CR Common Practices Segment disclosures and the chief operating decision maker under IFRS

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1 Introduction This report sets out our findings in respect of a review of the IFRS segment disclosures of 25 UK listed companies, drawn from a range of different industries, as covered by IFRS 8 Operating segments. We consider a number of points including disclosures in respect of the chief operating decision maker, the factors used to identify reportable segments and whether there has been aggregation of operating segments and income statement and statement of financial position information reported by segment. Specifically in relation to such information we will consider the measures of profit companies identify by segment and what is included and lastly whether companies disclose measures of assets and liabilities by segment and other related asset information such as capital expenditure. Key Findings 22 companies in the sample identify who their chief operating decision maker is. 10 companies identify their chief operating decision maker as an executive committee or executive management with a further 6 identifying it as the board at large. All 22 companies in the sample with multiple segments disclose the segmental basis of its operations with it being based on product/service for 12 companies, geographic location for 5 companies and a mix of the 2 for a further 5 companies. All 22 companies in the sample with multiple operating segments disclose revenue by segment. 24 companies in the sample identify the measure of profit used by the chief operating decision maker to assess performance. 20 Companies disclose either operating profit or adjusted operating profit as a profit measure that is monitored. 11 companies in the sample disclose a measure of assets by segment. 9 companies in the sample disclose a measure of liabilities by segment. 1

2 Companies under examination Our sample consists of the financial statements of 25 UK listed companies. The companies featured are drawn from a range of sectors including retail, airlines, restaurants and bars, industrial suppliers, business services and pharmaceuticals. The companies featured are audited by a range of large audit firms. Company Period end Auditor Industry Classification Associated British Foods plc 17 September 2016 Ernst & Young Food Producers Brewin Dolphin plc 30 September 2016 Deloitte Asset Managers Britvic plc 2 October 2016 Ernst & Young Beverages Close Brothers Group plc 31 July 2016 Deloitte Financial Services Debenhams plc 3 September 2016 PricewaterhouseCoopers General Retailers Diageo plc 30 June 2016 PricewaterhouseCoopers Beverages Diploma plc 30 September 2016 Deloitte Support Services Dixons Carphone plc 30 April 2016 Deloitte General Retailers easyjet plc 30 September 2016 PricewaterhouseCoopers Airlines Euromoney Institutional Investor plc 30 September 2016 PricewaterhouseCoopers Publishing Fenner plc 31 August 2016 PricewaterhouseCoopers Industrial Engineering GlaxoSmithKline plc 31 December 2016 PricewaterhouseCoopers Pharmaceuticals Real Estate Holding Grainger plc 30 September 2016 KPMG and Development Hays plc 30 June 2016 Deloitte Support Services Marston s PLC 1 October 2016 PricewaterhouseCoopers Restaurants & Bars Mitchells & Butlers plc 24 September 2016 Deloitte Restaurants & Bars Food and Drug Ocado Group plc 27 November 2016 PricewaterhouseCoopers Retailers Para gon Group plc 30 September 2016 KPMG Financial Services Sage Group plc 30 September 2016 Ernst & Young Software Senior plc 31 December 2016 Deloitte Aerospace Sky plc 30 June 2016 Deloitte Media Thomas Cook Group plc 30 September 2016 PricewaterhouseCoopers Travel & Tourism Victrex plc 30 September 2016 KPMG Specialty Chemicals William Hill plc 27 December 2016 Deloitte Gambling Wolseley plc 31 July 2016 Deloitte Industrial Supplies 2

3 Analysis Disclosure of the chief operating decision maker Under IFRS 8 the term chief operating decision maker identifies a function not specifically a manager with a specific title. This function is to allocate resources to and assess the performance of the operating segments of an entity (para 7). The chief operating decision maker can either be an individual or a group of individuals that carry out this function. Currently there is no requirement for a company to disclose the identity of its chief operating decision maker. An Exposure Draft which is currently in issue, however, ED/2017/2 Improvements to IFRS 8 Operating segments (March 2017) proposes the introduction of a requirement for an entity to disclose the title and description of the role of the individual or group which is the chief operating decision maker. Based on our review we found that: 22 of the 25 companies examined including Diageo, Victrex, Sage and Debenhams already identify who reviews their segmental disclosures although Euromoney Institutional Investor, Dixons Carphone Warehouse, GlaxoSmithKline and Senior do not specifically use the terminology chief operating decision maker. The three companies where we find no disclosure of identity are Brewin Dolphin, Paragon and Wolseley. 4 of the 22 companies identify their chief operating decision maker as an individual, Diploma, Thomas Cook, Grainger and William Hill, with it being the chief executive in each case. 6 of the 22 companies including Sky, Fenner, Britvic and Victrex identify the chief operating decision maker as the board. 10 of the 22 companies including EasyJet, Marstons, Sage and Hays identify the chief operating decision maker as the executive committee or executive management team. Mitchells and Butlers and Euromoney Institutional Investor refer to their chief operating decision makers respectively as chief executive and other board members and board and executive committee. Disclosure of the basis of organisation and aggregation of operating segments Under IFRS 8 an entity shall disclose the factors used to identify its reportable segments including the basis of organisation and a description of the aggregation criteria for operating segments combined into reporting segments (para 22(a)). A reportable segment is any operating segment or aggregation of operating segments which meets the following definition or a segment which accounts for either 10% of revenue, reported profit or loss in absolute terms or combined assets of all operating segments. An operating segment is 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 entities chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance (para 5). Under IFRS 8 for reporting segment basis operating segments may be aggregated for reporting purposes if the segments have similar economic characteristics and the segments are similar in each of the following respects: the nature of the products and services; the nature of the production processes; the type or class of customer for their products and services; the methods used to distribute their products or provide their services; and if applicable the nature of the regulatory environment (para 12). In addition an entity may combine 3

4 information about operating segments that do not meet the quantitative thresholds with information about other operating segments that do not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria outlined above (para 14). Based on our review we found that: All companies in the sample disclose the basis of organisation. Three companies, EasyJet (see appendix Extract 1), Brewin Dolphin and Ocado state that all operations represent a single operating segment. 12 companies including Fenner, Marstons, Associated British Foods (see appendix Extract 2) and Victrex identify type of product or service as the basis of organisation. 5 companies including Debenhams, Sage and Sky (see appendix Extract 3) identify geographic location as the basis of organisation. 5 companies including Britvic (see appendix Extract 4), William Hill and Dixons Carphone Warehouse identify a mix of geographic location and product type as the basis of organisation. 4 companies, Fenner, Sage (see appendix Extract 5), Senior and Wolseley aggregate operating segments for reporting purposes with Wolseley (see appendix Extract 6) doing so for two segments which do not meet the quantitative thresholds. Disclosure of income statement information by segment Under IFRS 8 an entity shall report a measure of profit or loss for each reportable segment. If the measure of profit or loss reported to the chief operating decision maker includes the following: revenues; interest revenue; interest expense; depreciation and amortisation; the entity s interest in the profit or loss of equity accounted investments; and income tax expense or income or if such information is otherwise regularly provided to the chief operating decision maker an entity shall disclose such information (para 23). Based on our review we found that: All 22 companies in the sample with multiple operating segments disclose separately revenue by segment with companies such as GlaxoSmithKline (see appendix Extract 7) and Sky (see appendix Extract 8) giving a detailed breakdown of segment revenue by type of revenue stream. 24 of the 25 companies in the sample identify the measure of profit used by the chief operating decision maker to assess performance. The exception is Brewin Dolphin. All 22 companies in the sample with evidence of multiple operating segments disclose separate quantification of the above identified profit measure by segment. 14 companies including Wolseley, Sky and Hays disclose operating profit by segment. 4

5 15 companies including Debenhams, Sage, Euromoney Institutional Investor and William Hill disclose adjusted operating profit by segment. Associated British Foods (see appendix Extract 9) and Senior (see appendix Extract 10) present a reconciliation of adjusted operating profit to statutory profit by segment showing individual adjustments separately by segment. Other measures of profit companies disclose by segment are: EBITDA (Mitchells & Butlers, Ocado and Sky); Adjusted profit before tax (Grainger); Gross profit (Victrex); Trading profit before exceptional items and amortisation of acquired intangibles (Wolseley); and Brand contribution defined as revenue less material costs and all other marginal costs that management considers to be directly attributable to the sale of a given product (Britvic). 15 of the 20 companies that report a measure of segmental profit which includes amortisation/depreciation disclose amortisation/depreciation by segment. The exceptions are Mitchells and Butlers (All relevant assets held by one segment), Grainger (depreciation/amortisation 1.7% of measure of segment profit), Paragon (depreciation/amortisation 4.5% of operating profit), Hays (12% of operating profit) and Sage. 5 companies Debenhams, Thomas Cook, Associated British Foods, William Hill and Wolseley go beyond what is required by disclosing separate amounts for depreciation and amortisation by segment. Only Paragon in the sample discloses interest revenue and interest expense by segment. In addition two further companies, Close Brothers and Grainger, disclose net interest or net finance costs by segment. IFRS 8 states that an entity may instead disclose net interest revenue if the majority of a segments revenues are from interest and the chief operating decision maker relies primarily on the net interest revenue to assess the performance of the segment (para 23). Only 3 companies in the sample, Grainger, Associated British Foods and Dixons Carphone Warehouse disclose the results of equity accounted investments by segment. No companies in the sample disclose income tax by segment. Disclosure of asset and liability information by segment Under IFRS 8 if the chief operating decision maker uses a measure of the segments assets or the segments liabilities in assessing segment performance, assets and liabilities shall be reported at those measures (para 26). Further if included in the measure of segment assets reviewed by the chief operating decision maker or otherwise regularly reported to the chief operating decision maker an entity shall disclose the amount of investment in associates and joint ventures accounted for by the equity method and the amounts of additions to non-current assets (para 24). Based on our review we found that: 11 companies in the sample including Associated British Foods, Senior, and Thomas Cook disclose a measure of assets by segment. 3 companies in the sample Fenner (see appendix Extract 11), Diploma and William Hill present a quantified breakdown by segment of different asset types included in the measure of segment assets disclosed. 5

6 For 10 of the 11 companies reporting a measure of segment assets the asset measure identified includes non-current assets. The exception to this is Hays which reports net trade receivables by segment stating specifically that this is the measure that is monitored for the purpose of appraising performance and allocating resources. 14 companies in the sample including Debenhams, Fenner, Diploma and Diageo disclose non-current asset additions by segment. Paragon and Wolseley (see appendix Extract 12) disclose a breakdown of non-current asset additions by type. Only Associated British Foods in the sample discloses the investment in entities accounted for using the equity method by segment. 9 companies in the sample including Fenner, Wolseley, Diploma and Thomas Cook disclose a measure of liabilities by segment. Summary - Conclusion: Our principal conclusions are that: 22 companies in the sample identify who their chief operating decision maker is. 10 companies identify their chief operating decision maker as an executive committee or executive management with a further 6 identifying it as the board at large. All companies in the sample disclose the segmental basis of its operations with it being based on product/service for 12 companies, geographic location for 5 companies and a mix of the 2 for a further 5 companies. All 22 companies in the sample with multiple operating segments disclose revenue by segment. 24 companies in the sample identify the measure of profit used by the chief operating decision maker to assess performance. 20 Companies disclose either operating profit or adjusted operating profit as a profit measure that is monitored. 11 companies in the sample disclose a measure of assets by segment. 9 companies in the sample disclose a measure of liabilities by segment. 6

7 Appendix Extracts Extract 1 EasyJet Annual Report 2016 Page 96 Extract 2 Associated British Foods Annual Report 2016 Page 109 7

8 Extract 3 Sky Annual Report 2016 Page 88 Extract 4 Britvic Report 2016 Page 108 8

9 Extract 5 Sage Group Annual Report 2016 Page 121 Extract 6 Wolseley Annual Report 2016 Page 80 9

10 Extract 7 GlaxoSmithKline Annual Report 2016 Page

11 Extract 8 Sky Annual Report 2016 Page 88 11

12 Extract 9 Associated British Foods Annual Report 2016 Page

13 Extract 10 Senior Annual Report 2016 Page 86 13

14 Extract 11 Fenner Annual Report 2016 Page 71 Extract 12 Wolseley Annual Report 2016 Page 81 14