aye rating Segments eee PFRS 8 Operating Segments eee ad hee (Gearning Objectives [1 Define an operating segment, 2, Describe the “management approach” to identifying reportable segments. 3. State the quantitative thresholds in identifying reportable segments. Introduction The business environment is constantly changing - the needs of consumers change, business regulations change, the demand for products and services, and consequently the supply thereof, may decline or end. Entities need to adapt to these changes in order to stay in business. One response to the constantly changing business environment is diversification of operations. Increasingly, many entities engage in diversified business activities and operate in different market environments. For example, business scandals in insurance and banking industries create loss of trust on consumers. Consumers become tluciant in doing business’ with entities belonging to this industry. To minimize loss of reverue, these entities may need to diversify their operations to addreés this type of industry-specific tisk, arket saturation. Entities may find demand for products or services ose threat to profitability. As Another example is ™ that the oversupply of or lack of Meertain aphical areas would p i ionpraes Fe risk, entities expand their business operations to New territories uh : erations, either by engaging in __ Diversification of OP ifferent business activities OF fographical areas, creates Operas doing business in different segments within an entity.530 PERS 8 The more diverse an entity’s operations become, the Mote information is needed by users in making economic decisions about the entity. The full disclosure principle calls for financia} reporting of any financial facts significant enough to influence the judgment of an informed user. To address users’ needs, PERS 8 prescribes the required disclosures for operating segments. Core principle PFRS 8 requires an entity to disclose information needed in evaluating the nature and financial effects of the. business activities in which it engages and the economic environments in which it operates, The required disclosures under PFRS 8 aim to help users of financial statements a. Better understand the entity’s performance. b. Better assess the entity’s prospects for future net cash flows, ©. Make more informed judgments about the entity as a whole. Scope PERS 8 applies to the separate or individual financial statements of an entity, and to the consolidated financial statements of a group with a parent, that is publicly listed or in the process of enlisting. If a financial report contains both consolidated and separate financial statements, segment information is required only in the consolidated financial statements. Non-publicly listed entities are not Tequired to disclose segment information. However, if they choose to do so, they will need to apply PFRS 8. Operating Segments 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), whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about| sing Segments a resources to be allocated fo: hi e F formance, and segment and assess its for which discrete financial information is available.” (PFRS 8.5) yA component of an entity comprises “operations and cash flows that can be clearly distinguished, operationally and for financial reporting pur es, fi Se Appendix A) rposes, from the rest of the entity.” (PFRS Not every part of an entity is necessarily an operating segment: To qualify as an operating segment, one must be a profit center (i.e., it earns its own revenues and incurs its own expenses), used internally by management for decision making, and on which separate financial information is available. A start-up operation can be an operating segment even if it fas yet to earn revenues. However, departments that do not earn revenues or earn revenues that are only incidental to the activities of the entity are not operating segments (e.g. corporate headquarters). Also, an entity's post-employment benefit plan is not an operating segment. The term “chief operating decision maker” refers to a function rather than a manager with a specific title. That function includes allocating resources and assessing the performance of operating segments. A chief operating decision maker may be the entity’s chief executive officer, chief operating officer, a group of executive directors, or others. Reportable segments ic An operating segment is reportable (ie, disclosed separately) ifit: a. is used by management in internal reporting or results from : Tend aggregating two or more segments; an >. qualifies under the quantitative thresholds Management approach be PERS 8 adopts OO angen! approach to identifying reportable Segments, Under this approach, operating segments are identified °n the basis of internal reports that are regularly reviewed by theB0 _ PERS 8 entity's chief operating decision maker in order to allocate resources to the segment and assess its performance. Basically, the decision on whether an operating segment js reportable or not is based on management's judgment. Operating segments used by management for internal reporting are also operating segments used for external reporting. Aggregation criteria Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of PFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following respects: a. Nature of the products and services; b. Nature of the production processes; c. Type or class of customer for their products and services; d. The methods used to distribute their products or provide their services; and e. Nature of the regulatory environment, if applicable, e.g, banking, insurance or public utilities. (PFRS 8.12) Quantitative thresholds An operating segment is reportable if it meets any of the following: a. Its revenue, including both external and intersegment sales, is 10% or more of the total revenue, external and internal, of all operating segments. b. Its profit or loss is 10% or more of the greater, in absolute amount, of the: i, total profit of all operating segments that reported a profit; and x ii, total Joss of all operating segments that reported a loss. c. Its assets are 10% or more of the total assets of all operating, segments.! Operating Segments ee 533 [llustration: Quantitative thresholds Entity A is preparing its year-end financi y A cial jdentified the following Operating segments: ee Segments Revenues Profit (loss) Assets A 1,000,000 200,000 14,000,000 B 1,200,000 140,000 18,000,000 ¢ 270,000 (70,000) 12,000,000 D 240,000 (700,000) 1,000,000 E 290,000 50,000 1,400,000 Totals 3,000,000 (330,000) 146,400,000 Requirement: Identify the reportable segments. Solution: Revenue test The threshold under the revenue test is 300,000 (3,000,000 total revenues x 10%). Segments A and B qualify under this test because their respective revenues are at least P300,000. pe cn epee Segments Revenues 10% test v A 1,000,000 B 1,200,000 ad c 270,000 x D 240,000 x x E 290,000 —E 290,000 __* — Totals __ 3,000,000 ei534 HS: a nn — OO — Profit or loss test Step 1: Total separately the profits and losses of the Operating segments. Segments Profit Loss A 200,000 B 140,000 c (70,000) D (700,000) E 50,000 Totals 390,000 (770,000) Step 2: Determine the higher between the totaled amounts, in absolute terms (i.e., ignore the negative value of losses). The higher amount is used for the 10% test. Based on the table above, the aggregate losses of P770,000 is higher than the aggregate profits. Therefore, the 10% threshold for profit or loss is P77,000 (770,000 x 10%). Segments A, B and D qualify under this test because each of their profit or loss is at least P77,000. — Segments Profit Loss 10% test A 200,000 v B 140,000 v c (70,000) x D (700,000) v E 50,000 x Totals 390,000 (770,000) Assets test The threshold under the asset test is P4,640,000 (46,400,000 total assets x 10%). Segments A, B, and C are teportable because each of their total assets is at least P4,640,000, * (ote: Total assets may includelinter-segiment assets) such a8 inlersegment receivables.)erating Segments @ 535 A 14,000,000 v B 18,000,000 v € 12,000,000 v D 1,000,000 x ee a ee Totals 46,400,000 “ Conclusion Based on all the tests performed, the reportable segments are A,B, ¢, and D. Each of these segments will be disclosed separately in the notes. Assets test Segments _ Revenue test__Profit or loss test v v v v x v eK AS moony um S To be reportable, operating segments need only to qualify in any of the quantitative thresholds. So even if segment C did not qualify under the revenue and profit or loss tests, it is still reportable because it qualified under the assets test. The same applies to segment p. Segment E is no! any of the quantitative tests. ¢ reportable because it did not qualify in Reporting of non-reportable segments ortable are combined and Operating segments that are not reps disclosed in an “all other segments” category. Limit on external revenue : If the total external revenues of the identified reportable segments are less than 75% of the entity’s total external revenue, additional Operating segments are included.as reportable, even if they do not536 : - PERS8 meet the quantitative threshold, until at least 75% of the entity's external revenue is included in reportable segments. Additional reportable segments are identified based on management's judgment. Reporting of interest revenue and interest expense Interest revenue and interest expense are reported separately for each reportable segment unless the segments revenue is primarily from interest (e.g., the segment is a financial institution) and internal decision-making is based on net interest revenue. In such case, the entity may report the segment's interest revenue net of interest expense and disclose that fact. Information about major customers An entity di. “loses the extent of its reliance on its major customers, A major customer is a single external customer who has provided 10% or more of the entity’s revenues. If an entity has major customers, it discloses that fact, along with the total amount of revenues from each major customer, and the identity of the segment or segments reporting the revenues. The entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from that customer. For the purpose of this disclosure, a group of customers under common control, such as subsidiaries’ of a common parent, or various government agencies are considered as a single customer. Seoperating, Segments ~ summary: {PERS 8 uses a “management approach” to identifying reportable segments. A reportable (oper ‘ating segment is one which management uses in making decisions about operating matters or results from the aggregation of two or more segments and qualifies under any of the quantitative thresholds, The quantitative thresholds are: (a) at least 10% of total revenues (external and internal), (b) at least 10% of the higher of total profits of segments with profits and total losses of segments with losses, and (c) at least 10% of total assets (inclusive of intersegment receivables). + The total external revenues of reportable segments should be at least 75% of the entity’s total external revenue, If the 75% limit is not met, additional segments are included as reportable segments, even if they do not meet the quantitative threshold, until the 75% limit is met. « Disclosures for major customer are required if ‘al customer amount to 10% or more of the entity’s revenues from a single extern external revenues. PROBLEMS PROBLEM 1: MULTIPLE CHOICE 1. PERS 8 requires which of th identifying operating segments? , a. manager's approach c. direct approach b. gentle approach d, thanagement approach e following approaches in 2. According to PFRS 8 @ reportable operating segment is one which sat / a. management uses in making decisions about operating, matters. ; . of two or more segments and b. results from aggregation qualify under any of the quantitative thresholds.538 c. d. PERS 8 aandb none of these 3. Which of the following is not among the quantitative thresholds under PFRS 8? a. b, d. At least 10% of total revenues (external and internal). At least 10% of the higher of total profits of segments reporting profits and total losses of segments reporting losses, in absolute amount. At least 10% of total assets (inclusive of intersegment receivables). At least 10% of total revenues (external only). 4. ABC Co. operates in six geographical areas offering three major types of products and services. Internal reports are structured based on the major types of products and services, How should ABC Co. identify its reportable segments for external reporting in accordance with PFRS 8? a. b. & d. a Based on the six geographical areas. Based on the three products and services. Based on quantitative threshold. Based on the operating results of either the geographical areas or the products and services, According to PFRS 8, disclosures for major customer shall be provided if revenues from transactions with a single external customer amount to a. b. c. d at least 75% of the entity’s external and internal revenues. at least 75% of the entity’s external revenues. 10% or more of the entity’s external revenues. . less than 10% of the entity’s extemal revenues. PROBLEM 2: FOR CLASSROOM DISCUSSION Management approach 1. Catalyst Co. is engaged in business process outsourcing. Catalyst —subcategorizes’ its main services into four:"IE vating Segments ee jnformation Technology, A fter- i Offsite Data Management, aeiet eta toha = geographical areas: Southeast Asia, North ASaetea, sah America, Australia and Europe. Internal reports are based on these five geographical areas. What is the most appropriate basis of segment reporting for Catalyst? P a. On the basis of the main services provided. b. on we oe of the geographical areas of operations. c. On the basis of the domici Cots base lomicile country of Catalyst and the d. Any of these. Quantitative thresholds 2, Segment A qualifies under the 10% test of total revenues but not on the profit or loss and total assets tests. Segment A a. isnot a reportable segment. b. is nonetheless included in the “all others” segment. c. may be reported as a separate segment. d. allof these 3, Information on an entity's operating segments is shown below: x 7,000,000 200,000 4,000,000 7 500,000 120,000 1,000,000 é 300,000 30,000 50,000 ao.000 50,000 1,700,000 ; 300,000 60,000 800,000 ___F 509000 __#00,000_i 0 — Torais sao 000_ 8600002 RT are " d. All segments b. A,B,DandF