Operating Segments

Question 1

Why is Segment Information important?

Answer 1

An entity’s operating segments is relevant to accessing the risks and returns of a diversified or multinational entity where often that information cannot be determined from aggregated data.

Segment information allows users of financial statements to:
1. Better understand the entity’s past performance.
2. Better assess the entity’s risks and returns.
3. Make more informed judgements about the entity as a whole.

Question 2

What is operating segment?

Answer 2

It is a component of an entity:
- That engages in business activities form which it may earn revenue and incur expenses.
- Whose operating results are regularly reviewed by the entity’s chief operating decision maker for resource allocation and performance evaluation.
- For which discrete financial information is available.

Question 3

What approach is used to identify an entity’s operating segments?

Answer 3

The management approach.

It depends on how many chief operating decision makers there are to review the internal reports or to allocate resources to the segments and assess their performances. It doesn’t matter the number of business activities to earn revenue and incur expenses.

Example: If there are 4 chief operating decision makers for 5 business units engaged in the business to earn revenue and incur expenses, the entity will only consist of 4 operating segments.

Question 4

How to identify reportable segments?

Answer 4

1. 10% test
2. 75% test

• The 10% test is to ensure that the operating segments are relevant to be reported separately.

Question 5

What is the 10% test?

Answer 5

• If any of the criteria is fulfilled, an operating segment is reportable.
  1. When revenue, both internal and external, is 10% or more of the total revenue of all operating segments.
• When result (profit/loss, in absolute amount) is 10% or more of the greater of:
  -> The combined reported profit of all operating segments that did not report a loss
  -> The combined reported loss of all operating segments that reported a loss.
• When total assets are 10% or more of the total assets of all operating segments.