Chapter 8

Operating segments and Interim Reports

An important aspect of reporting financial performance is segment reporting.

8.1 Operating segments

Introduction

Large entities produce a wide range of products and services, often in several different countries.
Further information on how the overall results of entities are made up from each of these product
or geographical areas will help the users of the financial statements. This is the reason for
segment reporting.

 The entity's past performance will be better understood

 The entity's risks and returns may be better assessed
 More informed judgments may be made about the entity as a whole

Risks and returns of a diversified, multi-national company can only be assessed by looking at
the individual risks and rewards attached to groups of products or services or in different groups
of products or services or in different geographical areas. These are subject to differing rates of
profitability, opportunities for growth, future prospects and risks.

In recent years this has proved to be a relatively controversial area of financial reporting. The
difficulty for standard-setters is twofold. First, one must decide what constitutes a segment (eg
should segments be identified on the basis of geography or their operational function?). Second,
financial reporting requirements must balance the relevance of the segmental information
provided in the context of the particular reporting entity, with the need for information to be
comparable across many different types of entity. A balance needs to be struck between allowing
management to exercise sufficient judgment for the information provided to be relevant, and
the need to minimize creative accounting to provide information that is both reliable and
comparable.

Objective: An entity must 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.

Scope: Only entities whose equity or debt securities are publicly traded (ie on a stock
exchange) need disclose segment information. In group financial statements, only consolidated
segmental information needs to be shown. (The statement also applies to entities filing or in the
process of filing financial statements for the purpose of issuing instruments.)

Definition of operating segment

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Reportable segments are operating segments or aggregation of operating segments that meet
specified criteria.

Operating segment; this is a component of an entity:

a) 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)
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, and
c) For which discrete financial information is available.
The term 'chief operating decision maker' identifies a function, not necessarily a manager with a
specific title. That function is to allocate resources and to assess the performance of the entity's
operating segments

Aggregation

Two or more operating segments may be aggregated if the segments have similar economic
characteristics, and the segments are similar in each of the following respects:

 The nature of the products or services

 The nature of the production process
 The type or class of customer for their products or services
 The methods used to distribute their products or provide their services, and
 If applicable, the nature of the regulatory environment

Determining reportable segments

IFRS 8 adopts a management approach to determining operating segments. An entity must

report separate information about each operating segment that:

a) Has been identified as meeting the definition of an operating segment; and

b) It exceeds at least one of the following quantitative thresholds:
i. Reported revenue is 10% or more of the combined revenue of all operating
segments (external and intersegment), or
ii. The absolute amount of its reported profit or loss is 10% 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
iii. Its assets are 10% or more of the total assets of all operating segments.

At least 75% of total external revenue must be reported by operating segments. Where this is
not the case, additional segments must be identified (even if they do not meet the 10%
thresholds).

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Two or more operating segments below the thresholds may be aggregated to produce a
reportable segment if the segments have similar economic characteristics, and the segments are
similar in a majority of the aggregation criteria above.

Operating segments that do not meet any of the quantitative thresholds may be reported
separately if management believes that information about the segment would be useful to users
of the financial statements.

Disclosures IFRS 8 disclosures are of:

 Operating segment profit or loss

 Segment assets
 Segment liabilities
 Certain income and expense items

Disclosures are also required about the revenues derived from products or services and about the
countries in which revenues are earned or assets held, even if that information is not used by
management in making decisions.

Example: determining operating segments

Jesmond, a retail and leisure group, has three businesses operating in different parts of the world.
Jesmond reports to management on the basis of region. The results of the regional segments for
the year ended 31 December 20X9 are as follows. ( in millions)

Region Revenue Segment results Segment Segment

External Internal profit/(loss) assets liabilities
European 200 3 (10) 300 200
North 300 2 60 800 300
America
Other regions 500 5 105 2,000 1,400
There were no significant intra-group balances in the segment assets and liabilities. The retail
outlets and leisure centres are located in capital cities in the various regions, and the company
sets individual performance indicators for each hotel based on its city location.

Required: Discuss the principles in IFRS 8 Operating segments for the determination of a
company's reportable operating segments and how these principles would be applied for
Jesmond plc using the information given above.

Solution

IFRS 8 Operating segments states that an operating segment is a reported separately if:

(i) It meets the definition of an operating segment, ie:

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 (1) It engages in business activities from which it may earn revenues and incur
expenses,

(2) Its 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, and

(3) Discrete financial information is available for the segment,

And

(ii) It exceeds at least one of the following quantitative thresholds:

(1) Reported revenue is 10% or more the combined revenue of all operating segments
(external and intersegment), or

(2) The absolute amount of its reported profit or loss is 10% 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

(3) Its assets are 10% or more of the total assets of all operating segments.

At least 75% of total external revenue must be reported by operating segments. Where this is
not the case, additional segments must be identified (even if they do not meet the 10%
thresholds).

Two or more operating segments below the thresholds may be aggregated to produce a
reportable segment if the segments have similar economic characteristics, and the segments are
similar in a majority of the following aggregation criteria:

 The nature of the products and services

 The nature of the production process
 The type or class of customer for their products or services
 The methods used to distribute their products or provide their services
 If applicable, the nature of the regulatory environment

Operating segments that do not meet any of the quantitative thresholds may be reported
separately if management believes that information about the segment would be useful to users
of the financial statements.

For Jesmond, the thresholds are as follows.

i. Combined revenue is $1,010m, so 10% is $101m.

ii. Combined reported profit is $165m, so 10% is $16.5m.
iii. Combined reported loss is $10m, so 10% is $1m.

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 iv. Total assets are $3,100m, so 10% is $310m.

The North America segment meets the criteria, passing all three tests. Its combined revenue is
$302m; its reported profit is $60m, and its assets are $800m.

The European segment also meets the criteria, but only marginally. Its reported revenue, at
$203m is greater than 10% of combined revenue, and only one of the tests must be satisfied.
However, its loss of

$10m is less than the greater of 10% of combined profit and 10% of combined loss, so it fails
this test. It also fails the assets test, as its assets, at $300m are less than 10% of combined assets
($310m).

IFRS 8 requires further that at least 75% of total external revenue must be reported by operating
segments. Currently, only 50% is so reported. Additional operating segments (the 'other regions')
must be identified until this 75% threshold is reached.

IFRS 8 may result in a change to the way Jesmond's operating segments are reported, depending
on how segments were previously identified.

8.2 Interim Reports

Objective:

• The objective of this Standard is to prescribe the minimum content of an interim

financial report and to prescribe the principles for recognition and measurement in
complete or condensed financial statements for an interim period.
• Timely and reliable interim financial reporting improves the ability of investors,
creditors, and others to understand an entity’s capacity to generate earnings and cash
flows and its financial condition and liquidity.

Definition:

• Interim period is a financial reporting period shorter than a full financial year.
• Interim financial report means a financial report containing either:
 a complete set of financial statements (in accordance with IAS 1), or
 a set of condensed financial statements (in accordance with IAS 34) for an
interim period.

Minimum components: The minimum component elements of an interim financial report:

• Condensed statement of financial position

• Condensed statement of profit or loss and other comprehensive income
• Condensed statement of changes in equity
• Condensed statement of cash flows
• Selected note disclosures

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The rationale for requiring only condensed statements and selected note disclosures is that
entities need not duplicate information in their interim report that is contained in their report
for the previous financial year.

• Interim statements should focus more on new events, activities and circumstances.

Examples of events or transactions that may require disclosure, if significant:

 the write-down of inventories to net realisable value and the reversal of such a write-
down;
 recognition of a loss from the impairment and the reversal of such an impairment loss;
 the reversal of any provisions for the costs of restructuring;
 acquisitions and disposals of items of property, plant and equipment;
 commitments for the purchase of property, plant and equipment;
 litigation settlements;
 corrections of prior period errors;
 related party transactions;

Other disclosures

• A statement that the same accounting policies and methods of computation have been
used for the interim statements as were used for the most recent annual financial
statements.
• Explanatory comments on the seasonality or 'cyclicality' of operations in the interim
period.
• The nature and amount of items during the interim period affecting assets, liabilities,
capital, net income or cash flows, that are unusual, due to their nature, incidence or size.
• The issue or repurchase of equity or debt securities
• Nature and amount of any changes in estimates of amounts reported in an earlier interim
report during the financial year
• Dividends paid on ordinary shares and on other shares

Periods covered:

The standard requires that interim financial reports should provide financial information for the
following periods or as at the following dates.

(a) SOFP data as at the end of the current interim period, and comparative data as at the end of
the most recent financial year

(b) SOPL & OCI data for the current interim period and cumulative data for the current year to
date, together with comparative data for the corresponding interim period and cumulative figures
for the previous financial year

(c) Statement of cash flows data should be cumulative for the current year to date, with
comparative cumulative data for the corresponding interim period in the previous financial year

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(d) Data for the statement of changes in equity should be for both the current interim period and
for the year to date, together with comparative data for the corresponding interim period, and
cumulative figures, for the previous financial year

The guiding principle:

An entity should use the same recognition and measurement principles in its interim statements
as it does in its annual financial statements.

Use of estimates

In assessing materiality, it needs to be recognised that interim financial reports will rely more
heavily on estimates than year-end reports.

Examples:

a) Inventories. An entity might not need to carry out a full inventory count at the end of each
interim period. Instead, it may be sufficient to estimate inventory values using sales margins.

(b) Provisions. An entity might employ outside experts or consultants to advise on the
appropriate amount of a provision, as at the year end. It will probably be inappropriate to employ
an expert to make a similar assessment at each interim date.

Similarly, an entity might employ a professional valuer to revalue non-current assets at the year
end, whereas at the interim date(s) the entity will not rely on such experts

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