
assets. These adjustments must be disclosed separately.
Improvements to IFRS issued May 2010 clarified the following points:
 When an entity changes an accounting policy after issue of interim
statements, but before the first set of IFRS annual statements, it
must explain those changes and update reconciliations between
previous GAAP applied and IFRS. lAS 8 relating to change of
accounting policy does not apply to such changes.
 An entity adopting IFRS for the first time is able to use revaluation
basis for deemed cost at the measurement date (usually the start

14. of the accounting period) based upon measurement events that
occurred at any point during the period covered by the first IFRS
financial statements.
 An entity adopting IFRS for the first time may elect to use the
previous GAAP carrying amount for items of property, plant and
equipment or intangible assets that were used in operations
subject to rate regulation.
The above three points, are effective for accounting periods commencing
on or after 1 January 2011, although earlier adoption is permitted.
5. Exemptions
IFRS 1 grants limited exemptions in situations where the cost of
compliance would outweigh the benefits to the user. For example:
(a) Previous business combinations do not have to be restated in
accordance with IFRS. In particular, mergers (pooling of interests)
do not have to be re-accounted for as acquisitions, previously
written off goodwill does not have to be reinstated and the fair
values of assets and liabilities may be retained. However, an
impairment test for any remaining goodwill must be made in the
opening statement of financial position.
(b) ED 2009/11 Improvements to IFRS issued in August 2009
identifies that, if there are any changes to accounting policies in
the first year of adoption of )FRS, but after the issue of the first
interim statements, the changes need to be explained and
reconciliations required should also be updated.
(c) ED 2009/11 also confirms that revaluations used as a basis for
deemed cost may arise during the period covered by the first IFRS
financial statements, rather than having been done in the period
prior to this. Normally, deemed cost would be either fair value,
determined in accordance with lAS 39, or the carrying value under
previous national standards.

15. (d) An entity may elect to use fair values for property, plant and
equipment, investment properties and intangibles as the deemed
cost under IFRS. This fair value may have been a market-based
revaluation or an indexed amount. This means that even if the
cost model is used for these assets under IFRS, this valuation can
be used to replace cost initially. Therefore, the entity can use fair
value as the deemed cost but then not have to revalue the assets
each year.
(e) Some actuarial gains and losses on pension schemes are left
‘unrecognised under lAS 19 Employee benefits. A first-time
adopter may find it easier to recognise all gains and losses at the
date of transition and this option is given in IFRS 1.
(f) Past currency translation gains and losses included in revenue
reserves need not be separated out into the currency translation
reserve.
(g) Under lAS 32 Financial instruments: presentation part of the
proceeds of convertible debt is classified as equity. If the debt had
been repaid by the date of transition, no adjustment is needed for
the equity component.
(h) If a subsidiary adopts IFRS later than its parent, then the
subsidiary may value its assets and liabilities either at its own
transition date its parent’s transition date (which would normally
be easier).
Note
There are also three situations where retrospective application of IFRS is
prohibited. These relate to derecognition of financial assets and liabilities,
hedging and estimates.
The IASB thought that it would be impractical to obtain the information
necessary to restate past financial statements, and that restating past fair
values and estimates was open to manipulation.

16. Implications of adoption of IFRS
There are a number of considerations to be made when adopting IFRS for
the first time. The key factors on converting from local GAAP to IFRS are
discussed below.
Factors to consider in implementing IFRS
Initial evaluation
The transition to IFRS requires careful and timely planning. Initially there
are a number of questions that must be asked to assess the current
position within the entity.
a) Is there knowledge of IFRS within the entity?
b) Are there any agreements (such as bank covenants) that are
dependent on local GAAP?
c) Will there be a need to change the information systems?
d) Which IFRSs will affect the entity?
e) Is this an opportunity to improve the accounting systems?
Once the initial evaluation of the current position has been made, the
entity can determine the nature of any assistance required.
They may need to:
 engage IFRS experts for assistance. Such experts can provide staff
training and assistance on the preparation of the opening statement
of financial position and first set of accounts. They can inform the
entity of the information that will be needed to ensure a smooth
transition to IFRS. It is essential that the entity personnel understand

17. the key differences between local GAAP and IFRS and in particular
the IFRS that will most affect the entity
 inform key stakeholders of the impact that IFRS could have on
reported performance. This includes analysts, bankers, loan creditors
and employees. Head office personnel will not be the only staff to
require training; managers of subsidiaries will need to know the
impact on their finance functions as there will be budgeting and risk
management issues
 produce a project plan that incorporates the resource requirements,
training needs, management teams and timetable with a timescale
that ensures there is enough time to produce the first IFRS financial
statements
 investigate the effect of the change on the computer systems.
Establish if the current system can easily be changed and, if not,
what the alternatives will be. Potentially the IT cost could be
significant if changes need to be made.
Other considerations
Aside from the practical aspect of implementing the move to IFRS, there
are a number of other factors to consider:
(i) Debt covenants
 The entity will have to consider the impact of the adoption of
IFRS on debt covenants and other legal contracts.
 Covenants based on financial position ratios (for example the
gearing ratio) and income statement measures such as interest
cover will probably be affected significantly by the adoption of
IFRS.
 Debt covenants may need to be renegotiated and rewritten, as
it would not seem to be sensible to retain covenants based on a
local GAAP if this is no longer to be used.

18. (ii) Performance related pay
 There is a potential impact on income of moving to IFRS, which
causes a problem in designing an appropriate means of
determining executive bonuses, employee performance related
pay and long-term incentive plans.
 With the increase in the use of fair values and the potential
recycling of gains and losses under IFRS (e.g. lAS 21 The effects
of changes in foreign exchange rates), the identification of
relevant measures of performance will be quite difficult.
 If there are unrealisecl profits reported in the income
statement/statement of comprehensive income, the entity will not
wish to pay bonuses on the basis of profits that may never be
realised in cash.
 There may be volatility in the reported figures, which will have
little to do with financial performance but could result in major
differences in the pay awarded to a director from one year to
another.
(iii) Views of financial analysts
 It is important that the entity looks at the way it is to
communicate the effects of a move to IFRS with the markets and
the analysts.
 The focus of the communication should be to provide assurance
about the process and to quantify the changes expected.
Unexpected changes in ratios and profits could adversely affect
share prices.

19.  Presentations can be made to interested parties of the potential
impact of IFRS. Analysts should have more transparent
andcomparable data about multinational entities once IFRS has
been adopted.
 Consistency over account classifications, formats, disclosures and
measurement will assist the analyst’s interpretation.
 Analysts will be particularly concerned about earnings volatility
that may affect how they discount future profits to arrive at a
present fair value for the business.
Benefits of harmonisation
There are a number of reasons why the harmonisation of accounting
standards would be beneficial. Businesses operate on a global scale and
investors make investment decisions on a worldwide basis. There is
thus a need for financial information to be presented on a consistent basis.
The advantages are as follows.
(1) Multi-national entities
Multi-national entities would benefit from closer harmonisation for the
following reasons.
(a) Access to international finance would be easier as financial
information is more understandable if it is prepared on a
consistent basis.
(b) In a business that operates in several countries, the
preparation of financial information would be easier as it would
all be
prepared on the same basis.
(c) There would be greater efficiency in accounting departments.
(d) Consolidation of financial statements would be easier.

20. (2) Investors
If investors wish to make decisions based on the worldwide
availability of investments, then better comparisons between entities
are required. Harmonisation assists this process, as financial
information would be consistent between different entities from
different regions.
(3) International economic groupings
International economic groupings, e.g. the EU, could work more
effectively if there were international harmonisation of accounting
practices. Part of the function of international economic groupings is
to make cross-border trade easier. Similar accounting regulations
would improve access to capital markets and therefore help this