OPERATING SEGMENT

SEGMENT REPORTING
Segment

A segment is a part of the business that has

separate financial information and a separate
management strategy. Segments may be geographic,
line of business or departmental.
SEGMENT REPORTING – CORE PRINCIPLE
PFRS 8 sets out the requirements for disclosure
of information about operating segments.

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 environment in which it operates.
 Scope of PFRS 8
 Shall
apply to the separate or individual financial
statements of an entity, and to consolidated financial
statements of a group with a parent:

a. Whose debt or equity instrument are traded in a public market.

b. The 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.
COMPONENT OF OPERATING SEGMENT
 a.
Engages in business activities from which it
may earn revenue ad incur expenses.

 b.Operating results are regular reviewed by

the entity’s chief operating decision maker.

 c. Discrete financial information is available.

 CHIEF OPERATING DECISION MAKER
 It 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.

 It 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.
 IDENTIFYING OPERATING SEGMENTS
 MANAGEMENT APPROACH
 Identified the basis of internal reports about components of an entity.
 Considered to be important for internal management reporting purposes.
 Component of entity that sells primarily or exclusively to other operating
segments is included.
 Reporting of segment information is seen through the “eyes of
management” and users would wish to see the business.

 IFRS has abandoned the “risk and reward approach” of identifying

operation business and geographical segments.
REPORTABLE SEGMENTS
QUANTITATIVE TRESHOLDS:
1. The segment revenue 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.
Illustration
 Revenue, profit or loss, and assets for each operating segment are
as follows:

Revenues 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
 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
 OVERALL SIZE TEST – 75% threshold

 If 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 threshold until at least 75% of the
entity external revenue is included.
AGGREGATION OF SEGMENTS
Five Aggregation Criteria:

a. Nature of product
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
IILUSTRATION
 An entity has no intersegment sales and has the following
operating segments with their corresponding revenue:
Segment 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
800,000 100%
Total Revenue of the Reportable Segments

Revenue Percentage
Segment 1 2,400,000 30%
2 1,600,000 20%
3 1,200,000 15%
5,200,000 65%
 Aggregation
 Assume that Segments 7 and 8 have similar products, similar
production process, similar marketing method and are not
operating under regulated environment.

Segment 1 30%
Segment 2 20%
Segment 3 15%
Segments 7 and 8 (6% + 5%) 11%
76%
Limit to the Number of Segments
No precise limit has been determined, as the
number increases above ten, the entity shall
consider whether a practical limit has been
reached.

Segments no longer reportable

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 threshold for reportability.
Segment becoming reportable

In the current period in accordance with the 10%

quantitative thresholds, segment data for 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.
INFORMATION TO BE DISCLOSED FOR
EACH SEGMENT

1. General information about the operating

segment

2. Information about profit or loss

3. Reconciliations of the totals to corresponding

items in the entity’s financial statements.
DISCLOSURE ABOUT GENERAL
INFORMATION

1. Factors used to identify the reportable

segments

2. Type of products and services from which

each reportable segment derives revenue.
DISCLOSURE OF PROFIT OR LOSS, ASSETS
AND LIABILITIES
 Anentity shall disclose for each reportable segment a
measure of profit or loss, total assets and liabilities.

 Shalldisclose a measure of profit or loss under all

circumstances.

 However, total assets and liabilities for each reportable

segment shall disclose if such an amount is regularly
provided to the chief operating decision maker.
Illustration : Disclosure of segment profit or loss, total assets and liabilities
An entity provided the following financial
information relating to one of the reportable
operating segments (amount are assumed):

Interest expense (2,000)

Sales – external 60,000
Impairment loss (5,000)
Sales – internal 10,000
Profit or loss 20,000
Total sales 70,000
Cost of goods sold (30,000)
Total Assets 60,000
Gross profit 40,000
Addition to noncurrent assets 8,000
Interest revenue 3,000
Carrying amount of noncurrent
Distribution costs (8,000)
assets sold 5,000
Administrative expenses (4,000)
Total liabilities 20,000
Doubtful accounts (1,000)
Employee benefit expense ( 500)
Depreciation and amortization (2,500)
The minimum disclosure relating to the reportable operating
segment shall include the following:

Sales – external 60,000

Sales – internal 10,000
Interest revenue 3,000
Interest expense 2,000
Depreciation and amortization 2,500
Impairment loss 5,000
Profit or loss 20,000
Total Assets 60,000
Addition to noncurrent assets 8,000
Total liabilities 20,000
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, total assets and total liabilities
reviewed by the chief operating decision maker.

Impairment loss is disclosed because the amount is deemed

material.
 RECONCILIATIONS
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 ta expense and discontinued operations.

3. 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.
 Illustration

 The Implementation guidance 3 of PFRS 8 provided the

following suggested format for disclosing information about
reportable segment profit or loss, total assets and total
liabilities.
 The chief operating decision maker decided not to allocate
income tax expense to reportable segments as a measure of
profit or loss.
Operating segments
All amounts are assumed:
Software Electronics Car parts Others Total

Revenue – external 12,500 17,000 5,000 1,000 35,500

Revenue – internal 3,000 1,500 4,500
Interest revenue 1,500 2,300 - - 3,800
Interest expense 1,000 1,700 - - 2,700
Depreciation 300 1,600 1,100 - 3,000
Profit or loss 1,100 2,400 500 100 4,100
Impairment loss - 200 - - 200
Total assets 25,000 47,000 7,000 2,000 81,000
Expenditure for 800 1,500 600 - 2,900
noncurrent assets
Total liabilities 16,000 24,000 4,000 200 44,200
 CHANGE IN INTERNAL ORGANIZATION
 Ifan 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 if the corresponding

information for earlier period is not available and
the cost to develop it would be excessive.
ENTITY-WIDE DISCLOSURE
Additional information that is required to be disclosed by all
entities if such information is not provided as a 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

REVENUE FROM PRODUCTS AND SERVICES
An entity shall disclose the revenue from external
customers for each product and services.

REVENUE FROM GEOGRAPHICAL AREAS

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.
DISCLOSURE ABOUT MAJOR CUSTOMER
 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:

a. The fact of reliance on major customers

b. The total amount of revenue from major customers
c. The identity of the segment or segments reporting the revenue

It is not required to disclose the identity of the major customer or the

amount of revenue that each segment reports from that customer.