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Module 6 - Operating Segments

The document discusses IFRS 8 Operating Segments, which requires public entities to disclose segment information to enable users to evaluate the nature and financial effects of different business activities. It defines an operating segment and reportable segments, and identifies the criteria for reportable segments. It also outlines the various disclosures required by IFRS 8, including general information, segment profit/loss, assets/liabilities, reconciliations, and entity-wide disclosures.

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Christine Joyce Basco
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127 views

Module 6 - Operating Segments

The document discusses IFRS 8 Operating Segments, which requires public entities to disclose segment information to enable users to evaluate the nature and financial effects of different business activities. It defines an operating segment and reportable segments, and identifies the criteria for reportable segments. It also outlines the various disclosures required by IFRS 8, including general information, segment profit/loss, assets/liabilities, reconciliations, and entity-wide disclosures.

Uploaded by

Christine Joyce Basco
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Module 6

OPERATING SEGMENTS

Overview:
IFRS 8 Operating Segments requires an entity whose debt or equity securities are publicly
traded to disclose information to enable users of its financial statements to evaluate the nature
and financial effects of the different business activities in which it engages and the different
economic environments in which it operates. It specifies how an entity should report information
about its operating segments in annual financial statements and in interim financial reports. It also
sets out requirements for related disclosures about products and services, geographical areas
and major customers.

Module Objectives:
At the end of the module, you will be able to:
❖ define operating segments;
❖ identify and apply the criteria for reportable segments; and
❖ understand the entity-wide disclosures in accordance with IFRS 8.

Course Materials:

OPERATING SEGMENTS DEFINED IN IFRS 8


IFRS 8 defines an operating segment as follows. An operating segment is a component
of an entity: [IFRS 8.2]
• that engages in business activities from which it may earn revenues and incur expenses
(includes the revenues and expenses relating to transactions with other components of
the same entity)
• whose operating results are reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess
its performance, and the chief operating decision maker could be an individual, such
as the chief executive officer or the chief operating officer or it could be a group of
executives such as the board of directors or a management committee.
• for which discrete financial information is available

REPORTABLE SEGMENTS
IFRS 8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments or aggregations of operating segments
that meet specified criteria (IFRS 8.13):
• its reported revenue, from both external customers and intersegment sales or transfers,
is 10 per cent or more of the combined revenue, internal and external, of all operating
segments, or
• the absolute measure 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,
• or its assets are 10% or more of the combined assets of all operating segments.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 68


Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principles of the standard, the segments have similar
economic characteristics and are similar in various prescribed respects (IFRS 8.12).
If the total external revenue reported by operating segments constitutes less than 75% of
the entity's revenue, additional operating segments must be identified as reportable segments
(even if they do not meet the quantitative thresholds set out above) until at least 75% of the entity's
revenue is included in reportable segments (IFRS 8.15).

Illustration:
ABS Company has the following segments for the year:
Revenue Profit
Segment 1 P6,000,000 P1,500,000
Segment 2 4,500,000 850,000
Segment 3 1,000,000 (300,000)
Segment 4 800,000 200,000

What are the reportable segments?

Solution:
Revenue:
(P6,000,000 + P4,500,000 + P1,000,000 + P800,000) = P12,300,000
P12,300,000 x 10% = P1,230,000; Qualify: 1, 2

Profit: (P1,500,000 + P850,000 + P200,000) = P2,550,000 x 10% = P255,000


Loss: P300,000
Qualify: 1, 2 and 3

**Segment 3 is included since the threshold is P255,000 profit or loss

OPERATING SEGMENTS: DISCLOSURES


This can be classified into four categories:
• General Information
• Information about profit or loss, assets and liabilities
• Reconciliations
• Entity-wide Disclosures

General Information includes disclosures of:


• Factors used to identify reportable segments – especially the basis of organizations
• Judgements in applying aggregation criteria
• Types of products/services generating revenues

Information about Profit or Loss, Assets and Liabilities


• Measurement of segment items equal to the measure reported to the Chief Operating
Decision Maker (CODM)
• Disclose separately the following amounts if it is included in items of segment profit or loss
reported to Chief Operating Decision Maker or regularly reported to him:
▪ Revenue from external customers
▪ “Internal” revenue
▪ Interest revenue

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 69


▪ Interest expense
▪ Depreciation and amortization
▪ Material items of income and expense
▪ Interest in P/L of associates and joint venture
▪ Income tax expense or income
▪ Material non-cash items
• Provide an explanation of measurement basis of segment profit or loss, segment assets
and segment liabilities for each reportable segment:
▪ Basis of accounting for transaction between reportable segments
▪ Nature of differences between measurements of reportable segments’ P/L and
entity’s P/L after income tax + discounted operations
▪ Nature of differences between measurements of reportable segments’ assets and
entity’s assets
▪ Nature of differences between measurements of reportable segments’ liabilities
and entity’s liabilities
▪ Nature of any changes from prior periods in the measurement methods to
determine segment’s P/L and their effects
▪ Nature and effect of asymmetrical allocations to reportable segments

Reconciliations
• Total of reportable segments’ revenue to entity’s revenue
• Total of reportable segment’s profit or loss to entity’s profit or loss before and after tax and
discounted operations
• Total of reportable segment’s assets to entity’s assets
• Total of reportable segment’s liabilities to entity’s liabilities
• Total of reportable segment’s amounts for every other material item of information
disclosed to the corresponding amount of the entity

Entity-wide Disclosures
These are not at a segment level but at the entity level of all the segments
• Information about the products and services
• Information about geographical areas
✓ Revenue from external customers
o Attributed to entity’s country of domicile
o Attributed to all foreign countries
✓ Non-current assets
o Located in entity’s country of domicile
o Located in all foreign countries
• Information about major customers
- Report if revenue with single customer is 10% or more of the total revenue

Assessment Activities
Choose the letter of the best answer.

1. If financial report contains both the consolidated financial statements of a parent and the
parent’s separate financial statements, segment information is required in
A. The separate financial statement only
B. The consolidated financial statement only
C. Both the separate and consolidated financial statements
D. Neither the separate nor the consolidated financial statement

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 70

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