CHAPTER 35: PFRS 8 - OPERATING SEGMENT

SEGMENT REPORTING CORE PRINCIPLE

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

In other words, segment reporting is the disclosure of certain financial information about the products and services an
entity produces and the geographical areas in which an entity operates.

The purpose of such disclosure is to enable investors and users make better assessment of each business activity leading
to the understanding of the performance of the entity as a whole.

Scope of PFRS 8

PFRS 8 shall apply to the separate or individual financial statements of an entity, and to the consolidated financial
statements of a group with a parent:

a. Whose debt or equity instruments are traded in a public market.

b. That files or is in the process of filing the consolidated financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of instruments in a public market.

However, if a financial report contains both the consolidated financial statements of a parent and the parent's separate
financial statements, segment information is required only in the consolidated financial statements.

Operating segment

An operating segment is a component of an entity:

a. That engages in business activities from which it may earn revenue and incur expenses, including revenue 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.
c. And for which discrete financial information is available.

An operating segment can generally be thought of as a distinguishable component of an entity that is engaged in
business activities which generate revenue and incur expenses.

Moreover, to be classified as an operating segment, separate financial information must be available about the segment
and its operating results shall be regularly reviewed by a chief operating decision maker.

An operating segment may engage in business activities for which it has yet to earn revenue.

For example, start-up operations may be operating segments before earning revenue.

Not every part of an entity is necessarily an operating segment or part of an operating segment.

For example, corporate headquarters or some functional departments that may not earn revenue or may earn revenue
that is incidental only to the activities of the entity would not be operating segments.

Chief operating decision maker

The term chief operating decision maker identifies a function and not necessarily a manager with a specific title.

This function is to allocate resources to the segments and assess their performance.
CHAPTER 35: PFRS 8 - OPERATING SEGMENT

The chief operating decision maker may be the entity's chief executive officer, chief operating officer or a group of
executive directors depending on who within the organization is responsible for the allocation of resources and
assessing the performance of operating segments,

Identifying operating segments

The management approach is used in identifying operating segments.

The management approach means that the operating segments are identified on the basis of internal reports about
components of an entity that are regularly reviewed by the chief operating decision maker in order to allocate resources
to the segment and to assess its performance.

In other words, operating segments are identified based on the components of the entity that are considered to be
important for internal management reporting purposes.

The idea is that the reporting of segment information is seen through the "eyes of management" and users would wish
to see the business as the chief operating decision maker sees it.

Reportable operating segments

An entity shall report information about an operating segment that meets any of the following quantitative thresholds:

1. The segment revenue, including both sales to external customers and intersegment sales or transfers, is 10% or
more of the combined revenue, internal and external, of all operating segments.
2. The absolute amount of profit or loss of the segment is 10% or more of the greater in absolute amount of:
a. Combined profit of all operating segments that reported a profit.
b. Combined loss of all operating segments that reported a loss.
3. The assets of the segment are 10% 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 on a voluntary basis if management believes that information about the segment would be useful to the users
of -the financial statements.

Illustration

Revenue Profit (loss) Assets

Segment A 16,000,000 1,700,000 25,000,000

Segment B 13,000,000 500,000 11,000,000

Segment C 6,000,000 (1,000,000) 3,000,000

Segment D 3,000,000 200,000 2,000,000

Segment E 2,000,000 100,000 4,000,000

40,000,000 1,300,000 45,000,000

Based on revenue, A, B and C are reportable segments because revenue associated with each of these segments is at
least P4,000,000 which is 10% of the total revenue of P40,000,000.

D and E are not reportable segments because revenue of such segments is less than 10% of the total revenue.
CHAPTER 35: PFRS 8 - OPERATING SEGMENT

Based on segment assets, A and B are reportable segments because assets of such segments are at least P4,500,000
which is 10% of the total segment assets of P45,000,000.

C, D and E are not reportable segments because their assets are less than 10% of the total segment assets.

Applying the criterion of 10% of profit or loss is somewhat complicated because some segments have profit and others
have losses.

The profit must be combined and the losses must be combined to determine which is greater between the two.

Profit Loss

A 1,700,000

B 500,000

C 1,000,000

D 200,000

E ______ 100,000

2,400,000 1,100,000

Because the total profit figure is greater than the total loss figure, P2,400,000 is the basis for identifying reportable
segment.

Any segment with profit or loss of P240,000 or greater (10% of P2,400,000) qualifies as reportable segment.

Therefore, A, B and C are identified as reportable segment under the profit or loss criterion.

In conclusion A, B and C are identified as reportable segments, D and E are not reportable segments because they do not
meet any one of the 10% quantitative thresholds for identification as reportable segment.

Thus, D and E may be combined for reporting purposes. But A, B and C, being reportable segments, shall be disclosed
separately.

Overall size test - 75% threshold

If the total external revenue of reportable operating segments constitutes less than 75% of the entity external revenue,
additional operating segments shall be identified as reportable segments even if they do not meet the 10% quantitative
thresholds until at least 75% of the entity external revenue is included in reportable segments.

Aggregation of segments

Two or more operating segments may be aggregated into a "single operating segment" if the segments have similar
economic characteristics and the segments share a majority of the following five aggregation criteria:

a. Nature of product or service

b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking, insurance or public utility

Information to be disclosed for each segment

An entity shall disclose the following for each reportable operating segment:
CHAPTER 35: PFRS 8 - OPERATING SEGMENT

1. General information about the operating segment.

2. Information about profit or loss, including specified revenue and expenses included in the measure of profit or
loss.
3. Information about segment assets and segment liabilities and the basis of measurement.
4. Reconciliations of the totals of segment revenue, segment profit or loss, segment assets, segment liabilities and
other material segment items to corresponding items in the entity's financial statements.

Disclosure about general information

An entity shall disclose the following general information about an operating segment:

a. Factors used to identify the reportable segments

b. Type of products and services from which each reportable segment derives revenue.

Disclosure of profit or loss, assets and liabilities

An entity shall disclose for each reportable segment a measure of profit or loss, total assets and total liabilities.

An entity shall disclose a measure of profit or loss under all circumstances.

However, an entity shall disclose a measure of total assets and total liabilities for each reportable segment if such an
amount is regularly provided to the chief operating decision maker.

Entity-wide disclosures

Entity-wide disclosures are additional information that is required to be disclosed by all entities if such information is not
provided as part of the reportable segment information.

An entity shall disclose information about the following:

a. Information about products and services

b. Information about geographical areas
c. Information about major customers

Revenue from products and services

An entity shall disclose the revenue from external customers for each product and service.

Revenue and assets from geographical areas

An entity shall disclose the following geographical information:

a. Revenue from external customers in the entity's country of domicile, and in all foreign operations in total.
b. Separate disclosure of material revenue from external customers in an individual foreign country.

Disclosure about major customer

A major customer is defined as a single external customer providing revenue which amounts to 10% or more of an
entity's external revenue.

The entity shall disclose the fact of reliance on major customers, the total amount of revenue from major customers and
the identity of the segment or segments reporting the revenue.

The entity is not required to disclose the identity of the major customer or the amount of revenue that each segment
reports from that customer.