(Intermediate Accounting 3)

LECTURE AID

2020

ZEUS VERNON B. MILLAN

Chapter 8 Notes – Part 2
Related standards:
PAS 24 Related Party Disclosures
PFRS 8 Operating Segments

Learning Objectives
• Enumerate examples of related parties.
• Describe the disclosure requirements for related parties.
• Define an operating segment.
• Describe the “management approach” to identifying
reportable segments.
• State the quantitative thresholds in identifying reportable
segments.

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

Objective and Scope of PAS 24

• PAS 24 prescribes the necessary disclosures regarding related party

relationships and transactions, outstanding balances and
commitments between an entity and its related parties.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Core principle

• The financial position and profit or loss of an entity may be affected

by a related party relationship even if related party transactions do
not occur. The mere existence of the relationship may be
sufficient to affect the transactions of the entity with other parties.
• Necessary disclosures, therefore, should be provided to draw users’
attention to the possible effects of such relationships and
transactions on the financial statements presented.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Related parties

• A related party is “a person or entity that is related to the

reporting entity that is preparing its financial statements.” (PAS 24)

• Examples of related parties:

1. Investor and investee relationship where control, joint control or
significant influence exists.
2. Key management personnel
3. Close family member
4. Post-employment benefit plan

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Definition of terms

• Control – an investor controls an investee when the investor is

exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its
power over the investee..
• Significant influence is the power to participate in the financial
and operating policy decisions of an entity, but is not control over
those policies. Significant influence may be gained by share
ownership, statute or agreement.
• Joint control is the contractually agreed sharing of control over an
economic activity.
INTERMEDIATE ACCTG 3 (By: Zeus V
ernon B. Millan)
Definition of terms - continuation
• Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise) of
that entity.

• Close members of the family of an individual

a. the individual’s domestic partner and children;
b. children of the individual’s domestic partner; and
c. dependents of the individual or the individual’s domestic partner.

• A related party transaction is a transfer of resources, services or obligations

between a reporting entity and a related party, regardless of whether a price is
charged.
INTERMEDIATE ACCTG 3 (By: Zeus V
ernon B. Millan)
Unrelated parties
• The following are not related parties:
1. Two entities simply because they have a director in common.
2. Two venturers simply because they share joint control over a joint
venture.
3. Providers of finance, trade unions, public utilities, and departments
and agencies of a government that does not control, jointly control
or significantly influence the reporting entity, simply by virtue of
their normal dealings with an entity.
4. A customer, supplier, franchisor, distributor or general agent with
whom an entity transacts a significant volume of business, simply
by virtue of the resulting economic dependence.
INTERMEDIATE ACCTG 3 (By: Zeus V
ernon B. Millan)
Disclosure

1. Parent-subsidiary relationship regardless of whether there have been

transactions between them.
2. Key management personnel compensation broken down into the
following categories SPOTS and loans to key management personnel.
3. Related party transactions – nature of transaction and outstanding
balances

• Disclosures that related party transactions were made on terms equivalent

to those that prevail in arm’s length transactions are made only if such
terms can be substantiated.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
 APPLICATION OF CONCEPTS

PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

Core principle of PFRS 8

• “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.” (PFRS 8)

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Scope of PFRS 8

• PFRS 8 applies to the separate, individual and consolidated

financial statements of an entity which is publicly listed or in the
process of enlisting publicly.

• An unlisted entity that chooses to apply PFRS 8 shall comply with

all of the requirements of PFRS 8; otherwise it shall not describe
the information as segment information.

• If a financial report contains both the consolidated and separate

financial statements of a parent that is within the scope of PFRS 8,
segment information is required only in the consolidated financial
statements.
INTERMEDIATE ACCTG 3 (By: Zeus V
ernon B. Millan)
Operating Segments

• An operating segment is a component of an entity:

1. 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),
2. 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
3. for which discrete financial information is available.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Component of an entity

• A component of an entity comprises operations and cash flows

that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. It can be cash
generating unit or group of cash generating units.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Reportable segments

• An entity shall report separately information about each operating

segment that:
1. Management uses in making decisions about operating
matters or those which results from aggregating two or more
of those segments; and
2. Qualify under the quantitative thresholds

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Management approach

• PFRS 8 adopts a management approach to identifying

reportable segments.

• Under the management 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.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Aggregation criteria
• Two or more operating segments may be aggregated into
a single operating segment if the segments have similar
economic characteristics, and the segments are
similar in each of the following respects:
1. Nature of the products and services;
2. Nature of the production processes;
3. Type or class of customer for their products and
services;
4. The methods used to distribute their products or
provide their services; and
5. Nature of the regulatory environment, if applicable,
e.g., banking, insurance or public utilities.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Quantitative thresholds

• An entity shall report separately information about an operating

segment that meets any of the following quantitative thresholds:
1. The segment’s revenue is at least 10% of the total revenues
(external and internal);
2. The segment’s assets is at least 10% of the total assets (external
and internal, e.g., intersegment receivables)
3. The segments profit or loss is at least 10% of the greater, in
absolute amount of:
a. the combined reported profit of all operating segments that did
not report a loss and
b. the combined reported loss of all operating segments that
reported a loss.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Limit on external revenue

• The total external revenue reported by reportable segments shall

at least 75% of the entity’s external revenue.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Disclosure of Major customer

• A major customer is a single external customer

providing revenues of 10% or more of an entity’s
revenues.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
Other disclosures

• Entity-wide disclosures apply to all entities subject to PFRS 8

including those entities that have a single reportable segment.
• Revenues from external customers attributed to the entity’s
country of domicile and attributed to all foreign countries in total
from which the entity derives revenues.
• Non-current assets other than financial instruments, deferred tax
assets, post-employment benefit assets, and rights arising under
insurance contracts located in the entity’s country of domicile and
located in all foreign countries in total in which the entity holds assets.

INTERMEDIATE ACCTG 3 (By: Zeus V

ernon B. Millan)
 APPLICATION OF CONCEPTS

PROBLEM 6: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

 END

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)