Operating Segments Flashcards
What does IFRS 8 require entities to disclose about their operating segments?
Entities must disclose information about their operating segments, including products and services, geographical areas of operation, and major customers, based on internal management reports.
How does IFRS 8 define an operating segment?
An operating segment is a component of an entity that:
- Engages in business activities earning revenues and incurring expenses.
- Has results reviewed by management to allocate resources and assess performance.
- Has discrete financial information available.
What are the criteria for identifying reportable segments under IFRS 8?
- Revenue: At least 10% of combined internal and external revenue.
- Profit/Loss: At least 10% of the greater of the combined profit of profitable segments or combined loss of loss-making segments.
- Assets: At least 10% of the combined assets of all segments.
What is the 75% revenue rule in IFRS 8?
Reportable segments must cover at least 75% of external revenue. If not, additional segments need to be reported.
What additional geographical information is required by IFRS 8?
Revenues and non-current assets must be disclosed by geographical area, with material revenues/assets reported for individual countries.
What specific information must be disclosed about each reportable segment?
- Profit or loss.
- Total assets and liabilities.
- Measurement methods for segment profit, assets, and liabilities.
- Reconciliations to totals in the financial statements.
How does IAS 24 define a related party?
A related party is a person or entity connected to the reporting entity through control, joint control, significant influence, or being key management personnel.
What are examples of related parties under IAS 24?
- Parent, subsidiary, or associate companies.
- Key management personnel and their close family members.
- Entities under common control.
- Partnerships, trusts, or companies where a related individual has significant control.
What constitutes a related party transaction under IAS 24?
A transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged.
What are the disclosure requirements for related party transactions under IAS 24?
- Nature of the relationship.
- Description and amounts of transactions.
- Amounts due to/from related parties.
- Doubtful debts and bad debt expenses.
- Compensation for key management personnel (total and by category).
Why are related party disclosures important?
- Transactions may not occur in the absence of the relationship.
- Terms may differ from those with unrelated parties.
- Third-party transactions may be influenced by the related party relationship.
What is the purpose of segment reporting?
Helps users evaluate the nature and financial effects of the business activities of the entity and the economic environments in which it operates.
What are the core principles of IFRS 8?
Based on the management approach, aligning segment reporting with internal management reports and focusing on internal decision-making.
What defines an operating segment?
A component of the entity with business activities generating revenue and incurring expenses, results reviewed by management for resource allocation and performance assessment, and discrete financial information.
What are the criteria for reportable segments?
Revenue test: 10% or more of combined internal and external revenue. Profit/loss test: 10% or more of the greater of combined profit of profitable segments or combined loss of loss-making segments. Asset test: 10% or more of total assets.
What is the 75% external revenue rule?
At least 75% of the entity’s external revenue must be included in the reportable segments.
What disclosures are required for segment reporting?
General information about how operating segments are identified, types of products/services generating revenue, detailed data for each segment including profit/loss, assets and liabilities, measurement methods, and reconciliations with consolidated financial statements.
What geographical information must be disclosed?
Revenues and non-current assets disclosed by geographical area, with material revenues/assets for individual foreign countries.
What is the aggregation of segments?
Aggregation is allowed if segments have similar economic characteristics, helping streamline reporting while maintaining relevance.
How are segments typically identified?
Segments are identified based on business lines (e.g., manufacturing vs. services) or geography (e.g., Europe vs. Asia).
Who is primarily targeted by IFRS 8?
Entities with publicly traded securities are primarily targeted, while voluntary disclosures for other entities are encouraged but not mandatory.
What are key challenges in segment reporting?
Identifying segments in complex businesses, ensuring comparability across entities and years, and deciding on aggregation while meeting user needs for detailed information.
