CHAPTER 35: PFRS 8 Operating Segments

Segment Reporting – Core Principle

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.

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
about resources to be allocated to the segment and assess its performance.
c. And for which discrete financial information is available.

Reportable operating segments

An entity 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

3. The assets of the segment are 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 are 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 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