PFRS 8 : OPERATING SEGMENTS

Scope
PFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated
financial statements of a group with a parent):
 Whose debt or equity instruments are traded in the public market

 That files, or in the process of filing, its (consolidated) financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of instruments in
the public markets

However, when both separate and consolidated financial statements for the parent are presented in a
single financial report, segment information need to be presented only on the basis of the consolidated
financial statements.
Identifying an Operating Segment
 An operating segment must be a component of an entity, meaning, its operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes, from the rest
of the entity.

 It engages in business entities 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 resources to be allocated to the segment and assess its performance

 For which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn revenues, for
example, start -up operations may be operating segments before earning revenues.
The term “chief operating decision maker identifies a function, not necessarily a manager with a specific
title. That function is to allocate resources to and assess the performance of the operating segments of an
entity.
A reportable segment – is an operating segment for which segment information is required to be
disclosed.

QUANTITATIVE THRESHOLDS
An entity shall report separately information about an operating segment that meets any or at least one of
the following quantitative thresholds:
 a. Its reported revenue, including both sales to external customers and intersegment sales or
transfers, is 10 percent or more of the combined revenue, internal and external, of all operating
segments.
b. The absolute amount of its reported profit or loss is 10 percent 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.
c. Its assets are 10 percent 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, if management believes that information about the segment would be useful to users
of the financial statements.
OVERALL SIZE TEST
 If total external revenue attributable to reportable segments identified using the 10% quantitative
thresholds is less than 75% of the total consolidated or enterprise revenue (external revenue),
additional segments should be identified as reportable segments, even if they do not meet the
10% requirement. Until at least 75% of total consolidated or enterprise revenue is included in
reportable segments.
 Stated in other words, the quantitative thresholds will not be necessary in determining additional
reportable segments in order to meet the 75% requirements.
 Information about other business activities and operating segments that are not reportable shall be
combined and disclosed in “all other segments” category separately from other reconciling items
in the reconciliation required. The sources of the revenue included in the “all other segments”
category shall be described.

DISCLOSURES REQUIRED FOR REPORTABLE SEGMENTS

An entity shall disclose information to enable users of its 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. Disclosures will include
 General information- factors used to identify the entity’s reportable segments, including
the basis of organization and types of products and services from which each reportable
segment derives its revenues.

 Information about reported segment profit and loss

 Reconciliations of the totals s of segment revenues, reported segment profit and loss,
segment assets, segment liabilities and other material segment items to corresponding
entity amounts.
ENTITY WIDE DISCLOSURES
 Information about products and services

 Information about geographical areas

  Information about major customers- If revenues from transactions with a single external
customer amount to 10 percent or more of an entity’s revenues, the entity shall disclose
that fact and disclose the following:

1. The total amount of revenues from each such customer

2. The identity of the segment or segments reporting revenues.

For Comparative Segments –

A reportable segment in the immediate preceding period may not meet the quantitative thresholds criteria
for reportability in a current period. If management judges that the operating segment is of continuing
significance, information about that segment continue to be reported separately in the current period.

If an operating segment is identified as a reportable segment in the current period, segment data for a
prior period presented for comparative purposes shall be restated to reflect the newly reportable segment
as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period,
unless the necessary information is not available and the cost to develop it would be excessive.

Example 1:
Segments A B C D E F Total
Revenue:
External 400,000 200,000 100,000 240,000 160,000 80,000 1,180,000
Inter-segment 40,000 20,000 20,000 60,000 20,000 20,000 180,000
Total revenue 440,000 220,000 120,000 300,000 180,000 100,000 1,360,000
% of revenue 32% 16% 9% 22% 13% 7%
Conclusion Reportable Reportable ? Reportable Reportable ?

Profit 80,000 40,000 20,000 4,000 144,000

Loss 20,000 10,000 (30,000)
% of profit 56% 28% 14% 3%
% of loss 67% 33%
Conclusion Reportable
Assets 1,000,000 400,000 200,000 500,000 360,000 100,000 2,560,000
% of assets 39% 16% 8% 20% 14% 4%
Conclusion Not
Reportable

Segments G H I J K L
External 600,000 400,000 100,000 100,000 80,000 80,000 1,360,000
Inter-segment 40,000 50,000 10,000 10,000 10,000 - 120,000
Total revenue 640,000 450,000 110,000 110,000 90,000 80,000 1,480,000
% of revenue 43% 30% 7% 7% 6% 5%
Conclusion Reportable Reportable ? ? ? ?
Example 2

Profit 200,000 20,000 10,000 4,000 234,000

Loss 160,000 10,000 (170,000)
% of profit 85% 9% 4% 2%
% of loss 94% 6%
Conclusion ? ? ? ?
Assets 1,600,000 800,000 200,000 160,000 120,000 100,000 2,980,000
% of assets 54% 27% 7% 5% 4% 3%
Conclusion ? ? ? ?

Reportable Segments: G H
External Sales 600,000 400,000
% of sales 44% 29% = 73%
Reportable Segments: G H I
External Sales 600,000 400,000 100,000
% of sales 44% 29% 7% = 75%

Based on the 10% thresholds for revenue, profit or loss and assets, only G and H are portable. Their
combined sales constitute only 73% of the total external revenue. Hence, an additional segment (segment
I) is identified as a reportable segment so that the combined external sales exceed 75%. The other 3
segments are not reportable segments. Information about these not reportable segments are combined and
disclosed in the “all other segments” category.