A practical guide to segment reporting

1 May 2008

A practical guide to segment reporting

In February 2007 the Australian Accounting Standards Board issued AASB 8 Operating Segments, the Australian equivalent of IFRS 8 Operating Segments. It replaces AASB 114 Segment Reporting, and it applies to annual reporting periods beginning on or after 1 January 2009. Early adoption is permitted.

Key impacts of AASB 8

AASB 8 has a narrower scope than its predecessor standard AASB 114. It only applies to for-prot entities whose equity or debt securities are publicly traded or who issue, or are in the process of issuing, any class of instrument in a public market. This will mean that some entities that were previously within the scope of AASB 114 will have relief from reporting their operating segment information. It introduces a management approach to identifying and measuring the nancial performance of an entitys operating segments for nancial reporting purposes. Reported segment information will be based on the information that is provided internally to management. This will mean that: The way entities identify, measure and present their segment information could change There will be more diversity in the reported information on segments The measurement of segment information may not be in accordance with IFRS. In these cases, entities will need to reconcile key nancial information presented in their nancial statements Entities will no longer need to prepare two sets of information for internal and external reporting

Reportable segments are no longer limited to those that earn a majority of revenue from sales to external parties. This will mean that entities may now report the different stages of vertically integrated operations as separate segments.

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Key differences between AASB 8 Operating Segments and the former AASB 114 Segment Reporting
AASB 8 Operating Segments Who does it apply to? It applies to for-prot entities that issue and/or trade equity or debt securities in a public market, or are in the process of doing so. AASB 114 Segment Reporting It applied to all reporting entities in the for-prot sector. PwC insight We anticipate early adoption of AASB 8 by reporting entities that were caught under the previous standard, AASB 114, and that wish to gain relief from reporting their segment information. We expect there will be an increase in the number of segments disclosed. In particular, vertically integrated operations may become separately reportable.

What are operating segments?

They are business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker and for which discrete nancial information is available. The information to be reported is based on information that management uses to view the business.

Segments were only reportable where they were subject to risks and returns that are different from those of other segments.

What information is reported on operating segments?

The information reported was based on the disaggregation of nancial information presented in the consolidated nancial statements and the differing risks and rewards of the entitys distinguishable components.

The way in which management assess the performance of the business is expected to become more transparent. Segment information will be at risk of greater scrutiny and criticism from shareholders and analysts. Entities should ensure their stakeholder communication on how segment information is determined and reconciled to the nancial statements is clear. Currently the segment information prepared and reviewed internally may not be supported by robust processes and controls, or subject to external audit. Entities should be aware that implementing such processes and systems could be costly.

What is the measurement of segments based on?

It is based on what is reported to the chief operating decision maker.

It is calculated using IFRS compliant information.

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What do entities need to do on rst-time adoption of AASB 8?

Identify the chief operating decision maker (CODM) (refer to section 1 for more information). Identifying the correct person/s within the company is fundamental to the correct identication and measurement of reportable segments. Be aware that more operating segments may be identied. Some companies may experience an increase in the number of reportable segments, particularly where vertically integrated operations are identied or where more segments of the business are regularly reviewed by the CODM. Consideration will need to be given to the practicalities of presenting this information in the nancial statements. Revisit goodwill impairment. Given that goodwill cannot be allocated to a group of cash generating units larger than an operating segment, changes in the identication and measurement of operating segments will need to be carefully considered. Comparatives will require restatement. Management should consider the impacts of AASB 8, resolve any issues and commence capturing the relevant data well before the initial application of the standard.

Practical experience
AASB 8 Operating Segments was released to align segment reporting with the requirements of the equivalent US standard SFAS 131. Because AASB 8 adopts the requirements of the US standard almost in its entirety, PwC has practical experience in helping US companies which may benet Australian companies as they commence rst time adoption.

Insight. Key ndings from the US show that:

Financial statement preparers subject to Sarbanes-Oxley Section 404 requirements may experience signicant costs as a result of ensuring internal processes and systems are sufciently robust in capturing internal segment information for disclosure in the nancial report. Identifying the CODM can prove problematic. Judgements about the level of operations that are regularly reviewed by the CODM have been challenging and subject to regulatory scrutiny. The SEC has scrutinised a number of companies about the appropriateness of aggregating operating segments.

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Contents
A practical guide to segment reporting Section 1: AASB 8 at a glance
Scope of AASB 8 Application date What is an operating segment? Determining reportable segments Financial statement disclosures

3 8
8 8 8 9 11

Section 2: Identifying operating segments

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Can the chief operating decision maker (CODM) be a group of individuals? Is the CODM always viewed as the highest level of management at which decisions are made? Can a head ofce function be an operating segment? Would the review of revenue-only information meet the denition of an operating segment? Can vertically integrated operations and cost centres that dont earn revenues be classied as an operating segment? Can a research and development function be an operating segment? Can a discontinued operation be an operating segment? An entity is structured in a matrix style, where the CODM reviews two overlapping sets of nancial information. How are the operating segments determined?

12
12 12 12 13 13 14 14 15

Section 3: Aggregating and reporting segments

3.1 3.2 3.3 3.4 3.5 3.6 If operating segments are based on geography rather than products or services can they still be aggregated? Can a company aggregate start-up businesses with mature businesses? Can two similar operating segments be combined despite having different long-term average gross margins? How should an entity perform the 10 % test when each of an entitys operating segments report different measures of segment protability and segment assets? How should an entity identify its operating segments when it has both prot and loss making segments? Can information about non-reportable operating segments be combined and disclosed in an all other category, together with items that reconcile the segment information to the statutory information?

16
16 16 17 19 20

21

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3.7

Can a company aggregate an immaterial non-reportable segment with a reportable segment, even though the AASB 8 aggregation criteria have not been met? When applying the 75% test under AASB 8 para 15, must the next largest operating segment always be selected? An illustrative example based on VALUE AIFRS Holdings 2008

21 21 22

3.8 3.9

Section 4: Segment disclosures

4.1 4.2 4.3 Where the CODM is provided with more than one measure of segment protability, what measure of segment protability should be reported? What measure must be reported when the asset information reported to the CODM is limited or not reviewed at all? Do the measures of prot or loss and assets and liabilities presented for each operating segment have to comply with the IFRS accounting policies used in the consolidated nancial statements? When should an entity consider and review its segment reporting? Is restatement of segment information required when a reorganisation causes the composition of reportable segments to change? What is the denition of material where an entity is required to separately disclose material revenues and material non-current assets from an individual foreign country [AASB 8 para 33]?

24
24 24

25 26 27

4.4 4.5 4.6

27

Section 5: Other matters for consideration

5.1 5.2 5.3 The impact of AASB 8 on accounting for impairment of assets Convergence with US standard SFAS 131 Whats in the pipeline?

28
28 28 28

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Section 1

AASB 8 at a glance

What is the scope of AASB 8?

AASB 8 applies to for-prot entities that prepare nancial statements in accordance with Part 2M.3 of the Corporations Act, that prepare general purpose nancial statements, and that: trade equity or debt securities in a public market, or le, or are in the process of ling, nancial statements with a securities commission or other regulatory organisation for the purposes of issuing any class of instruments in a public market.

Insight:
We expect AASB 8 to apply to entities that issue instruments on the public market where those instruments can only be redeemed by putting them back to the issuer. For example, XYZ Equity Investment Fund issues a public prospectus whereby members of the public can subscribe for units. Investors can only redeem their units by selling them back to the fund. Since XYZ Equity Fund has issued a prospectus to the market and subsequently issued instruments to members of the public, AASB 8 would apply.

When does it apply?

AASB 8 applies to annual reporting periods beginning on or after 1 January 2009. It may be early adopted for annual reporting periods beginning on or after 1 January 2005, provided the entity has made a written election under CA 334(5) of the Corporations Act and discloses that fact in the notes to the nancial statements.

What is an operating segment?

An operating segment is a component of an entity: i. ii. that engages in business activities from which it may earn revenues and incur expenses; whose operating results are regularly reviewed by the entitys chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance; and for which discrete nancial information is available.

iii.

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How do I identify an entitys operating segments?

There are four key steps that entities should take in order to identify their operating segments. Entities will need to: 1 2 3 4 Identify the chief operating decision maker (CODM) Identify its business activities (which may not necessarily earn revenue or incur expenses) Determine whether discrete nancial information is available for the business activities Determine whether that information is regularly reviewed by the CODM

Insight:
PwCs US experience has shown that identifying the CODM can be problematic. So too is the determination of the level of operations that are regularly reviewed by the CODM to make decisions. This is an area that has also been scrutinised by the US regulator, so its critical that entities give due consideration to these elements. It is also important to regularly reassess this, particularly following a business reorganisation, acquisition or disposal. A change in the CODM may impact the operating segments identied, which will impact the segments reported and their measurement.

Section 2 considers some of the practical implications when identifying an entitys operating segments.

What is a chief operating decision maker?

The chief operating decision maker is a function and not necessarily a person. That function is to allocate resources to, and assess the performance of, the operating segments. It is likely to vary from entity to entity it may be the CEO, chief operating ofcer, the senior management team, or the board of directors. It doesnt matter what the title or titles of the person/s named as chief operating decision maker is, as long as that is the person or people responsible for making strategic decisions about the entitys segments.

How do I determine my entitys reportable segments?

Not all operating segments must be separately reported. Similar to the principles in the former standard, two or more segments may be combined (aggregated) and reported as one if certain conditions are satised. Operating segments are only reportable if they exceed quantitative thresholds. Aggregation of operating segments (AASB 8 para 12) Aggregation of two or more operating segments into a single reportable segment is permitted where certain conditions are met. Two or more operating segments may be combined as a single reportable segment if: aggregation provides nancial statement users with information that allows them to evaluate the business and the environment it operates in; they have similar economic characteristics; and they are similar in each of the following respects: a) the nature of the products and services,

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b) c) d) e)

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 (i.e. banking, insurance or public utilities).

Quantitative thresholds (AASB 8 para 13) However, information on an operating segment (or an aggregated operating segment) must be separately reported if: reported revenue (external and intersegment) is 10% or more of the combined revenue of all operating segments the absolute amount of the segments reported prot or loss is 10% or more of the greater of the combined reported prot of all operating segments that did not report a loss, and the combined loss of all operating segments that reported a loss.

the segments assets are 10% or more of the combined assets of all operating segments.

Minimum number of reportable segments After determining the reportable segments the entity must ensure that the total external revenue attributable to those reportable segments is at least 75% of the entitys total revenue (AASB 8 para 15). If the 75% threshold is not met then additional reportable segments must be identied (even if they do not meet the 10% thresholds), until at least 75% of the total entitys external revenue is included in its reportable segments. Section 3 considers some of the practical implications of determining reportable segments.

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Financial statement disclosures

The disclosure requirements under AASB 8 aim to enhance the transparency and usefulness of segment information. The disclosures focus on the information that management believes is important when running the business. The disclosure requirements are summarised below.
Reference to disclosure requirements General information (para 21(a) & 22) Required disclosures Factors used to identify the reportable segments Types of products/services from which each reportable segment derives its revenue Specic amounts as listed in para 23 & 24, such as revenues from external customers etc. Explanation of the measurement of the segment items The basis of accounting for transactions between reportable segments The nature of differences between the measurements of segment items and comparable items in the entitys nancial report (ie accounting policy differences, asymmetrical allocations and changes from prior periods in methods used) Totals of segment revenue, segment prot or loss, segment assets and segment liabilities and any other material segment items to corresponding totals within the nancial statements Revenues from external customers for each product and service, or each group of similar products and services Revenues from external customers attributed to the entitys country of domicile and attributed to all foreign countries from which the entity derives revenues Revenues from external customers attributed to an individual foreign country, if material Non-current assets (other than nancial instruments, deferred tax assets, post-employment benet assets, and rights arising under insurance contracts) located in the entitys country of domicile and in all foreign countries in which the entity holds assets Non-current assets in an individual foreign country, if material Extent of reliance on major customers, including details if any customers revenue is greater than 10% of the entity revenue

Information about the reportable segment; prot or loss, revenue, expenses, assets, liabilities and the basis of measurement (para 21(b) & 23 27)

Reconciliations (para 21(c) & 28)

Entity-wide disclosures (para 31 34)

Section 4 outlines some of the practical implications regarding the disclosures required under AASB 8. Note. There is no longer a primary and secondary segment format. That is, if an entity has determined that its operating segments are based on its products and services then it does not need to provide geographical segment information other than the specic entity-wide disclosures mentioned in the table above.

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Section 2

Identifying operating segments

2.1 Can the chief operating decision maker (CODM) be a group of individuals?
Yes. The CODM may be an individual or a group of individuals.

Insight:
In practice, a business activity usually has a unit manager who is directly accountable to, and maintains regular contact with, an individual or group of individuals to discuss operating activities, nancial results, forecasts, or plans for the business activity. The CODM is that individual or group of individuals that is responsible for the allocation of resources and assessing the performance of the entitys business units.

2.2

Is the CODM always viewed as the highest level of management at which decisions are made?
Typically yes. In almost every organisation, decisions about the entitys overall resource allocation to different areas of its business are made at the highest level of management. However, certain decisions may be made at lower levels of management where more detailed disaggregated information is reviewed.

Insight:
Judgement is required. In practice, the CODM will vary from entity to entity and it may be the chief executive ofcer, chief operating ofcer, senior management team or the board of directors.

2.3

Can a head ofce function be an operating segment?

Yes. A head ofce function that undertakes business activities (for example, a treasury operation that earns interest income and incurs expenses), may be an operating segment provided its revenues earned are more than incidental to the activities of the entity, and discrete nancial information is reviewed by the CODM. In contrast, a head ofce function (such as accounting, information technology, human resources and internal audit functions) that earns revenue that is purely incidental to the entitys activities would not be an operating segment. Such functions should be reported in the reconciliation of the segment totals as other reconciling items.

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Example Incidental revenues.

Examples of incidental revenues might include interest income and expenses, realised and unrealised foreign exchange gains and losses, and the net effect of pension schemes.

2.4

If the CODM reviews only the revenue information for a particular area of business does that meet the denition of an operating segment?
No. For most entities the review of revenue-only data is not sufcient for decision making related to resource allocation or performance evaluation of a segment.

Insight:
Only in rare cases where product sales or service provisions involve minimal costs is the revenue-only data representative of the results. In this case, the review of the revenue-only data by the CODM may be sufcient to conclude that the business activity falls within the denition of an operating segment.

2.5

Can vertically integrated operations and cost centres that earn no revenues be classied as an operating segment?
Yes. AASB 8 denes an operating segment as a component of an entity that engages in business activities from which it may earn revenues and incur expenses, which recognises that not all business activities earn revenues.

Example Cost centres as a separate segment.

Manufacturing entities that are managed by an operating cost centre may not reect separate revenues because the entitys overall customer revenues are not allocated to the cost centre. Provided discrete nancial information is prepared and reviewed by the CODM, such components would be considered operating segments. However, care should be exercised when determining whether an internally reported activity constitutes an operating segment (refer to question 2.3 for more information).

Example Vertically integrated operation.

Where transfer prices are charged between an entitys stages of production (as with oil-and-gas companies) the fact that the transfer prices are not assessed would not exempt such activities from being considered operating segments. In the case of oil-and-gas companies, its operating segments may include exploration, development, production, rening and marketing if the CODM manages the entity in this way.

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2.6

Can a research and development function be an operating segment?

Yes, provided discrete information is reviewed by the CODM. Typically, an entitys R&D function is a vertically integrated operation (refer to section 2.5), in which the R&D activities serve as an integral component of the entitys business. The denition of operating segment envisages that part of an entity that earns revenue and incurs expenses relating to transactions with other components of the same entity may still qualify as an operating segment even if all of its revenue and expenses derive from intra-group transactions.

Insight:
Where entities allocate entity-wide R&D costs into the business activities for which the R&D is specically being performed, the R&D function will be considered a separate operating segment provided the CODM separately reviews discrete R&D activity and data.

2.7

Can a discontinued operation be an operating segment?

Yes. A discontinued operation can meet the denition of an operating segment if: it continues to engage in business activities; the operating results are regularly reviewed by the CODM; and discrete nancial information is available to facilitate the review.

Example Insurance company disposing of its workers compensation business.

An insurance company discontinues its workers compensation line of business, but existing customers can continue to renew policies for indenite periods. The discontinuation meets the criteria for discontinued operations under AASB 5 Non-current Assets Held for Sale and Discontinued Operations. For internal purposes, separate nancial results are maintained for this business and they are reviewed by the CODM. Given, the operation is still being managed by the CODM it would continue to meet the denition of an operating segment. Conversely, if the CODM no longer reviews discrete nancial information on the discontinuing operation it would no longer fall within the denition of an operating segment. For example, a furniture manufacturing plant shuts down its operations in Asia. The plant is no longer producing inventory and it has been reclassied under AASB 5 as assets held for sale. Discrete nancial information is no longer reported. As a result, it would not be considered an operating segment. Note. Particular disclosures would still need to be presented in accordance with AASB 5.

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2.8

An entity is structured in a matrix style, where the CODM reviews two overlapping sets of nancial information. How are the operating segments determined?
AASB 8 para 10 addresses the issue of matrix structures. It uses the example of an entity where some managers are responsible for certain product and service lines worldwide, whereas other managers are responsible for specic geographical areas. The CODM reviews the operating results of both sets of components, and discrete nancial information is available for both. In this situation, the entity should determine which set of components constitutes the operating segments, taking account of what its nancial statement users would need to know in order to evaluate the entitys business activities and the environment it operates in.

Insight:
Matrix-structured entities have the exibility to determine how they present their operating segments. For these entities it will be a matter of weighing up the importance of the factors that have led to the matrix structure. For example, if an entitys priority is to increase total sales, market share and geographic spread, the most relevant information for shareholders would be based on geographic markets. On the other hand, if an entitys priority is to improve the sales of individual products and the CODM believes that improving and maintaining the product quality is the key to achieving this and that different geographic markets are likely to respond uniformly to such measures, then the most relevant information for shareholders would be based on products. This approach would be acceptable under AASB 8 if: the entity can sufciently support the basis for how it determined its segments; and the entitys basis for determining segments enables users of its nancial statements to evaluate its activities and nancial performance, and the business environment it operates in.

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Section 3 Aggregating and reporting segments

3.1 If operating segments are based on geography rather than products or services can they still be aggregated?
Yes, provided that individual country segments have similar economic characteristics and are similar in each of the other areas set out in AASB 8 para 12.

Insight:
In practice the requirement that segments must have similar economic characteristics may be difcult to overcome when combining individual countries. That is because the individual countries will need to have similar economic conditions, exchange control regulations, and underlying currency risks in order for them to be considered to have similar economic characteristics.

Even when aggregation of geographic segments is permitted, AASB 8 para 33 requires the separate disclosure of revenues and assets for each material foreign country.

3.2

Can a company aggregate start-up businesses with mature businesses?

Yes. One of the objectives of requiring disclosures about segments is to help users assess the future prospects of an entitys business. Further, segments with similar economic characteristics often exhibit similar long-term nancial performance. To the extent that the future nancial performance (including the competitive and operating risks) of the start-up businesses is expected to be similar to that of a companys mature businesses, the economic-characteristics requirement for aggregation would be satised.

Example A retail chain opens new stores.

A retail chain has mature businesses (store locations) in ve major cities across Australia. In the current year, the retail chain opens additional stores in those cities. Each store constitutes a separate operating segment as the CODM of the retail chain reviews nancial results and makes decisions on a store-bystore basis. These start-up stores may meet the economic characteristics requirement for aggregation with mature stores if management determines that the future long-term nancial performance of the stores is expected to be similar.

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3.3

Can two similar operating segments be combined despite having different long-term average gross margins?
Yes, potentially. Many different factors should be considered when an entity is determining whether the economic characteristics of its segments are similar. AASB 8 states that similar long-term average gross margins for two operating segments are expected if their economic characteristics were similar. However, other performance factors such as trends in sales growth, returns on assets employed and operating cash ow may also be considered by an entity when it is assessing whether segments have substantially similar economic characteristics.

Insight:
When management reviews nancial-performance measures and compares segments, it should consider not only the quantitative results, but also the reasons why the results are similar or dissimilar before reaching a conclusion about whether the economic characteristics are similar/dissimilar. Further, in the US a number of entities have been scrutinised by the SEC about the appropriateness of their aggregation of operating segments. Australian entities should be mindful of this when considering the aggregation of their operating segments, and ensure their facts and circumstances support aggregation. Key learnings from the US include: If an entity cannot demonstrate similar economic characteristics, it cannot rely on the other criteria in paragraph 12 to aggregate operating segments. The SEC has stated that aggregation on the basis of similar long-term average gross margins is not supportable where the variation in gross margins is greater than 5%. However, the US Financial Accounting Standards Board and PwC believe that it is important to consider a variety of factors, such as trends in growth of the products, gross margins and managements long-term expectations for the product lines. Several years of both historical and future nancial performance should be considered. Segment reporting should be consistent with other public information and disclosures, such as ASX announcements. Management should document (in robust analysis) their conclusion that segments are economically similar.

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Example A retailer of womens coats.

A retailer of womens coats has the following operating segments: store label wool coats; other designer brands wool coats; and fur coats. The following table reects limited nancial information for each segment:
Store label wool coats Average gross-margin percentage Sales volume Average sales price Growth rate per year 25% 500,000 units 175 per unit 3% (steady) Other designer brands wool coats 40% 375,000 units 365 per unit 2% (steady)

Fur coats

40% 20,000 units 4,200 per unit -5% (declining)

The companys fur coats line of business has experienced sales declines over the past few years and the rate of decline is expected to continue. Management believes that the sales decrease is principally in response to the growing consumer focus on animal rights. Management expects that it can maintain the prot margin at 40% for at least the next three years. While management views the fur coats line as still favourably contributing to its operations, management has indicated that after a ve-year period it will deliberate whether to maintain the line. The wool for the store label and other designer brands segments is purchased from the same manufacturer. While, on average, the margins and gross sales of the two segments differ, there are specic designer lines in the other designer brands segment with margins and sales prices very similar to the store label segment. The growth rates of the two segments have moved in tandem over the past 10 years, and management expects this to continue in the future. In this example, the store label and other designer brands segments possess similar economic characteristics, despite the difference in average gross margins. Conversely, the fur coats segment may be viewed as having different economic characteristics than the other segments (in light of the ongoing differences in growth and the operating risks), despite the similarity of its average gross margins to that of the other designer brands segment.

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3.4

How should an entity perform the 10% test when each of an entitys operating segments report different measures of segment protability and segment assets?
Where segments report different measures of segment protability, assets and liabilities, a consistent measure should be developed for the purposes of assessing the 10% test. This measure should be used regardless of whether the CODM uses that measure when evaluating the segments performance.

Example Segments use different measures of protability.

An entity has three operating segments, none of which can be combined under the aggregation criteria. The following is reported to the CODM: Segment 1 measures protability based on operating income, with pension amounts reported on a cash basis. Segment 1 is the only segment for which pension expense is reported; while the other segments have pension expenses, allocations of pension amounts are not made to the other two segments. Asset information is limited to the presentation of accounts receivable. Segment 2 measures protability based on pre-tax income, which includes an internal cost-of-capital amount, charged by corporate that is assessed to Segment 2 only. Asset information includes only accounts receivable and xed assets. Segment 3 measures protability based on post-tax income. Asset information is limited to accounts receivable.

In this example, operating income is the lowest measure of protability that is available and which is provided to the CODM for all three segments. It should be the measure used in the 10% test. The same approach would apply for assets. Accordingly, in this example accounts receivable would be the most consistent measure of assets to perform the 10% test.

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3.5

How should an entity identify its reportable segments under AASB 8 para 13(b) when it has both prot and loss making segments?
Where an entity is applying the 10% test to segment results the entity is required to ascertain whether the absolute amount of its reported prot or loss is 10% or more of the greater, in absolute amount, of (i) (ii) the combined reported prot of all operating segments that did not report a loss; and the combined reported loss of all operating segments that reported a loss.

Example Determining reportable segments.

Entity A has the following operating segments. The revenues (internal and external), prots and assets are set out below. Entity A needs to determine how many reportable segments it has. The gures are in the same proportions as in the previous year.
Segment A B C D E F Total Revenue 11,000 7,500 3,000 3,500 4,000 1,500 30,500 Prot/loss 2,000 1,000 (1,000) (500) 600 400 2,500 Total Assets 25,000 15,500 10,500 7,000 7,000 3,500 68,500

In this example: Segment A, B, D and E clearly satisfy the revenue and assets tests under AASB 8 para 13(a) & (c) and they are separate reportable segments. There is no need to consider the prots test in these cases. Segment C does not satisfy the revenue test but it does satisfy the assets test and its a reportable segment. Therefore, there is no need to consider the prots test. Segment F does not satisfy the revenue or the assets tests but it does satisfy the prots test. Thats because its prot of 400 is 10% of the greater of the absolute amount of losses of those segments in loss (1,500) and those which either break even or make a prot (including segment F this is 4,000). Therefore segment F is a reportable segment.

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3.6

Can information about non-reportable operating segments be combined and disclosed in an all other category, together with items which reconcile the segment information to the statutory information?
No. As discussed in paragraph 16 of AASB 8, all non-reportable operating segments and other business activities must be combined and disclosed in an all other category on a stand-alone basis. The disclosure of other reconciling items must be presented separately in the reconciliation of segment totals to the consolidated nancial statement totals.

3.7

Can a company aggregate an immaterial non-reportable segment with a reportable segment, even though the aggregation criteria in paragraph 12 have not been met?
No. Two or more operating segments may only be combined if all of the aggregation criteria are met. An exception to this is under AASB 8 para 14, which allows the aggregation of two or more immaterial non-reportable segments (ie operating segments that do not meet the 10% quantitative threshold) where the operating segments have similar economic characteristics and share a majority of the aggregation criteria.

Insight:
The scenario in 3.5 has identied two operating segments one is a reportable segment and the other is a non-reportable segment. In such situations, an entity may treat the immaterial non-reportable segment in one of the following ways (assuming the 75% test in paragraph 15 of AASB 8 is met): include the segment in an all other category; voluntarily report the segment separately; or if applicable, aggregate the segment with other non-reportable segments in accordance with paragraph 14.

3.8

When applying the 75% test under AASB 8 para 15, must the next largest operating segment always be selected?
No. The entity should select the next most meaningful operating segment.

Insight:
The next most meaningful operating segment may be the next largest in terms of revenue, but it need not be. Entities should consider both quantitative and qualitative factors when determining which segment would be most useful to users of nancial statements. For example, an entity may select a small segment in terms of revenue contribution because it is a potential growth segment, which is expected to materially contribute to group revenue in the future.

Note. Immaterial segments can only be aggregated with material segments if they meet the denition of an operating segment (see page 8), are economically similar, and meet all of the aggregation criteria in AASB 8, para 12.

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3.9

An illustrative example based on VALUE AIFRS Holdings 2008

The basis for this illustrative example has been taken from PwCs VALUE AIFRS Holdings 2008 illustrative nancial statements publication. It is largely based on the information contained within Appendix I. VALUE AIFRS Holdings 2008 has identied the following operating segments.
Total revenue $,000 9,000 6,100 15,100 3,000 2,100 5,100 11,600 13,300 4,100 3,850 5,500 1,100 59,650 % of segment revenue EBITDA $,000 2,020 1,370 3,390 820 580 1,400 1,900 4,000 700 900 1,000 897 59,650 % of EBITDA Total assets $,000 7,000 4,730 11,730 3,300 2,200 5,500 11,600 9.640 3,500 2,590 4,500 1,718 50,878 % of segment assets

Segment

Furniture mfg (Aust) commercial ofce hardwood Furniture mfg (Indon) commercial ofce hardwood Furniture retail (Aust) IT consulting (Aust) IT consulting (Asia) Electronic equipment Land development Machinery hire Total of all segments Balance per nancial statement

25

24 820 580 1,400 13 28 5 6 7 6

23

9 20 22 7 6 9 2

11 23 19 7 5 9 3

58,540

The following ow chart demonstrates the steps required when determining which segments should be presented separately as reportable segments and which segments constitute immaterial non-reportable segments and should be disclosed under the all other segments category.

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Reporting segments
Yes

Do any operating segments meet all of the aggregation criteria?

Aggregation into a single reportable segment is permitted (but not required)

No

Furniture manufacturing commercial office and hardwood furniture (Aust) Furniture manufacturing commercial office and hardwood (Indonesia). Australia and Indonesia cannot be aggregated because they have dissimilar economic characteristics

Yes

Are there any operating segments (or aggregated operating segments) that exceed the 10% threshold?

No

Material reportable segments Furniture manufacturing (Aust) Furniture manufacturing (Indonesia) Furniture retail IT consulting (Aust)

Aggregation into a separate reportable segment is permitted (but not required)

Yes

Are there any immaterial non-reporting segments that have similar economic characteristics and share a majority of the aggregation criteria?

No

Do the reportable segments identified constitute at least 75% of consolidated revenue?

In this example total reportable segments constituted 73%. $43k external revenue $58k consol revenue

No

Yes

Present as separate reported segments in the financial statements

Identify additional segments (aggregated if permitted) until external revenue of all reportable segments exceed 75% if consolidated revenue

Add IT consulting (Asia), (total now 81%). Also added electronic equipment, even though it is not required under the standard. Management felt that this segment should be reported due to its expected growth

Aggregate the remaining immaterial non-reportable segments and other activities into an all other segments category

Present land development and machine hire as all other segments

PricewaterhouseCoopers A practical guide to segment reporting, 1 May 2008 | 23

Section 4 Segment disclosures

4.1 Where the CODM is provided with more than one measure of segment protability, what measure of segment protability should be reported?
If more than one measure of protability is provided to the CODM, the measure most relied upon by the CODM for assessing performance and deciding on the allocation of resources should be the measure disclosed. If two or more measures are equally relied upon by the CODM then the measure most consistent with its corresponding amount in the entitys nancial statements should be used. Additional disclosure may need to be made in some circumstances. An example of this is shown below.

Example Company A uses two measures of prot.

Company A provides the CODM with two measures of protability by operating segment, which is operating prot and prot before income tax expense. Segment operating prot is determined based on the same measurement principles that are used in the preparation of consolidated operating prot. However, segment prot before income tax expense includes certain internal cost-of-capital charges that are eliminated in determining consolidated prot before income tax expense. In this situation, segment operating prot would be the measure reported externally because this measure is the most consistent with its corresponding amount in the entitys nancial statements. In addition, disclosure would need to be made for interest income and expense because that information is included in the prot before income tax expense measure provided to the CODM. It is also worth noting that the measure of segment protability may differ for each operating segment, since different operating segments may report different measures of protability to the CODM. AASB 8 para 27 requires companies to explain the measurements of segment protability for each reportable segment.

4.2

What measure must be reported when the asset information reported to the CODM is limited or not reviewed at all?
AASB 8 para 25 states that only those assets that are included in the measure of the segments assets that are used by the CODM should be reported.

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Scenario Asset information, although available, is not reported or used by the CODM.

Basis of asset measurement No measure of segment asset is disclosed.* Disclose in the notes that asset information is not reported.

Asset information is reported but is not used by the CODM.

If asset information is included in other reports provided to the CODM, that asset information should be disclosed even if the information is not used by the CODM. The sum of the total of those asset items must be disclosed as the segments assets. The total of the reported segments assets would then be reconciled to the total consolidated assets. An explanation of the basis of measurement must also be disclosed. The specic asset information or its working capital amount is not required to be disclosed. Although it has an asset component, the current asset component is not what is relevant to the CODMs decision making. However, an entity may elect to voluntarily report total working capital, and then reconcile that gure to total consolidated working capital.

Asset information reported is limited to cash, inventory and accounts receivables.

The CODM is provided with, and reviews ratios derived from, asset balances (ie working capital). The components that form the ratios are not separately provided.

Additionally, non-current assets by geographical area are required to be disclosed (AASB 8, para 33(b)) even if such information is not reviewed by the CODM. *The Basis of Conclusions to IFRS 8 BC35 states that a measure of total segment assets should be disclosed for all segments regardless of whether those measures are reviewed by the CODM. In December 2007 the IASB concluded that BC35 should be changed to state that a measure of segment assets should only be disclosed when such information is provided to the CODM. This change will occur as part of the IASBs 2009 Annual Improvements project.

4.3

Do the measures of prot or loss and assets and liabilities presented for each operating segment have to comply with the IFRS accounting policies used in the consolidated nancial statements?
No. AASB 8 para 25 requires that the information presented is on the same basis as it is reported internally, even if the segment information does not comply with IFRS or the accounting policies used in the consolidated nancial statements.

Insight:
Examples of such situations include segment information reported on a cash basis (as opposed to an accruals basis), and reporting on a local GAAP basis for segments that are comprised of foreign subsidiaries.

PricewaterhouseCoopers A practical guide to segment reporting, 1 May 2008 | 25

Although the basis of measurement is exible, AASB 8 para 27 requires entities to provide an explanation of: the basis of accounting for transactions between reportable segments; the nature of any differences between the segments reported amounts and the consolidated totals. For example, those resulting from differences in accounting policies and policies for the allocation of centrally incurred costs that are necessary for an understanding of the reported segment information. The nature of any changes from prior periods in the measurement methods and the effect of those changes should also be disclosed; and the nature and effect of any asymmetrical allocations to reportable segments. For example, an entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

In addition, paragraph 28 requires reconciliations between the segments reported amounts and the consolidated nancial statements.

4.4

When should an entity consider and review its segment reporting?

There is no specic guidance in AASB 8 on what changes would trigger a change in the reportable operating segments of an entity. However, based on the denition of an operating segment, a change in the CODM and/or the information provided to and reviewed by the CODM for the purposes of evaluating performance and allocating resources, would impact the identied operating segments.

Insight:
Determining operating segments is an area of signicant judgement and scrutiny, so it is important that entities consider how internal organisational change will impact the identication and measurement of their operating segments. An entity should consider the following when determining its operating segments Who is the CODM and what is reviewed by the CODM? Has the CODM changed (ie have reporting lines changed)? How has the CODM reporting package changed? Has the organisational chart changed (ie acquisition/disposal of business activities)? Is there a change in the person with whom the CODM meets with? Have there been any changes in the budgeting process or level at which budgets are set? What is the company communicating to external parties such as investors, creditors and customers?

Scenarios that may impact identied operating segments Entering a new line of business Line of service vs. geography (ie a company has hired a new CEO and the internal reporting structure is changing from a model of geographical reporting to that of product line reporting). New system and reporting tools (ie implementation of a new system that includes various reporting tools has enabled the entity to report on and manage its business activities differently).

26 | PricewaterhouseCoopers A practical guide to segment reporting, 1 May 2008

4.5

Is restatement of segment information required when a reorganisation causes the composition of reportable segments to change?
Yes. If an entity changes the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, should be restated unless the information is not available and the cost to develop it would be excessive. Determining that the information is unavailable and the cost to develop it would be excessive should be made for each individual item of disclosure. This means that an entitys disclosures may consist of some comparatives that have been restated and some that have not, and so disclosures to this effect must be made. Other examples where restatement is required are shown below.
Scenario A previously immaterial non-reportable segment becomes material in the current year Restatement required? Yes. Restate prior year to reect new reportable segments. Insight Restatement is required even if it is anticipated that the segment would not meet the 10% threshold in the future (ie non-recurring event) Information to the effect that it does not meet the quantitative thresholds but is considered to be of signicance should be disclosed. Disclosure should be made describing the restatement.

No. If management view the segment to be of continuing signicance it should continue to report it as a separate reportable segment. A previously reportable segment becomes a non-reportable segment in the current year

Yes. If it is not considered to be of continuing signicance it should not be separately disclosed and the prior year should be restated to conform to the current years presentation. Yes.

Initial year of application

N/A

4.6

What is the denition of material where an entity is required to separately disclose material revenues and material non-current assets from an individual foreign country [AASB 8 para 33]?
AASB 8 does not dene the term material for the purpose of determining whether an individual countrys revenue or non-current assets should be separately disclosed. The entity should consider materiality from both quantitative and qualitative perspectives. When considering materiality quantitatively, the standard uses the threshold of 10% or more in determining whether an operating segment is a reportable segment. Therefore, it would seem reasonable to apply the same test to determine whether an individual countrys revenue or assets are material for the purpose of separate disclosure.

Insight:
PwC believes the materiality test should be applied by comparing the countrys revenue or assets to total entity external revenue or assets (including the country of domicile) rather than comparing those gures to the relevant totals of foreign countries revenues and assets (excluding the country of domicile).

PricewaterhouseCoopers A practical guide to segment reporting, 1 May 2008 | 27

Section 5 Other matters for consideration

5.1 The impact of AASB 8 on accounting for impairment of assets
The release of AASB 8 has required a consequential amendment to AASB 136 Impairment of Assets. AASB 136 required goodwill acquired in a business combination to be allocated to existing cash generating units of the acquiring entity. The amendment to AASB 136 now states that each cash generating unit or group of cash generating units to which the goodwill is allocated should not be larger than an operating segment determined in accordance with AASB 8. Consequently, all entities should reassess their cash generating units ahead of impairment reviews.

5.2

Convergence with US standard SFAS 131

AASB 8 has adopted SFAS 131 almost in its entirety. There are still some minor differences between the standards, which are outlined in the basis for conclusion within AASB 8.
AASB 8 Uses the term non-current assets SFAS 131 Uses the term long lived assets Impact Long lived assets is limited to physical assets, whereas non-current assets include intangible assets. Disclosure impact for some companies. Under AASB 8 entities must use judgement to determine which basis provides the most useful information.

Includes the disclosure of segment liabilities Allows matrix structures to determine their segments on either product/services or geography

Does not require this disclosure Requires matrix structures to determine their segments based on products or services

5.3

Whats in the pipeline?

The International Accounting Standards Board has indicated that the scope paragraph of IFRS 8 is likely to be amended upon nalisation of the IFRS standard for small and medium sized entities. The intention is that IFRS 8 would apply to all entities that have public accountability. This means that IFRS 8 would have to be applied whenever an entity has to apply full IFRS and is not able to use the IFRS for SME standard.

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pwc.com/au/ifrs

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