Chapter 25

Segment reporting
25.1

25.2

The advantages of segmental information may include:

(i)

It highlights the performance of the management within the different segments and,
therefore, helps to identify those segments that are performing above or below
expectations.

(ii)

Well-performing segments will not be able to mask those segments that perform
poorly.

(iii)

Different operating segments would be subject to differing levels of risk. Knowledge

of entities proportional investment in such segments would be useful to investors and
potential investors when assessing their resource allocation decisions.

(iv)

Investors should be better able to determine whether the segments are providing a
return which is commensurate with the associated risk.

(v)

It enables reporting entities to demonstrate greater accountability.

(vi)

By providing more refined data, it enables financial statement users to make more
informed predictions about future profitability.

(vii)

Segment data will enable institutional investors to determine whether an entity is

operating within sectors that are outside the ethical investment screens of the
various investors.

Some of the potential costs of providing segment data would include:

(i)

Management may be less inclined to take business risks if results are made more
visible (and, therefore, not hidden through a process of aggregation).

(ii)

The disclosure of segment data may result in competitors having access to

information about the profitability of particular segments.

(iii)

The additional segment data might provide encouragement for additional entrants into
the industry.

(iv)

If segment disclosures are made which indicate that particular segments are making a
loss, there is a possibility that these disclosures may lead to takeover bids by other
organisations or pressure being exerted upon management to sell the loss-making
segments.

(v)

The disclosure of operating segment data that indicates different profit rates
internationally may attract host-government attention.

(vi)

Inter-segment sales may draw attention from fiscal agencies.

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(vii)

Segment data may attract political attention from various interest groups, such as
employee groups or environmental groups, if it is shown that particular segments are
making unusually high profits.

25.3

If segment information is available then arguably it is more difficult to disguise the results of
poor business decisions. As such, there is a possibility that the disclosure of segment
information may stifle the introduction of new ideas.

25.4

Even where segment data is provided, the information is still highly aggregated, so it is
difficult to understand how competitors could really take advantage of the information.
Segment data does not provide information about the actual business practices employed. For
a competitive disadvantage to arise, the competitors would somehow need to access further
confidential information from the organisation.

25.5

Surveys by Edwards and Smith (1996) indicate that issues associated with competitive
disadvantage do bias a firm towards providing lower-quality segment disclosures. Some of
the respondents to the surveys indicated that issues of competitive disadvantage actually
drove their entity towards providing segment information which could be construed as being
misleading. Students should be encouraged to consider the merit of the argument that
segment disclosures can actually lead to competitive disadvantage. Is the information detailed
enough to really be competitively disadvantageous?

25.6

This requires some consideration as to what accountability actually means. Accountability

has been defined by Gray, Owen and Adams (1996, p. 38) as:
The duty to provide an account (by no means necessarily a financial account) or
reckoning of those actions for which one is held responsible (the source of this quote
is provided in Chapter 37).
Accountability is deemed to involve two responsibilities or duties: the responsibility to
undertake certain actions (or refrain from taking actions); and the responsibility to provide an
account of those actions. By providing greater information about how management has
utilised the financial resources entrusted to it, we can argue that management is
demonstrating greater accountability.

25.7

25.8

Operating segments are defined in the Appendix to AASB 8 as follows:

An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity);
(b) whose operating results are regularly reviewed by the entitys chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance; and
(c) for which discrete financial information is available.
As we can see from the above definition, AASB 8 relies upon how the organisation identifies
its operating segments, rather than imposing a particular basis of segment identification upon
an entity. That is, AASB 8 requires identification of operating segments on the basis of
internal reports that are regularly reviewed by the entitys chief operating decision maker in
order to allocate resources to the segment and assess its performance.
AASB 8 requires the amount (for example, profit, assets, liabilities) reported for each
operating segment item to be the measure reported to the chief operating decision maker for
the purposes of allocating resources to the segment and assessing its performance. This can
be the case regardless of the accounting methods being used. By contrast, AASB 114 the

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former accounting standard pertaining to segment disclosure - required segment information

to be prepared in conformity with the accounting policies adopted for preparing and
presenting the external financial statements.
The former standard, AASB 114, provided relatively detailed definitions of segment revenue,
segment expense, segment result, segment assets and segment liabilities. Again, by contrast,
AASB 8 does not define these terms, nor require particular measurement approaches to be
adopted. But it does require an explanation of how segment profit or loss, segment assets and
segment liabilities are measured for each reportable segment. We can see that under our new
accounting standard there are far fewer stringent guidelines and much of what used to be a
matter for professional judgment is being delegated to the management of the reporting
entity.
25.9

See the answer to Question 25.8.

25.10 For the purposes of external reporting, individual operating segments may be aggregated.
Indeed, it might be advisable to aggregate similar segments and thus avoid overwhelming
readers with information about too many segments. As paragraph 12 of AASB 8 states:
Operating segments often exhibit similar long-term financial performance if they
have similar economic characteristics. For example, similar long-term average
gross margins for two operating segments would be expected if their economic
characteristics were similar. Two or more operating segments may be aggregated
into a single operating segment if aggregation is consistent with the core principle
of this Standard, the segments have similar economic characteristics, and the
segments are similar in each of the following respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking,
insurance or public utilities.
Clearly, whether or not we aggregate two or more operating segments for the purposes of
external reporting will be a matter of professional judgment. In relation to the aggregation of
similar operating segments, the Basis for Conclusions that accompanied the release of SFAS
131 stated (paragraph 73):
The Board believes that separate reporting of segment information will not add
significantly to an investor's understanding of an enterprise if its operating
segments have characteristics so similar that they can be expected to have
essentially the same future prospects. The Board concluded that although
information about each segment may be available, in those circumstances the
benefit would be insufficient to justify its disclosure. For example, a retail chain
may have 10 stores that individually meet the definition of an operating segment,
but each store may be essentially the same as the others.
Similarity of operating segments is not the only criterion for aggregating operating segments
for disclosure purposes. Apparently to avoid overwhelming readers with information about a
multiplicity of operating segments, AASB 8 sets quantitative thresholds that provide guidance
on when an operating segment should be disclosed (or, perhaps, aggregated with other
segments instead). According to paragraph 13 of AASB 8:

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An entity shall report separately information about an operating segment that

meets any of the following quantitative thresholds:
(a) its reported revenue, including both sales to external customers and
intersegment sales or transfers, is 10 per cent or more of the combined
revenue, internal and external, of all operating segments;
(b) the absolute amount of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of (i) the combined reported profit of all operating
segments that did not report a loss and (ii) the combined reported loss of all
operating segments that reported a loss;
(c) its assets are 10 per cent or more of the combined assets of all operating
segments.
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable, and separately disclosed, if management believes that
information about the segment would be useful to users of the financial statements.
With regard to the threshold in (b) just quoted, it should be emphasised that this test is based
on absolute amounts. Only one of the three tests (in (a) to (c) just quoted) needs to be
satisfied for the segment to be deemed a reportable segment. It is worth emphasising that
segment information is required to be disclosed about any operating segment that meets any
of the above tests. In relation to combining operating segments that might not otherwise be
deemed to be reportable, paragraph 14 of AASB 8 states:
An entity may combine 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 listed in paragraph 12.
In addition to determining whether or not a specific operating segment should be disclosed,
we also need to consider whether, in total, a sufficient number of operating segments have
been disclosed. AASB 8 requires a specific proportion of an entitys total revenue to be
attributed to operating segments. Specifically, paragraph 15 requires:
If the total external revenue reported by operating segments constitutes less than
75 per cent of the entitys revenue, additional operating segments shall be
identified as reportable segments (even if they do not meet the criteria in
paragraph 13) until at least 75 per cent of the entitys revenue is included in
reportable segments.
The rationale for the above requirement is that in order to provide adequate insight into an
entitys operations, reportable segments should represent a substantial proportion of the
entitys total operations. In this regard, identification by the entity of sufficient segments so
that the total revenues of all reported segments constitute 75 per cent or more of the entitys
revenues might help ensure that the reported segments constitute a substantial proportion of
the entitys total operations. Because some organisations might have a large number of
smaller operating segments that might not warrant separate disclosure (perhaps on the basis
of materiality), such segments are required to be combined and disclosed together. As
paragraph 16 of AASB 8 states:
Information about other business activities and operating segments that are not
reportable shall be combined and disclosed in an all other segments category
separately from other reconciling items in the reconciliations required by
paragraph 28. The sources of the revenue included in the all other segments
category shall be described.
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25.11 Paragraph 33 of AASB 8 requires the following entity-wide disclosures in relation to

geographical areas:
An entity shall report the following geographical information, unless the necessary
information is not available and the cost to develop it would be excessive:
(a)
revenues from external customers (i) attributed to the entitys country of
domicile and (ii) attributed to all foreign countries in total from which the
entity derives revenues. If revenues from external customers attributed to an
individual foreign country are material, those revenues shall be disclosed
separately. An entity shall disclose the basis for attributing revenues from
external customers to individual countries;
(b) non-current assets other than financial instruments, deferred tax assets, postemployment benefit assets, and rights arising under insurance contracts (i)
located in the entitys country of domicile and (ii) located in all foreign
countries in total in which the entity holds assets. If assets in an individual
foreign country are material, those assets shall be disclosed separately.
The amounts reported shall be based on the financial information that is used to
produce the entitys financial statements. If the necessary information is not
available and the cost to develop it would be excessive, that fact shall be disclosed.
An entity may provide, in addition to the information required by this paragraph,
subtotals of geographical information about groups of countries.
25.12 Segment information is required to be disclosed about any operating segment that meets any
of the quantitative tests provided in AASB 8 (tests (a) to (c)). In relation to combining
operating segments that might not otherwise be deemed to be reportable, paragraph 14 of
AASB 8 states:
An entity may combine 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 listed in paragraph 12.
25.13 Across time, an entitys operating segments may grow or contract relative to the sizes of
other operating segments and this has implications for identifying reportable segments. It
could mean that some operating segments that met the quantitative criteria for disclosure in
previous periods no longer do so, and vice versa. In this regard, paragraphs 17 and 18 of
AASB 8 state:
17. If management judges that an operating segment identified as a reportable
segment in the immediately preceding period is of continuing significance,
information about that segment shall continue to be reported separately in the
current period even if it no longer meets the criteria for reportability in paragraph
13.
18. If an operating segment is identified as a reportable segment in the current period
in accordance with the quantitative thresholds, segment data for a prior period
presented for comparative purposes shall be restated to reflect the newly reportable
segment as a separate segment, even if that segment did not satisfy the criteria for
reportability in paragraph 13 in the prior period, unless the necessary information
is not available and the cost to develop it would be excessive.

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25.14 As we know, if the chief operating decision maker reviews particular components of an
organisation for the purposes of allocating resources and assessing performance, these
components will be considered to represent the operating segments of the organisation.
Hence, there are four operating segments. However, whether we report information about
each individual operating segment will depend on whether the operating segments are
considered to be reportable. To determine if they are reportable we apply the quantitative
tests provided in AASB 8.
Mining and Food qualify as reportable segments as their revenue is more than 10 per cent of
total segment revenue, thus satisfying test (a).
Mining, Food and chemicals qualify as material using test (b), as the absolute-amount total of
the profits/losses of the segments that earned a profit is $125 000, whereas the combined
reported loss of those that generated a loss totals $35 000. Hence for test (b) we need to
compare the absolute amount of the profit/loss with $125 000. Using these criteria, mining,
Food and Chemicals are reportable operating segments.
Using test (c), Mining and Food are reportable operating segments, as their assets are 10 per
cent or more of the total segment assets of all segments.
Therefore, Mining, Food and Chemicals are all reportable segments. Clothing is not a
reportable segment as it did not pass any of the three tests. Mining, food and chemicals also
generate more than 75 per cent of the entitys total revenues (875/965 x 100 = 91 per cent),
and so meet the test of paragraph 15 of AASB 8.
Note that even though we have considered each segment under all three tests, the passing of
only one of the tests would be enough to establish a segment as reportable.
25.15 Timber and Steel qualify as reportable segments as their revenue is more than 10 per cent of
total segment revenue, thus satisfying test (a).
Timber, Steel and Cardboard qualify as material using test (b), as the absolute-amount total of
the profits/losses of the segments that earned a profit is $100 000, whereas the combined
reported loss of those that generated a loss totals $15 000. Hence for test (b) we need to
compare the absolute amount of the profit/loss with $100 000. Using these criteria, all three
segments are reportable operating segments.
Using test (c), all three operating segments are reportable, as their assets are 10 per cent or
more of the total segment assets of all segments.
Therefore, Timber, Steel and Cardboard are all reportable segments. Note that even though
we have considered each segment under all three tests, the passing of only one of the tests
would be enough to establish a segment as reportable.
25.16 Clothing, Travel and Agriculture are reportable segments as their revenue is more than 10 per
cent of total segment revenue, thus satisfying test (a).
Clothing, Travel and Agriculture qualify as material using test (b), as the absolute-amount
total of the profits/losses of the segments that earned a profit is $180 000, whereas the
combined reported loss of those that generated a loss totals $15 000. Hence for test (b) we
need to compare the absolute amount of the profit/loss with $180 000. Using these criteria,
Clothing, Travel and Agriculture are reportable operating segments.

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Using test (c), Clothing and Travel are reportable operating segments, as their assets are 10
per cent or more of the total segment assets of all segments.
Therefore, Clothing, Travel and Agriculture are all reportable segments. Motor Vehicle
Manufacture is not a reportable segment as it did not pass any of the three tests. Clothing,
Travel and Agriculture also generate more than 75 per cent of the entitys total revenues
(510/555 x 100 = 92 per cent), and so meet the test of paragraph 15 of AASB 8.
Note that even though we have considered each segment under all three tests, the passing of
only one of the tests would be enough to establish a segment as reportable.
25.17 Food and Beverages qualify as reportable segments as their revenue is more than 10 per cent
of total segment revenue, thus satisfying test (a).
Food and Beverages qualify as material using test (b), as the absolute-amount total of the
profits/losses of the segments that earned a profit is $210 000, whereas the combined
reported loss of those that generated a loss totals $20 000. Hence for test (b) we need to
compare the absolute amount of the profit/loss with $210 000. Using these criteria, Food and
Beverages are reportable operating segments.
Using test (c), all segments are reportable operating segments, as their assets are 10 per cent
or more of the total segment assets of all segments.
Therefore, Food, Beverages and Hotels are all reportable segments. Note that even though
we have considered each segment under all three tests, the passing of only one of the tests
would be enough to establish a segment as reportable.
25.18 In the absence of other factors, a segment would be considered material if one or more of the
following conditions applied:
(a)

its revenue is 10 per cent or more of total revenue of all segments (including intersegment sales and transfers); or,

(b)

the absolute amount of its profit or loss is 10 per cent or more of the greater, in
absolute amount, of:

the combined reported profit of all segments that earned a profit; and
the combined segment loss of all segments that earned a loss; or,
(c)

its segment assets are 10 per cent or more of total assets of all segments.

Entertainment (passes tests a, b and c), Clothing (passes tests b and c), Food (passes test a),
and Agriculture (passes test b) would all be considered to be material industry segments.
The following disclosure is appropriate:
SEGMENT INFORMATION
Entertainment
$

Clothing
$

Food
$

Agriculture
$

Eliminations
$

Consolidated
$

REVENUE
External sales
Inter-segment sales
Total segment revenue

600
50
650

80

80

200

200

40
10
50

(60)
(50)

920

920

RESULT
Segment profit

100

20

(10)

20

(15)*

105

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Unallocated corporate
expenses
Profit before income tax
expense
Income tax expense
Net profit
Segment assets
Unallocated corporate
assets
Consolidated total assets
Segment liabilities
Unallocated corporate
liabilities
Consolidated total
liabilities
Acquisition of property,
plant and equipment and
intangible assets
Depreciation
Unallocated depreciation
Non cash expenses other
than depreciation
Unallocated expenses

(10)
95
40
55
800

200

300

100

100

150

110

100

1 310

50
1 360
550
250
800

50
20

10
10

20
15

10
25

90
70
20
90

10

10

15

60
20
80

* This number for profit on inter-segment sales has been assumed, as the information was not provided in the
question.
Geographical information
Petersen Ltd operates solely within Queensland, Australia.
Information about major customers
Revenues from one customer of Petersen Ltds entertainment segment represents approximately $100 000 of Petersen
Ltds total revenues. No other single customer is responsible for 10 per cent or more of the entitys total revenues.

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25.19 Because the chief operating decision maker considers six segments of the entity when making
decisions about resource allocations and when assessing performance, these are the six
operating segments of the entity pursuant to AASB 8.
To determine whether the individual segments are reportable, we need to apply the tests
provided in paragraph 13 and paragraph 15 of AASB 8. Paragraph 13 of AASB 8 requires
that for each segment it must first be established that:
(a) its reported revenue, including both sales to external customers and intersegment sales
or transfers, is 10 per cent or more of the combined revenue, internal and external, of
all operating segments;
(b) the absolute amount of its reported profit or loss is 10 per cent or more of the greater,
in absolute amount, of (i) the combined reported profit of all operating segments that
did not report a loss and (ii) the combined reported loss of all operating segments that
reported a loss;
(c) its assets are 10 per cent or more of the combined assets of all operating segments.
As we have noted, AASB 8, paragraph 13, specifies three tests, and a segment needs to
pass any one of these to be deemed to be a reportable segment.
Test (a) is whether revenues, including from sales to internal and external customers,
account for 10 per cent or more of the total segment revenues of all segments. In this
example the total revenue from sales made by all segments, including inter-segment sales,
is $3 625 000. Therefore, the materiality threshold is $3 625 000 x 10% = $362 500
Applying this threshold to the four segments:

Travel: sales total $1 750 000, therefore this segment passes the test.

Student Accommodation: sales total $625 000, therefore this segment passes the
test.

Entertainment: sales total $375 000, therefore this segment passes the test.

Consulting: sales total $750 000, therefore this segment passes the test.

Neither Building or Sandmining pass the test.

As four segments pass the test, they are all considered to be reportable segments. It does
not matter whether or not they pass the remainder of the tests.
Test (b) is whether the segment profit or loss is 10 per cent or more of the combined result
of all segments that earned a profit or the combined result of all segments that incurred a
loss, whichever is the greater in absolute amount. The combined result of all segments that
earned a profit is $162 500 + $50 000 + $87 500 +15 000 + 10 000
= $325 000.
The combined result of all segments that earned a loss is $25 000.
The threshold amount is therefore $325 000 x 10% = $32 500.
Three segments do not pass the test: Entertainment, Building and Sandmining (but,
remember, Entertainment has already passed the previous test).
Test (c) is whether assets are 10 per cent or more of the total segment assets of all
segments. Total segment assets equal $41 250 000. The threshold amount is therefore
$41 250 000 x 10% = $4 125 000
All segments pass this test apart from Building and Sandmining. So we have four
reportable segments.
Apart from the above tests, we can also see that the total revenues attributable to the
reportable segments constitute at least 75 per cent of the entitys total revenues (the test
provided at paragraph 15 of AASB 8).
We are now in a position to prepare our note to the financial statements relating to the
entitys operating segments. It should be noted that we will not prepare a separate note from
an entity-wide perspective about products and services as required by paragraph 32 of AASB
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8 as the identification of the entitys operating segments is based on differences between

products and services.
Note x: Information about operating segments
(a) Financial information about operating segments
Travel

Revenue from
External sales
Inter-segment sales
Interest revenue

Segment liabilities
Acquisition of property, plant
and equipment and intangible
assets
Other non-cash expenses other than
depreciation

(b)

($000)

($000)

(000$)

($000)

1750

625

375

625
125

125

12.5

Total
($000)
3500
125
12.5

7.5
75
162.5
20 000

37.5
50
6250

62.5
(250)
5 000

50
87.5
8750

25
25
1250

250
300
41250

7500

3750

2500

6250

500

20500

625

125

250

500

1500

37.5

25

37.5

50

12.5

162.5

Reconciliation of financial information provided in operating segment note to information

provided in the financial statements

Revenues
Total revenues from operating segments
Other revenues (received by head office)
Elimination of intersegment revenues
Total revenue shown in income statement

($000)
3625
25
(125)
3525

Profit or loss
Total profit or loss from operating segments
Elimination of intersegment profits
Unallocated corporate expenses
Profit before income tax expense
Tax expense
Profit after tax as shown in income statement

($000)
300
(12.5)
(50)
237.5
75
162.5

Assets
Total assets of operating segments
Goodwill not allocated to reportable segments
Other unallocated corporate assets
Total assets as shown in balance sheet

($000)
41250
5000
125
46375

Liabilities
Total liabilities of operating segments
Unallocated liabilities
Total liabilities as shown in the balance sheet

($000)
20500
250
20750

(c)

All other
segments

($000)

Interest expense
Depreciation and amortisation
Profit before tax
Segment assets

Student
Accom. Entertainment Consulting

Geographical information

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Ulluwatu Ltd operates predominantly within Australia; however, some sales are made to
customers in Kuwait.
Sales by geographical area
($000)
Australia
Kuwait

(d)

3 450
50
3 500

Non-current assets
($000)
30 000
30 000

Information about major customers

Revenues from one customer of Ulluwatu Ltds Travel operating segment represents
approximately $375 000 of Ulluwatu Ltds total revenues. No other single customer is
responsible for 10 per cent or more of the entitys total revenues.

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