Chapter 8

Operating segments and Interim Reports

8.1 Operating segments
Introduction

Large entities produce a wide range of products and services, often in several different
countries. Further information on how the overall results of entities are made up from
each of these product or geographical areas will help the users of the financial statements.
This is the reason for segment reporting.
reporting

• The entity's past performance will be better understood

• The entity's risks and returns may be better assessed
• More informed judgments may be made about the entity as a whole

Risks and returns of a diversified, multi-

multi-national company can only be assessed by
looking at the individual risks and rewards attached to groups of products or services or
in different groups of products or services or in different geographical areas. These are
subject to differing rates of profitability, opportunities for growth, future prospects and
risks.

In recent years this has proved to be a relatively controversial area of financial reporting.
The difficulty for standard-setters is twofold. First, one must decide what constitutes a
segment (eg should segments be identified on the basis of geography or their operational
function?). Second, financial reporting requirements must balance the relevance of the
segmental information provided in the context of the particular reporting entity, with the
need for information to be comparable across many different types of entity. A balance
needs to be struck between allowing management to exercise sufficient judgment for the
information provided to be relevant,
relevant and the need to minimize creative accounting to
provide information that is both reliable and comparable.
comparable

Objective
Objective: An entity must disclose information to enable users of its financial statements
to evaluate the nature and financial effects of the business activities in which it engages
and the economic environments in which it operates.

Scope:
Scope: Only entities whose equity
equity or debt securities are publicly traded (ie on a stock
exchange) need disclose segment information. In group financial statements, only
consolidated segmental information needs to be shown. (The statement also applies to
entities filing or in the process of filing financial statements for the purpose of issuing
instruments.)

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Definition of operating segment

Reportable segments are operating segments or aggregation of operating segments that

meet specified criteria.

Operating segment;
segment this 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 entity's 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.
The term 'chief operating decision maker' identifies a function, not necessarily a manager
with a specific title. That function is to allocate resources and to assess the performance
of the entity's operating segments

Aggregation

Two or more operating segments may be aggregated if the segments have similar
economic characteristics,
characteristics and the segments are similar in each of the following respects:

• The nature of the products or services

• The nature of the production process
• The type or class of customer for their products or services
• The methods used to distribute their products or provide their services,
services and
• If applicable, the nature of the regulatory environment

Determining reportable segments

IFRS 8 adopts a management approach to determining operating segments. An entity

must report separate information about each operating segment that:

a) Has been identified as meeting the definition of an operating segment;

segment and
b) It exceeds at least one of the following quantitative thresholds:
i. Reported revenue is 10% or more of the combined revenue of all
operating segments (external and intersegment), or
ii. The absolute amount of its reported profit or loss is 10% or more of the
greater, in absolute amount, of (i) the combined reported profit of all
operating segments that did not report a loss, loss and (ii) the combined
reported loss of all operating segments that reported a loss,
loss or
iii. Its assets are 10% or more of the total assets of all operating segments.

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At least 75% of total external revenue must be reported by operating segments. Where
this is not the case, additional segments must be identified (even if they do not meet the
10% thresholds).

Two or more operating segments below the thresholds may be aggregated to produce a
reportable segment if the segments have similar economic characteristics, and the
segments are similar in a majority of the aggregation criteria above.

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.

Disclosures IFRS 8 disclosures are of:

• Operating segment profit or loss

• Segment assets
• Segment liabilities
• Certain income and expense items

Disclosures are also required about the revenues derived from products or services and
about the countries in which revenues are earned or assets held, even if that information
is not used by management in making decisions.

Example: determining operating segments

Jesmond, a retail and leisure group, has three businesses operating in different parts of
the world. Jesmond reports to management on the basis of region. The results of the
regional segments for the year ended 31 December 20X9 are as follows. ( in millions)

Region Revenue Segment results Segment Segment

External Internal profit/(loss) assets liabilities
European 200 3 (10) 300 200
North 300 2 60 800 300
America
Other 500 5 105 2,000 1,400
regions
There were no significant intra-group balances in the segment assets and liabilities. The
retail outlets and leisure centres are located in capital cities in the various regions, and the
company sets individual performance indicators for each hotel based on its city location.

Required:: Discuss the principles in IFRS 8 Operating segments for the determination of a
Required
company's reportable operating segments and how these principles would be applied for
Jesmond plc using the information given above.

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Solution

IFRS 8 Operating segments states that an operating segment is a reported separately if:

(i) It meets the definition of an operating segment,

segment ie:

(1) It engages in business activities from which it may earn revenues and incur
expenses,
expenses

(2) Its operating results are regularly reviewed by the entity's chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance, and

(3) Discrete financial information is available for the segment,

And

(ii) It exceeds at least one of the following quantitative thresholds:

(1) Reported revenue is 10% or more the combined revenue of all operating
segments (external and intersegment), or

(2) The absolute amount of its reported profit or loss is 10% or more of the
greater, in absolute amount, of (i) the combined reported profit of all operating
segments that did not report a loss,
loss and (ii) the combined reported
reported loss of all
operating segments that reported a loss,
loss or

(3) Its assets are 10% or more of the total assets of all operating segments.

At least 75% of total external revenue must be reported by operating segments. Where
this is not the case, additional segments must be identified (even if they do not meet the
10% thresholds).

Two or more operating segments below the thresholds may be aggregated to produce a
reportable segment if the segments have similar economic characteristics, and the
segments are similar in a majority of the following aggregation criteria:

• The nature of the products and services

• The nature of the production process
• The type or class of customer for their products or services
• The methods used to distribute their products or provide their services
• If applicable, the nature of the regulatory environment

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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.

For Jesmond, the thresholds are as follows.

follows

i. Combined revenue is $1,010m, so 10% is $101m.

ii. Combined reported profit is $165m, so 10% is $16.5m.
iii. Combined reported loss is $10m, so 10% is $1m.
iv. Total assets are $3,100m, so 10% is $310m.

The North America segment meets the criteria, passing all three tests. Its combined
revenue is $302m; its reported profit is $60m, and its assets are $800m.

The European segment also meets the criteria, but only marginally. Its reported revenue,
at $203m is greater than 10% of combined revenue, and only one of the tests must be
satisfied. However, its loss of $10m is less than the greater of 10% of combined profit
and 10% of combined loss, so it fails this test. It also fails the assets test, as its assets, at
$300m are less than 10% of combined assets ($310m).

IFRS 8 requires further that at least 75% of total external revenue must be reported by
operating segments. Currently, only 50% is so reported. Additional operating segments
(the 'other regions') must be identified until this 75% threshold is reached.

8.2 Interim Reports

Objective:

• The objective of this Standard is to prescribe the minimum content of an interim

financial report and to prescribe the principles for recognition and measurement in
complete or condensed financial statements for an interim period.
• Timely and reliable interim financial reporting improves the ability of investors,
creditors, and others to understand an entity’s capacity to generate earnings and
cash flows and its financial condition and liquidity.

Definition:

• Interim period is a financial reporting period shorter than a full financial year.
• Interim financial report means a financial report containing either:

a complete set of financial statements (in accordance with IAS 1), or

a set of condensed financial statements (in accordance with IAS 34) for an
interim period.

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Minimum components:
component The minimum component elements of an interim financial
report:

• Condensed statement of financial position

• Condensed statement of profit or loss and other comprehensive income
• Condensed statement of changes in equity
• Condensed statement of cash flows
• Selected note disclosures

The rationale for requiring only condensed statements and selected note disclosures is
that entities need not duplicate information in their interim report that is contained in
their report for the previous financial year.

• Interim statements should focus more on new events,

events activities and circumstances.

Examples of events or transactions that may require disclosure, if significant:

 the write-down of inventories to net realizable value and the reversal of such a
write-down;
 recognition of a loss from the impairment and the reversal of such an impairment
loss;
 the reversal of any provisions for the costs of restructuring;
 acquisitions and disposals of items of property, plant and equipment;
 commitments for the purchase of property, plant and equipment;
 litigation settlements;
 corrections of prior period errors;
 related party transactions;

Other disclosures

• A statement that the same accounting policies and methods of computation have
been used for the interim statements as were used for the most recent annual
financial statements.
• Explanatory comments on the seasonality or 'cyclicality'
'cyclicality of operations in the
interim period.
• The nature and amount of items during the interim period affecting assets,
liabilities, capital, net income or cash flows, that are unusual,
unusual due to their nature,
incidence or size.
• The issue or repurchase of equity or debt securities
• Nature and amount of any changes in estimates of amounts reported in an earlier
interim report during the financial year
• Dividends paid on ordinary shares and on other shares

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Periods covered:
covered:

The standard requires that interim financial reports should provide financial information
for the following periods or as at the following dates.

(a) SOFP data as at the end of the current interim period, and comparative data as at the
end of the most recent financial year

(b) SOPL & OCI data for the current interim period and cumulative data for the current
year to date, together with comparative data for the corresponding interim period and
cumulative figures for the previous financial year

(c) Statement of cash flows data should be cumulative for the current year to date, with
comparative cumulative data for the corresponding interim period in the previous
financial year

(d) Data for the statement of changes in equity should be for both the current interim
period and for the year to date, together with comparative data for the corresponding
interim period, and cumulative figures, for the previous financial year

The guiding principle:

An entity should use the same recognition and measurement principles in its interim
statements as it does in its annual financial statements.

Use of estimates

In assessing materiality, it needs to be recognized that interim financial reports will rely
more heavily on estimates than year-end reports.

Examples:

a) Inventories.
Inventories An entity might not need to carry out a full inventory count at the end of
each interim period. Instead, it may be sufficient to estimate inventory values using sales
margins.

(b) Provisions.
Provisions An entity might employ outside experts or consultants to advise on the
appropriate amount of a provision, as at the year end. It will probably be inappropriate
to employ an expert to make a similar assessment at each interim date.

Similarly, an entity might employ a professional valuer to revalue non-current assets at

the year end, whereas at the interim date(s) the entity will not rely on such experts

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