MODULE 33 OPERATING SEGMENTS

LEARNING OBJECTIVES:
1. Define an operating segment.
2. Describe the “management approach” to identify reportable segments.
3. State the quantitative thresholds in identifying reportable segments.

OVERVIEW
PFRS 8 Operating Segments requires particular classes of entities (essentially those with
publicly traded securities) to disclose information about their operating segments, products and
services, the geographical areas in which they operate, and their major customers. Information
is based on internal management reports, both in the identification of operating segments and
measurement of disclosed segment information.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on October 27, 2020 (Tuesday 9:00
– 10:00 AM)

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 cash flows.
c. Make more informed judgments about the entity as a whole

Operating segments
PFRS 8 defines an operating segment as follows. An operating segment is a component of an
entity:
o 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)
o whose operating results are reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance and
o for which discrete financial information is available

Reportable Segments
An operating segment is reportable if it:
a. Is used by management in internal reporting or results from aggregating two or more
segments; and
b. Qualifies under the quantitative thresholds

Management approach
PFRS 8 adopts a management approach to identifying reportable segments. Under this
approach, operating segments are identified on the basis of internal reports that are regularly
reviewed by the 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 is reportable or not is based on

management’s judgment.

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 segment are similar in each of the following respects:
a. Nature of the products and services;
b. Nature of production processes;
c. Type or class of customer for their products and services;
d. The method 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.

Quantitative thresholds
Operating segment is reportable if it meets any of the following:
o its reported revenue, from both external customers and intersegment sales or transfers,
is 10 per cent or more of the combined revenue, internal and external, of all operating
segments, or
o the absolute measure of its reported profit or loss is 10 per cent 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, or
o its assets are 10 per cent or more of the combined assets of all operating segments.

Illustration: Quantitative thresholds

Entity X is preparing its year-end financial statements and has identified the following operating
segments:
Segments Revenue Profit (loss) Assets
A 1,000,000 200,000 14,000,000
B 1,200,000 140,000 18,000,000
C 270,000 (70,000) 12,000,000
D 240,000 (700,000) 1,000,000
E 290,000 50,000 1,400,000
Total 3,000,000 (380,000) 46,400,000

Requirement: Identify the reportable segments.

Solution:
Revenue test – 10% of the total revenue to be reportable
(3,000,000 x 10%) = 300,000 which means that any segment with revenue of 300,000
are reportable segments. Therefore, segment A and B are reportable as it meets the
10% thresholds on revenues.

Profit or loss test

Step 1. Compute for the profit or loss separately.
Segment 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 totalled amount, in absolute terms (i.e., ignore the
negative value of losses). The higher amount is used for the 10% test. The loss is higher,
therefore that will be the basis for the 10% thresholds. 770,000 x 10% = 77,000, any segment
with profit or loss of 77,000 are reportable segments. Segment A,B and D qualify under these
test because their profit is at least 77,000.

Asset test
Total assets of all the segments 46,400,000
Multiply by x 10%
Total 4,640,000

Any segment whose asset is 4,640,000 are reportable segments. Segment A, B, and C are
reportable.

Conclusion:
Base on the revenue, profit or loss, and asset test, segment A, B, C, and D are reportable
segments, and these segments will be disclosed separately in the notes.

Reporting of non-reportable segments

Operating segments that are not reportable are combined and 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 meet the quantitative threshold, until at least 75% of the entity’s external revenue is
included in reportable segment. Additional segments are identified based on management’s
judgment.

Reporting of interest revenue and interest expense

Interest revenue and expense are reported separately for each reportable segment unless
segment revenue is primarily from interest ( e.g., the segment is a financial institution) and
internal decision-making is based on net interest revenue.

Information about major customer

A major customer is a single external customer who has provided 10% or more of the entity’s
revenue. The entity shall disclosed the extent of its reliance on its major 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.
Summary:
PFRS 8 uses a “management approach” to identifying reportable segments.

A reportable operating 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 the 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 the assets ( inclusive of intersegment receivables).

The total reported 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 thresholds, until the 75% limit is met.

Disclosures for major customer are required if revenues from a single external customer
amounts to 10%or more of the entity’s external revenues.
 MODULE # 33 Post-test
TOA – OPERATING SEGMENTS
Prof. U. C. Valladolid

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before October 30, 2020 (Friday)

1. If a financial report contains both the consolidated financial statements of a parent’s separate financial
statements, segment information is required in
a. The separate financial statements only
b. The consolidated financial statements only
c. Both the separate and consolidated financial statements
d. Neither the separate nor the consolidated financial statements

2. What is the “core principle” of PFRS 8 on operating segments?

a. An entity shall; disclose significant financial information by business and geographical
segments.
b. 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.
c. An entity shall disclose information to enable users to evaluate the nature and financial
effects of the economic environments in which it operates.
d. An entity shall disclose information to enable users to evaluate the nature and financial
effects of the business activities in which it engages and the economic environments in
which it operates.

3. Operating segments that do not meet any of the quantitative thresholds

a. Cannot be considered reportable.
b. May be considered reportable and separately disclosed if management believes that
information about the segment would be useful to the users of the financial statements.
c. May be considered reportable and separately disclosed if the information is for internal use
only.
d. May be considered reportable and separately disclosed if this is the practice within the
economic environment in which the entity operates.

4. What is the approach prescribed by PFRS 8 in identifying operating segment?

a. Management approach
b. Risk and rewards approach
c. Matrix approach
d. Geographical segment approach
5. An entity shall report information about an operating segment when the absolute amount of its reported
profit or loss is
a. 10% or more of the absolute amount of the combined profit or loss of all operating
segments.
b. 10% or more of the absolute amount of the combined profit of all operating segments that
reported a profit.
c. 10% or more of the absolute amount of the combined loss of all operating segments that
reported a loss.
d. 10% or more of the greater in absolute amount between the combined profit of all operating
segments that reported a profit, and the combined loss of all operating segments that
reported a loss.

6. What is the quantitative requirement for the revenue that must be reported by reportable operating
segments?
a. The total external and internal revenue of all operating segments is 75% or more of the
entity external revenue.
b. The total external revenue of all operating segments is 75% or more of entity external and
internal revenue.
c. The total external revenue of all operating segments is 75% or more of the entity external
revenue.
d. The total internal revenue of all operating segments is 75% or more of the entity internal
revenue.

7. An entity shall disclose for each reportable segment which of the following specified amounts that are
included in the measure of segment assets?
a. The amount of investment in associates and joint ventures accounted for by the equity
method.
b. Financial assets
c. Deferred tax assets
d. Postemployment benefit assets

8. An entity shall report for each reportable segment a measure of all of the following, except
a. Profit or loss
b. Total assets
c. Liabilities if such amount is regularly provided to the chief operating decision maker
d. Net assets

9. An entity shall report information about an operating segment when

a. Its asset are 10% or more of the combined assets of all operating segments.
b. Its net assets are 10% or more of the combined assets of all operating segments.
c. Its net assets are 10% or more of the combined net assets of all operating segments.
d. Its assets are 10% or more of the total assets of the entity.
10. An entity shall report information about an operating segment when
a. Its reported external and internal revenue is 10% or more of the combined external revenue
of all operating segments.
b. Its reported external revenue is 10% or more of the combined external and internal revenue
of all operating segments.
c. Its reported external revenue is 10% or more of the combined external revenue of all
operating segments.
d. Its reported external and internal revenue is 10% or more of the combined external and
internal revenue of all operating segments.

11. PFRS 8 now requires information about transactions with “major customers”. What is the definition of major
customers?
a. Those customers that individually account for revenue of 10% or more of the entity external
revenue.
b. Those customers that individually account for revenue of 10% or more of the entity external
and internal revenue.
c. Those customers that individually account for revenue of at least 90% of the entity revenue.
d. Those customers who have been dealing with the entity for at least 5 years regardless of
the volume of revenue.

12. Entity- wide disclosure include all of the following, except

a. Information about products and services
b. Information about geographical areas
c. Information about major customers
d. Information about intersegment sales or transfers

13. What is the function of the chief operating decision maker?

a. To allocate resources to the operating segments only.
b. To assess the performance of the operating segments only.
c. To provide general information to financial statement users about operating segments.
d. To allocate resources to the operating segments and assess their performance.

14. The following statements relate to measurement of segment information. Which statement is correct?

I. The amount reported for each operating segment item shall be the measure reported to the chief
operating decision maker for the purpose of making decisions about allocating resources to the segment
and assessing its performance.
II. The segment information reported shall be prepared in conformity with accounting policies adopted for
preparing and presenting the financial statements of the entity.

a. I only
 b. II only
c. Both I and II
d. Neither I nor II

15. An entity shall disclose which of the following general information?

I. Factors used to identify the entity’s reportable segments, including the basis of organization.
II. Types of products and services from which each reportable segments derives its revenue.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

16. What is the “management approach” of identifying operating segments?

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

II. Operating segments are identified on the basis of the dominant source and nature of the entity’s risks
and rewards.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

17. PRFS 8 shall apply to

a. Separate financial statements of an entity only.
b. Consolidated financial statements of a group only.
c. Both the separate financial statements of an entity and the consolidated financial
statements of a group.
d. Neither the separate financial statements of an entity nor the consolidated financial
statements of a group.

18. What is the practical limit to the number of reportable operating segments?
a. Five segments
b. Ten segments
c. No precise limit but if the number increases above five, the entity shall consider whether a
 practical limit has been reached.
d. No precise limit but if the number increases above ten, the entity shall consider whether a
practical limit has been reached.

19. Who could be the chief operating decision maker?

a. Chief operating officer
b. Chief executive officer
c. Group of executive directors
d. All those mentioned depending on who within the organization is responsible for the
allocation of resources and assessing the performance of operating segments.

20. An entity is engaged in the manufacturing industry and has recently purchased an 80% holding in a small
financial services group. This group does not meet any of the threshold criteria for a reportable segment.
Can the entity disclose the financial services group as a separate operating segment?
a. No, because it does not meet any of the criteria for a reportable segment.
b. Yes, even though it does not meet the criteria for a reportable segment, an entity can
disclose operating segments separately if management believes that information about the
segment would be useful to the users of the financial statements.
c. The entity can disclose only 80% of the results and net assets of the banking group.
d. Because of the disparity in type of business, the entity shall disclose its segmental
information on a geographical basis.