Operating Segments

PFRS 8

Learning Objectives:
1. To know the core principle of segment reporting.
2. To understand the concept of an operating segment.
3. To identify the criteria for the recognition of a reportable segment.
4. To identify the information required to be disclosed for a reportable
segment.

By:
Mr. Remark M. Montalban
1
Holy Name University
Segment Reporting – Core Principle
The core principle of segment reporting is as follows:
 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.

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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.

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

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Operating Segment
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.

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Operating Segment
For example, start-up operations may be
operating segments before earning revenue.

Not every part of an entity is necessarily an

operating segment or part of an operating
segment.

For example, corporate headquarters or some

functional departments that may not earn
revenue or may earn revenue that is incidental
only to the activities of the entity would not be
operating segments.
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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.
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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.
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Identifying operating segments
 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 and reward approach of
identifying operations by business segments and geographical
segments.

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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.
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Reportable 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.

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Illustration 1
Revenue, profit or loss, and assets for each operating segment are as
follows:
Segments Revenue Profit (Loss) Assets

A 16,000,000 1,700,000 25,000,000

B 13,000,000 500,000 11,000,000

C 6,000,000 (1,000,000) 3,000,000

D 3,000,000 200,000 2,000,000

E 2,000,000 (100,000) 4,000,000

TOTALS 40,000,000 1,300,000 45,000,000

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Illustration 1 - Analysis
Using Revenue Test:
Reportable segment are those segments with 10%
or more of the combined revenue. In this case, the
10% of combined revenue is P4,000,000
(P40,000,000 x 10%). Any segment with P4,000,000
and above are reportable segments.

Using Asset Test:

Reportable segment are those segments with 10%
or more of the combined assets. In this case, the
10% of combined assets is P4,500,000 (P45,000,000
x 10%). Any segment with P4,500,000 and above
are reportable segments.
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Illustration 1 - Analysis
Using Profit or Loss Test:
Reportable segment are those segments with 10% or more of the
greater in absolute amount of (1) Combined Profit and (2) Combined
Losses.
Segments Profit Loss

A 1,700,000

B 500,000

C 1,000,000

D 200,000
E 100,000

TOTALS 2,400,000 1,100,000

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Illustration 1 - Analysis
Using Profit or Loss Test:
The greater absolute amount is the combined profit. Therefore,
reportable segments are those 10% or more of P2,400,000, or
P240,000.

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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.

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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

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Illustration 2
An entity has no intersegment sales and has the following operating
segments with their corresponding revenue:

Segments 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
8 400,000 5
Totals 8,000,000 100%

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Illustration 2 - Analysis
Based on the revenue test, the reportable segments are segments 1, 2,
and 3. The remaining are not reportable.

The total external revenue of the reportable segments is as follows:

Segments Revenue Percentage

1 2,400,000 30%
2 1,600,000 20
3 1,200,000 15
Totals 5,200,000 65%

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Illustration 2 - Analysis
 In this case, additional operating segments (e.g. two or more) shall be identified
even if they do not meet any of the 10% quantitative thresholds.
 Take note: The segments that are to be combined should have similar economic
characteristics and share a majority of the five aggregation criteria.
 Assuming, Segments 7 and 8 can be aggregated as one reportable segments
because they possess the same characteristics. The reportable segments therefore
are the following:

Segments Revenue Percentage

1 2,400,000 30%
2 1,600,000 20
3 1,200,000 15
7&8 880,000 11
Totals 6,080,000 76%

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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.

Although no precise limit has been determined, as the

number increases above ten, the entity shall consider
whether a practical limit has been reached.

In other words, if the number of reportable segments

exceeds ten, it is likely that the information may
become too detailed and consequently lose its
usefulness.
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Segment no longer reportable
If the management judges that an operating segment identified as a
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.

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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.

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Information to be disclosed for each segment
An entity shall disclose the following for each
reportable operating segment:
1. General information about the operating
segment
2. Information about profit or loss, including
specified revenue and expenses included in the
measure of profit or loss
3. Information about segment assets and segment
liabilities 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 in the entity's
financial statements.
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Disclosure about general information
1. Factors used to identify the reportable segments
For example, whether management has chosen to organize
the entity around differences in products and services.
combination of factors, and whether operating segments
have been aggregated.

2. Type of products and services from which each reportable

segment derives revenue.

Example of disclosure about type of products and services

An entity has three reportable operating segments, namely
car parts, motor vessels and software.:
a. The car parts segment produces replacement parts for
sale to car parts retailers.
b. The motor vessels segment produces small motor vessels
to serve the offshore oil industry and similar businesses.
c. The software segment produces application software for
sale to computer manufacturers and retailers. 25
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 amount is regularly provided to
the chief operating decision maker.

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Other disclosures
The other items disclosed are specified in PFRS 8 and are
disclosed only because these are included in the measure of profit
or loss, measure of total assets and measure of total liabilities
reviewed by the chief operating decision maker

The impairment loss is disclosed because the amount is deemed

material.

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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. 30
Change in internal organization
If an 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.

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Entity-wide disclosures
Entity-wide disclosures are additional information that is required to be
disclosed by all entities if such information is not provided as part of the
reportable segment information.

An entity shall disclose information about the following:

a. Information about products and services
b. Information about geographical areas c. Information about major
customers

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Entity-wide disclosures
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.

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Entity-wide disclosures
Disclosure about major customer
 A major customer is defined as a single external customer providing
revenue which amounts to 10% or more of an entity's external
revenue.
 The entity shall disclose the fact of reliance on major customers, the
total mount of revenue from major customers and the identity of the
segment or segments reporting the revenue.
 The entity is not required to disclose the identity of the major
customer or the amount of revenue that each segment reports from
that customer.

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Illustration 3
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 operating segments at year

end amounted to P45,000,000.

1. What is the minimum amount of sales to a major

customer?
2. What is the minimum amount of external revenue to
be disclosed by reportable segments?

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Illustration 3
Grum Company is subject to the Minimum Amount of Sales to a major
requirements of segment reporting. In the Customer:
income statement for the current year, the
50,000,000 x 10% 5,000,000
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 Minimum Amount of external revenue to be
of P15,000,000. disclosed by reportable segments:
50,000,000 x 75% 37,500,000
The combined total assets of all operating
segments at year end amounted to
P45,000,000.

1. What is the minimum amount of sales

to a major customer?
2. What is the minimum amount of
external revenue to be disclosed by
reportable segments?

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Illustration 4
 Hyde Company has three reportable segments. Common costs are
appropriately 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 expense is included in the measure of profit or loss.
 What amount should be reported as Segment A's profit for the current
year?

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Illustration 4 Sales – Segment A 3,000,000
Traceable Costs (1,900,000)
 Hyde Company has three reportable Allocated Cost (500,000 x 25%) ( 125,000)
segments. Common costs are Interest Expense ( 300,000)
appropriately allocated on the basis Segment A Profit 675,000
of sales,
 In the current year, Segment A had Note:
sales of P3,000,000, which was 25%
of Hyde's total sales, and had 1. Costs that are directly traceable to the segment
traceable costs of P1,900,000. In the will be reported by the segment.
current year, the entity incurred 2. Common costs must be regularly reviewed and
segment costs of P500,000 that were submitted to the CODM, and/or allocated by
not directly traceable to any of the CODM to segments in assessing performance to
divisions. be allocated to the segment.
 Segment A incurred interest expense
of P300,000 in the current year.
Interest expense is included in the
measure of profit or loss.
 What amount should be reported as
Segment A's profit for the current
year?
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Let me hear what’s on your mind.

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