CHAPTER 10 OPERATING SEGMENT TECHNICAL KNOWLEDGE To know the core principle of segment reporting. To define an operating segment. To identify the criteria for the recognition of a reportable segment. To identify the information required to be disclosed for a reportable segment. 263SEGMENT REPORTING - CORE PRINCIPLE PFRS 8 sets out the requirements for disclosure of information about operating segments. The core principle of segment reporting is: 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 it 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. 3 264Operating segment An operating segment is a component of an entity: a. That engages in business acy revenue and j 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. Accordingly, 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. every part of an entity is necessarily an operating or part of an operating segment. imple, corporate headquarters or some functional nts that may not earn revenue or may earn revenue ncidental only to the activities of the entity would rating segments. 265* 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. 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. A component of. entity that sells primarily or exclusively to other operating segments is included in the definition of an operating segment if the entity is managed that way. 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. IFRS has abandoned the risk identifying operations b geographical segments. and reward approach of y business segments an! 266Reportable 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. 267Illustration Revenue, profit or loss, and assets for each operating segment are as follows: Revenue Profit (loss) Assets 25,000,000 Segment A 16,000,000 1,700,000 000, 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. 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 ic 200,000 1,000,000 a peeereuy 100,000 2,400,000 1,100,000 268peop Bea ee, 400,008 ie one is Sreater than the total loss segment. asis for identifying reportable Any segment a Profit or loss of P240,000 or greater (10% tee Sie ae as reportable segment. Therefore, A, as rey Bad peitction: portable segment under the profit In conelnsion 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: Nature of product or service Nature of production process e or class of customers ack . Mactied method or the method used to distribute the Product ‘e. The nature of the regulatory environment, for example, ‘banking, insurance or public utility 269Illustration An entity has no intersegment sales and has the following operating segments with their corresponding revenue: . Segment Revenue Percentage 1 2,400,000 . 30% 2 1,600,000 20 3 1,200,000 15 4 720,000 9 5 640,000 8 6 560,000 7 7 480,000 6 a 400,000 es 8,000,000 100% Based on the revenue criterion, the reportable segments are segments 1, 2 and3. The remaining’ segments are not reportable. Assume that the remaining segments did not also satisfy the other criteria of "profit or loss" and "total assets". The total external revenue of the reportable segments is as follows: Revenue Percentage Segment 1 2,400,000. 30% 2 1,600,000 20% 3 1,200,000 15% 5,200,000 65% Observe that the total percentage of the reportable segments is only 65%. is In this case, additional operating segments shall be identified even if they do not meet any of the 10% quantitative thresholds. 270Aggregation ‘Two or more operating se; ¥ ‘ements m: P 1 0 . ay be ay " reportable segment” to achieve the ie esrewated into "one revenue" threshold. % of entity. external Heer 8 ‘onsraling segments to be aggregated must have mic characteristics and share a majority of thé five aggregation criteria. eens Ase Segments ue and 8 have similar products, similar production process, similar marketing method and are not operating under regulated environment. Accordingly, Segments 7 and 8 can be a > ggregated as "one reportable segment" to achieve the 75% threshold. Segment 1 30% Segment 2 20% Segment 3 ; 15% Segments 7 and 8 (6% + 5%) 11%’ 16% Thus, the remaining segments 4, 6 and 6 shall be considered not reportable and lumped in the “other segments" category. Limit to the number of segments There may be a practical limit to the number of reportable segments to be disclosed separately by an entity beyond which segment information may become too detailed. ote ay ‘ ie Although no precise limit has been determined, as the numt inéreases abe ten, the entity shall consider whether a practical limit has been reached. In other words, if the number of reportable segments “¢ is likely that the information may become exceeds ten, it is likely nr be: too detailed and consequently lose 1 271Segment no longer reportable ji ting segment identified If the management judges that an operat : i asa reportable segment in the immediately preceding period is of continuing significance, information about the segment shall continue to be reported separately in the current period even if it no longer meets any of the 10% quantitative thresholds for reportability. Segment becoming reportable If an operating segment is identified as a reportable segment in the current period in accordance with the 10% quantitative thresholds, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment even if that segment did not satisfy any of the quantitative thresholds in the prior period. However, prior period segment information shall not be restated if the necessary information is not available and the cost to develop it would be excessive. Information to be disclosed for each segment An entity shall disclose the following for each rep operating segment: 1. General information about the operating segme! 2. Information about profit or loss, including spe revenue and expenses included in the measure of or loss 3. Information about segment assets and segment liabili 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 it the entity's financial statements, : 272Disclosure about general information An entity shall disclose the follow; i ‘i Ae paralitg eget lowing general information about 1. Factors used to identify the reportable segments For example, whether mana; i the.entity around differe: me ne eervices, geographical areas, re; combination of factors, ay i g have been aggregated. 2. Type of products and servic, Hu es from which each reportable segment derives revenue, Example of disclosure about n type of products and services 7 An entity has three reportable operating segments, namely car parts, motor vessels and software. The car parts segment produces replacement parts for sale to car parts retailers. The motor vessels segment produces small motor vessels to serve the offshore oil industry and similar businesses. The software segment produces application software for sale to computer manufacturers and retailers. 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 Qmount is regularly provided to the chief operating decision maker. 273.Illustration — Disclosure of segment profit or loss, total assets and total liabilities An entity provided the following financial information relating to one of the reportable operating segments (amounts are assumed): . Sales — external 60,000 Sales — internal 10,000 Total sales 70,000 Cost of goods sold . (30,000) Gross profit 40,000, Interest revenue 3,000 Distribution costs ( 8,000) Administrative expenses ( 4,000) Doubtful accounts. ( 1,000) Exployee benefit.expense (500) Depreciation and amortization ( 2,500) Interest expense ( 2,000) Impairment loss (5,000) Profit or loss 20,000 Total assets 60,000 Addition to noncurrent assets 8,000 Total liabilities * 4,000 The minimum disclosure relating to the reportable operating segment shall include the following: Sales - external 60,000 Sales — internal 10,000 Interest revenue 3,000 Interest expense 2,000 Depreciation and amortization 2,500 Impairment loss - 5,000 Profit or loss 20,000 Total assets 60,000 Addition to noncurrent assets 8,000 Total liabilities , 20,000 Note that the amount for profit or loss is disclosed under all : circumstances. 274other disclosures e other items disclosed are specified in. P 'FRS disclosed only because these are included in the ee ‘of rofit OF loss, measure of total assets and measure of total jiabilities reviewed by the chief operating decision maker. The impairment loss is disclosed because i deemed material. the amount is Reconciliations An entity shall provide reconciliations of segment amounts and amounts shown in the entity's financial statement related to all of the following: 1. The total revenue of all reportable segments to the entity revenue. 2. The total profit or loss of all reportable segments to the entity profit or loss before income tax expense and discontinued operations. 3. The total assets of all reportable segments to the entity total assets. 4. The total liabilities of all reportable segments to the entity total liabilities. 5. The total for every other material item of information disclosed by the reportable segments to the corresponding amount for the entity. Illustration ¢ Implementation Guidance 3 of PFRS 8 provided the wing suggested format for disclosing information about rtable segment profit or loss, total assets and total llities. ating decision maker illustration, the chief oper se to reportable not to allocate income tax expen ‘as a measure of profit or loss. ; 275Operating segments The entity has three reportable seg) electronics and car parts. ments, namely software ot reportable include q small " " which are n\ i The "other segments" which ar tal business and warehouse property business, equipment ren leasing. All amounts are assumed. Software Electronics Car parts Others Tota Revenue ~ external 12,500 37,000 5,000 :. 1,000 35,500 Revenue ~ internal 3,000 1,501 2 rs on Interest revenue 1,500 ee joo Interest expense 1,000 i 7 - Depreciation 300 1,600 1,100 ‘= $000 Profit or loss 1,100 2,400 500 100 4, 08 Impairment loss =. 200 - lag 0 Total assets 25,000 47,000 7,000 2,000 81,000 Expenditure for noncurrent assets 800 1,500 600 - 2,900 ‘Total liabilities 16,000 24,000 4,000 200 44,200 The following reconciliations are necessary: Revenue Revenue of reportable segments — external plus internal. 39,000 Revenue of nonreportable segments 1,000 Elimination of intersegment revenue (4,500) Entity revenue shown in income statement 35,500 Profit or loss Profit or loss of reportable segments 4,000 Profit or loss of nonreportable segments 100 Elimination of intersegment profit (500) Unallocated amount: Litigation settlement received 500 Corporate expenses : (_ 150) Entity profit or loss shown in income statement 3,350 == The intersegment profit is th - t le gro: " men! sales. ross profit on interseg! 276Total assets Total assets of reportable segments 79,000 Total assets of nonreportable segments 2,000 Unallocated corporate assets 1,500 Entity total assets shown in statenient of financial position Total liabilities Total liabilities of reportable segments 44,000 Total liabilities of nonreportable segments 200 Unallocated corporate liabilities 5,000 Entity total liabilities in statement of financial position 49,200 Other material items Segment total. Adjustment Entity total Interest revenue 3,800 150 3,950 Interest expense 2,700 100 2,800 Depreciation 3,000 - 3,000 Impairment loss 200 = 200 Expenditure for noncurrent assets 2,900 1,000 3,900 The reconciling item to adjust expenditure for noncurrent assets is the amount incurred for the corporate headquarters building. Change in internal organization - Ifan entity changes the structure of the internal organization in a manner that causes the composition of-the reportable segments to change, the corresponding information for earlier Periods, including interim periods, shall be restated. However, no restatement is made if the corresponding information for earlier periods is not available and the cost to develop it would be excessive. 277Entity-wide disclosures es are additional information requireq 1] entities if such information is not table segment information. Entity-wide disclosur to be disclosed by a provided as part of the repor' 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 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. Disc'osure about major customer A major customer is defined as a single external. customer providing revenue which amounts to 10% ity’ ntity's external revenue. eee : The entity shall disclose: a. Ae fact of réliance on major customers . The total amount of revenue from all major customers c. The identity of 1 revenue y ithe Segment or segments reporting the The entity is not requi . ei customer or the Gm to disclose the identity of a majo unt from that customer, of revenue that each segment repo 278QUESTIONS 1, What is the core principle of segment reporting? 9, Explain briefly segment reporting. 3. What is the scope-of PFRS 8? 4, Define an operating segment. 5. Define a chief operating decision maker. 6. What are the quantitative thresholds in identifying reportable segments? 7. Explain the 75% threshold in identifying reportable segments. 8. Enumerate the information to be disclosed for each reportable segment. 9. Explain the disclosure about general information. 10. Explain the disclosure about profit or loss for each reportable segment. 11. What are entity-wide disclosures? 12. What is the entity-wide disclosure about products and services? 18. What is the entity-wide disclosure about geographical areas? 14. Define a major customer. 15. Explain the major customer disclosure. 279PROBLEMS ~ Problem 10-1 (AICPA Adapted) Timmy Company provided the following information in relation to revenue earned by operating segments for the current year: Sales to : unaffiliated § Intersegment Total Segment i customers sales revenue Alo 5,000 3,000 8,000 Bix . 8,000 4,000 12,000 Cee 4,000 - 4,000 Dil 43,000 16,000 59,000 Combined 60,000 23,000 83,000 Elimination s (23,000) (23,000) Consolidated 60,000 = 60,000 What total revenue should be disclosed by the reportable segments? a. 60,000 b. 83,000 c. 71,000 d. 51,000 Problem 10-2 (AICPA Adapted) Correy Company provided the following data relating to operating segments: Industry Revenue ; Profit. Total assets A 10,000,000 1,750,000 20,000,000 B 8,000,000 1,400,000 17,500,000 Cc 6,000,000 1,200,000 12,500,000 D 3,000,000 550,000 7,500,000 E 4,250,000 675,000 7,000,000 FE 1,500,000 225,000 3,000,000 How-.many reportable segments does Correy have? a. Three b. Four c. Five d. Six 280problem 10-3 (AICPA Adapted) Aurora Company provided the followi ‘ to operating segments: following profit (loss) relating y 3,400,000 w 1,000,000 x (2,000,000) x 400,000 2 ( 200,000) What are the reportable segments based on profit or loss? V, W, X and Y V, Wand X Vand W . V,W, X,Y and Z Problem 10-4 (IFRS) Beep Macbeth Company, an entity listed on a recognized stock exchange, reports operating results from a North American division to the chief operating decision maker. The segment information for the current year is: Revenue 3,800,000 Profit 1,200,000 Assets 1,600,000 Number of employees 2,500 The entity's results for all of the segments in total are: Revenue 40,000,000 Profit 10,000,000 Assets 20,000,000 Number of employees 25,000 Which piece of information determines that the North American division is a reportable segment? Revenue Profit Assets Number of employees peop 281Problem 10-6 (AICPA Adapted)” Aris Company provided the following information in relation to operating divisions for the current year: ; 50,000,00 Sales to unaffiliated customers ,000 Intersegment sales of products similar to those sold tounaffiliated customers _ Z 10,000,009 Interest earned on loans to other industry segments 5,000,000 The entity and all of its divisions are engaged solely in manufacturing operations. Under the revenue test, what is the minimum. revenue of a reportable segment? t 6,000,000 6,500,000 5,500,000 5,000,000 Problem 10-6 (AICPA ‘Adapted) Grum Company ‘is subject to the requirements of segment reporting. In the income statement for the current year, the entity reported revenue of P50,000,000 excluding intersegment sales of P10,000,000, expenses of P47,000,000 and net income of P3,000,000. Expenses included payroll costs of P15,000,000. The combined total assets of all o; year-end amounted to P 45,000,000. Boop perating segments at 1. What is the minimum amount of sales to a major customer? _ a. 5,000,000 b. 4,000,000 ¢. 6,000,000 d. 4,500,000 2. What is the : minimum. amoui snue to be . disclosed by nt of external reven' reportable segments? a. 22,500,000 b. 30,000,000 c. 33,750,000 d. 37,500,000 282problem 10-7 (AICPA Adapted) Graf Company discloses supplemental operating segment jnformation. The following information is available for the current year: Segment ; Sales : Traceable expenses. 000,000 3,000,000 ¥ 4,000,000 2,500,000 Z 3,000,000 1,500,000 Additional expenses Indirect segment expenses | 1,800,000 General corporate expenses 1,200,000 Interest expense 600,000 - Income tax expense 400,000 The interest’ expense and income. tax expense are regularly reviewed by the chief operating decision maker as a measure of profit or loss. Appropriate common expenses are allocated to segments based on the ratio of a segment’s sales to total sales. What amount should be-reported as Segment Z’s operating profit? a. 900,000 b. 950,000 ¢. 800,000 d. 500,000 Problem 10-8 (AICPA Adapted) Clay Company has three lines of business, each of which was determined to be reportable segment. Sales aggregated P7,500,000 in the current year, of which Segment One contributed 40%. : Traceable costs were P1,750,000 for Segment One out of a total of P5,000,000 for the entity as a whole. The entity allocates common costs of P1,500,000 based on the ratio of a segment’s income before common costs to the total income before common costs. What amount should be reported as operating profit for egment One? p £250,000 - 1,000,000 S 650,000 500,000 283.Problem 10-9 (AICPA Adapted) its. Co: Hyde Company has three reportable segmen mmon costa are abpropriatély allocated on the basis of sales, In the current year, Segment A had sales of P3,000,000, which was 25% of Hyde’s total sales, and had traceable costs of P1,900,000. In the current year, the entity incurred segment costs of P500,000 that were not directly traceable to any of the divisions. Segment A incurred interest expense of P300,000 in the current year. Interest éxpense is included in the measure of profit or loss. What amount should be reported as Segment A’s profit for the current year? a. 875,000 b. 900,000 c. 975,000 d. 675,000 Problem 10-10 (IAA) Eagle Company operates in several different industries. Total sales for the entity totaled P14,000,000, and total common costs amounted to P6,500,000 for the current year. For internal reporting purposes, the entity allocates common costs based on the ratio of a segments sales to total sales. Contribution to total sales Costs specific to the segment Segment 1 25% 1,100,000 2 12% 1,000,000 3 31% 1,300,000 4 23% 880,000 5 9% 400,000 What amount should be report i fit of Ségnient 1) Ported as operating pro’ a. 3,500,000 b. 1,875,000 ¢. 2,400,000 d. 775,000 284problem 10-11 (AICPA Adapted) Colt Company has four ma, . etd which has been determined to ba guing divis Nopihont: h of Common costs are appropriat, 1 ‘ each division's sales in relation ely allocated on the basis of ee to Colt’s aggregate sales, Colt’s Delta division accounted for 40% a current year: of Colt’s total sales in the For the current year, Delta division h, id sales of P8,000,000 and traceable costs of P4,800,000. In addition, the Delta division incurred interest expense of P680,000. In the current year, Colt incurred costs of P800,000 that were not directly traceable to any of the divisions. It is an entity policy that interest expense-is included in the measure of profit or loss that is reviewed by the chief operating decision maker. What amount should be disclosed as Delta’s profit for the current year? a. 3,200,000 b. 3,000,000 ¢. 2,880,000 d. 2,200,000 Problem 10-12 (AICPA Adapted) Taylor Company assesses performance and makes operating decisions using the following information for the reportable segments: Total revenue 9,000,000 Total profit and loss 1,500,000 The t fit and loss included intersegment profit of P300,000. Tn addition, the entity had P100,000 of common costs for the reportable segments that are not allocated in reports provided to the chief operating decision maker. For purposes of segment reporting, what amount should be Teported as segment profit? a. 1,400,000 1,200,000 © 1}800,000 4. 1,500,000 285Problem 10-13 (IAA) ts of P65,000,000 i ity C any had total asse ‘ x at yen ani provided the following condensed income statement for the current year: 45,000,000 Sales Expenses (33,000,000) i + 12,000,000 Income before income tax , Income tax expense ‘ (3,800,000) Net income 8,200,000 The entity has two reportable segments and has developed the following related information: SegmentA SegmentB Others Sales 25,000,000 15,000,000 5,000,000 Segment expenses 18;000,000 9,000,000 4,000,000 Segment assets 35,000,000 18,000,000 7,000,000 The total assets of P65,000,000 include general corporate assets of P5,000,000. The total segment expenses of P33,000,000 include. general corporate expenses of P2,000,000. : The chief operating decision maker does not allocate income tax as a measure of profit or loss, Required: 1, Prepare the necessary disclosures for Diversity Company in relation to operating segments, 2. Prepare the reconcili, lations between a ation and amount shown i, egment inform: in the entity's financial statements. 286problem 10-14 (IAA) Congo Company does business in several different industries. phe entity provided the followi h statement for the current year: owing condensed income ee goods sold ie toeon) a ce Depreciation ( o00 000) Income tax expense ( 4,000,000) Net income E “10,000,000 The entity had two major reportable segments, X and Y. An analysis revealed that P1,000,000 of the total depreciation expense arid P2,000,000 of the expenses are related to general corporate activities. The chief operating decision maker allocates income tax expense to reportable segments as a measure of profit or _ loss. 5 The expenses and sales ‘are directly allocable to segment activities according to the following percentages: - Segment X Segment Y Others Sales 40% 45% 15% Cost of goods sold 35, 50 15 Expenses 40 40 7. 20 Depreciation 40 45 + 15 Income tax expense 50 40 10 Required: 1. Prepare a schedule that reports the segment profit or loss. 2. Prepare the disclosures required for operating segments. tions between segment information -- 8. Prey ili pare the reconcilia' ; the entity's financial statements. and amounts shown in 287Problem 10-15 (IFRS) i ing statement of finangi, Easy Company provided the following s' cial position ae year-end and income statement for the current year: 130,000 Current assets , Property, plant and equipment 500,000 Goodwill 100,000 Investment in associate —70,000 Total assets 800,000 Current liabilities f 90,000 Noncurrent liabilities 60,000 Share capital 400,000 Retained earnings 250,000 Total liabilities and equity T 800,000 Revenue 1,800,000 Cost of goods sold 1,200,000) Gross profit i. 600,000 Other income 60,000 Distribution cost ~ — ( 200,000) Administrative expenses ( 100,000) Other expenses ( 50,000) Finance cost : i (60,000) Share in profit of associate 10.600 Income before tax 260,000 Income tax expense (90,000) Net income External sales Intersegment sales Furniture 800,000 n R 200,000 Stationery 500,000 150,000 Computer products 400'0p 50,000 Other segments 100,000 ‘ 288The cost of goods sold, distribution cost, administrative expenses and finance cost can be allocated as 50% to furniture, 25% to stationer: , 20% ti and 5% to other segments. © computer products, The cost of sales related to interse; gment sales amounted to P240,000 to be allocated as 50% to furniture, 40% to stationery, and 10% to computer products. The segment assets and liabilities are: ‘ Computer Furniture Stationery products Others Current assets 80,000. 40,000 5,000 2,000 Property, plant and equipment 300,000 100,000 85,000 3,000 Goodwill 60,000 —_ 30,000 10,000 = Total assets 170,000 Current liabilities 45,000 30,000 1,000 Noncurrent liabilities 30,000 20,000 _7,000 2,000 Total liabilities 50,000 15,000 3,000 The remaining assets and liabilities are general corporate assets and liabilities identified with the entity as a whole. The other income and other expenses are not allocated to the operating segments as a measure of profit or loss. The chief operating decision maker does not allocate income tax expense to reportable segments as a measure of profit or loss. Required: L Determine the profit or loss for all of the operating segments. 2. Prepare the disclosures required for operating segments. 3. Prepare the necessary reconciliations between the segment information and amounts shown in the entity's financial statements. 289Problem 10-16 (IAA) Revlon Company provided the following data for the current year. Segment Revenue Profit (loss) Assets 1 "620,000 200,000. 400,000 2 100,000 20,000 80,000 3 340,000 70,000 300,000 4 190,000 (30,000), 140,000 5 180,000 (25,000) 180,000 a 70,000 10,000 120'000 gu 120,000 ( 20,000) 140,000 Others 380,000 ( 25,000) 140,000 *, The "others" category included five operating segments, none of which has revenue or assets greater than P80,000 and none with an operating profit. *. Operating Segments 1 and 2 produce very similar products and use very similar production processes, but serve different customer types and use quite different product distribution system. Such differences are due in part to the fact that Segment 2 operates in a regulated environment while Segment 1 does not. ae Operating Segments 6 and 7: have very similar products, production Processes, product distribution systems, but are organized as separate. divisions since they. serve substantially different types of customers. Neither Segments 6 and 7 operate in a regulated environment. Required: 1. Determine the te, i n portable segment: ard to aggregation criteria, Tete eat me 2. If the er eioeerall size test for reportable segments is not yet met, tify additional reportable segments. 3. What are thi Ae factors? © Teportable segments after considering all 290problem 10-17 (IAA) Universal Company had two diffe; re! ‘ significant sales both in the Phil nt product lines and made ippines and Japan. ‘The entity compiled the following information: in Product A Product B Philippines Japan Philippines Japan Revenue 1,000,000 1,500,000 4,000,000 2,000,000 Segment profit or loss 250,000 400,000 500,000 +—-200,000 Depreciation 150,000 . 200,000. 800,000 500,000 Property; plant and equipment 500,000. 600,000 2,500,000. 1,500,000 Segment assets 1,200,000 1,400,000 6,000,000 __ 4,000,000 Segment liabilities 700,000 600,000 4,000,000 2,000,000 Capital expenditures 200,000 400,000 1,000,000 300,000 Required: 1. Universal Company had structured its operations internally into two divisions based on two products, A and B. Prepare the disclosures required in relation to operating segments. 2. Prepare the entity-wide disclosure about geographical areas to conform with the requirement of segment reporting. s 291Problem 10-18 Multiple choice (PFRS 8) i th the consolidat, i i port contains bo n ed * ir i oan eine of a parent and the parent’s Separate financial statements, segment information is required in a. b. c. d. i ts only The separate financial statement The consolidated financial statements only © : Both the separate and consolidated financiag) tatements j . Neither the separate nor the consolidated financia] statements 2. An operating segment is a component of an entity a. b. c. d. ‘That engages in business activities from which it may earn revenue and incur expenses. Whose operating results are regularly reviewed by the entity's chief operating decision maker. For which discrete information is available. All of these characterize an operating segment. 3. Which quantitative threshold is not a requirement in qualifying a reportable segment? a. b. 4.An Operating segment is conside: of the following conditions is m a. b. c. The segment revenue, both external and internal, is 10% or. more of the combined external and internal revénue of all operating segments. The segment profit or loss is 10% or more of the greater between the combined profit of profitable segments and combined loss of unprofitable segments. The segment assets are 10% or more of the combined assets of all Operating segments. The segment assets are 20% or more of the combined assets of all operating segments, ‘ red reportable when any et, except ean orang 10% or more of the combined an of the entity's segments. Segment assets are 19% or more of the combined assets of all segments, Segment liabilities )Y i liabilities of all se mishte % or more of the combined Segment’s profit or loss is 10% oy more of the combined Profit of all segments that did not incur a loss. 2925, Which statement is true concerning the 75% overall size test for reportable segments? _ The total extern. i » Taportable rats and. internal reyentis of all external revenue. lore/ of the enhityS p. The total external revenue of alll 1 i \ e reportable segments is 715% or more of the entity’s external and internal revenue. c. The total external revenue of all reportable segments js 75% or more of the entity's external revenue. d. The total internal revenue of all reportable segments is 75% or more of the entity’s internal revenue. 6. The term chief operating decision maker a. Refers to a manager with a specific title. b. Must be disclosed by title in the financial reporting for segments. c. Must be described in the disclosures for the financial reporting for segments. d. Refers to a function of allocating resources to the operating segments and assessing their performance. _ 7,Which statement is not true with respect to a chief operating decision maker? a. The term chief operating decision maker identifies a function and not necessarily a manager with a specific title. b. In some cases, the chief operating decision maker ice could be the chief operating officer. : The board of directors acting collectively could qualify as the chief operating decision maker. d. The chief internal auditor would genarally qualify as chief operating decision maker. 8.In financial reporting for operating segments, an entity shall disclose all of the following, except a. Bos Type of product and service from which each reportable segment derives.revenue. o The title of the chief operating decision whaler Factors used to jdentify the reportable sens Sea The basis of measurement of segment profit or los: and segment assets. 293t any of th its, 9, Operating segments that do not meet any of the quantitatiy, thresholds be considered reportable. ae considered reportable and separately disclogeg if management believes that information about the segment would be useful to the users of the financia] statements. c: May be considered reportable and separately discloseq if the information is for internal use. d. May:be considered reportable and separately disclosed if this is the practice within the economic environment in which the entity operates. 10. Segment reporting requires that an entity should provide reconciliations of segment information. Which is‘ not a required reconciliation? 7 a. The total of the reportable segments’ revenue to the entity revenue b. The total of the reportable segments’ profit or loss to the entity profit or loss before tax expense and discontinued operations c. The total number of major customers of all segments to the total number of major customers of the entity d. The total of the reportable segments’ assets to the entity assets 294problem 10-19 Multiple choice (IFRS) L Entity-wide disclosures include all; except . Information about, products pb, Information about geographical areas ” Information about major customers d. Information about intersegment revenue g,Which statement is true about major customer disclosure? 4a a. A major customer is defined as one providing revenue which amounts to 10% or more of combined external revenue of all operating segments. b. The identities of major customers need not be disclosed. c. The entity shall disclose the total amount of revenue from all major eustomers. d. Allof these statements are true about major customer disclosures. * 3. Which entity is required to report on business segments? a. Publicly traded b. Not for profit c, Joint venture d. Nonpublic 4. An entity must disclose all of the following about each reportable segment jf the amounts are reviewed by the chief operating decision maker, except a. Depreciation expense b. Allocated expense c. Interest expense d. Income tax expense 5. An entity shall disclose for each reportable segment all of the following specified amounts included in the measure of profit. or loss, except a. Revenue from external customers b. Revenue from internal customers c. Interest revenue d. Gain on disposal of investment 295i i ble se, 6. An entity shall disclose for each, reportal ement of the following specified amounts included jn ant measure of profit or loss, except Boge 10. a. b. c da. Depreciation and amortization The entity’s interest in the profit or loss of A880¢iate Income tax expense General corporate expenses An entity must disclose all of the following aboutieach reportable segment if the amounts are reviewed by the chief operating decision maker, except a b. c d Unusual items Income tax expense Intersegment revenue Cost of goods sold . For segment reporting purposes, which test must be applied to determine if a component is a reportable operating segment? a. b. c. d. Revenue test and asset test “ Revenue test, asset test and profit or loss test Revene test, asset test and expense test Revenue test, asset test and cash flow test What may be considered as the practical limit to the number of reportable operating segments? Five segments ' Ten segments Six segments Four segments The approach used in segment reporting is known as Bo sp Segment approach Revenue approach Management approach Enterprise approach "296