CH .18 Reportable Segments Flashcards
Explain the need for IFRS 8 Operating Segments?
and
When is it compulsory for an organisation to apply the standard?
Financial Statements Highly Aggregates information of the business, making it difficult for users to understand how the company has arrived in its current position.
Large entities often have a wide range of products or services and operate in a diverse range of locations, all of which contribute to the results of the entity as a whole.
In order to allow shareholders to fully understand the development of the company’s business, certain entities are required to provide segment information that discloses:
- revenues
- profits
- assets (amongst other items)
By major business area.
IFRS 8 Operating Segments is only
COMPULSORY for entities whose debt or equity instruments are traded in a public market (or entities filing or in the process of filing financial statements for the purpose of issuing instruments)
How is an operating segment defined? and identified?
An operating segment is defined as a component of an entity:
- - ‘that engages in business activities from which it may earn revenues and incur expenses.
-
- Operating results are regularly reviewed by the entity’s chief operating decision-maker to make decisions on how to allocate resources to the segment and assess its performance.
- This means Segments should be the same as internal management reports
- For which discrete financial information is available
When identifying a reportable segment, The basis of reporting information should be the one that best enables users to understand the business and the environment in which it operates.
So the company may decide to report based on revenues from a geographic area or a type of product line, but they must stay consistent.
When can a reportable segment be aggregated?
IFRS 8 says that two or more operating segments can be aggregated and reported as a single operating segment provided that they have similar economic characteristics, and are similar in the following respects:
- products and services
- production processes
- classes of customer
- distribution methods.
Current issue note:
The IASB has criticised many companies are over aggregating the information
What are the Quantitative thresholds for reportable Segments?
10% or more tests
An entity must separately report information about an operating segment that meets any of the following quantitative thresholds:
(a) Its revenue (internal and external) is 10% + of Total Revenue;
(b) Its reported profit or loss is 10% + of all segments in profit (or in loss if greater);
or
(c) Its assets are 10% or more of total assets.
75% Rule
- Segments reporting should be reported until at least 75% of the entity’s external revenue has been disclosed. (even if the 10 % rule is met but other segments meet the 75% rule that segment may be excluded)
- If the 75% test is not met then, Other smaller segments should be identified as reportable segments until 75% of external revenue is reported.
Notes:
- Operating segments that do not meet any of the quantitative thresholds may be reported separately if management believes that information about the segment would be useful to users of the financial statements.
- Other business activities and operating segments that are not reportable are combined into an ‘all other segments’ category.
Summary
- 10% of all revenue
-
10% of results (example attached)
- <strong>(add all profitable segments * 10%, segment with profit higher than the 10%)</strong>
- <strong>(add all segments in losses * 10%, the segment with losses higher than the 10%)</strong>
- the higher of the 10% of profits or loss-making segments creates the threshold for a segment to be reportable
- 10% of assets
Only have to report up to 75% of external revenue, if segment does
What are the disclosure requirements of IFRS 8 REPORTABLE SEGMENTS?
Key items to be disclosed ore:
- The basis used to identify the entity’s reportable segments
- Types of products/Services of each reportable segment derives their revenue
- External revenue by each product and service (if the reported basis is not products and services)
- Information about reliance on major customers (ie those who represent > 10% external revenue)
-
Geographical information on by:
- • Entity’s country of domicile
- • All foreign countries (subdivided if material)
- Reporting on:
- External Revenues - <strong>Allocated based on customer’s location</strong>
- Non-Current Assets - Excludes financial instruments, deferred tax assets, post-employment benefit assets, and rights under insurance contracts
- Reportable segment revenues, profit or loss, assets, liabilities and other material items: illustration attached
What are the advantage and Disadvantages of segment reporting?
What are some of the limitations of segment reporting?
Segmental reports have some limitations:
- Trading between segments may distort the results of each operating segment, particularly if the transactions do not occur at fair value.
- IFRS 8 states that segments should reflect the way in which the entity is managed. This means that segments information is not useful for comparing the performance of different entities.
- The segmentation process is based on management’s perspective, and some users lack trust in management’s intentions. For example, management may attempt to conceal loss-making areas of the business within a larger, profitable reportable segment.
- Many entities over-aggregate segments, which reduces the level of detail reported to stakeholders.
- Common costs may be allocated to different segments on whatever basis the directors believe is reasonable. This can lead to arbitrary cost allocation.
