Accountancy Tuition Centre (International Holdings) Ltd 2008 3101
Overview Objective To provide users of financial statements with information about the nature and financial effects of the business activities in which an entity engages and the economic environment in which it operates.
OPERATING SEGMENTS DISCLOSURE Core principle General information Information about profit or loss, assets and liabilities Basis of measurement Reconciliations Restatement of previously reported information Entity-wide disclosures Scope Definitions Reportable segments
SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3102 1 Operating segments 1.1 Scope IFRS 8 applies to the separate financial statements of entities whose debt or equity instruments are publicly traded (or are in the process of being issued in a public market). IFRS 8 also applies to the consolidated financial statements of a group whose parent is required to apply IFRS 8 to its separate financial statements.
Commentary The scope of IAS 33 has been changed to be consistent with that of IFRS 8. Where an entity is not required to apply IFRS 8, but chooses to do so, it must not describe information about segments as segment information unless it complies with IFRS 8. Where a parents separate financial statements are presented with consolidated financial statements, segment information is required only in the consolidated financial statements.
Commentary IFRS is applicable to annual financial statements for periods beginning on or after 1 January 2009. Early adoption must be disclosed. 1.2 Definitions 1.2.1 Operating segment This is a component that meets the following three criteria: (1) it engages in business activities from which it may earn revenues and incur expenses (including intersegment revenues and expenses arising from transactions with other components of the same entity);
Commentary Thus a start-up operation not yet earning revenues may be an operating segment, as revenues would be expected in the future. (2) its operating results are regularly reviewed by the entitys chief operating decision maker to make decisions (about resources to be allocated) and to assess its performance; and (3) discrete financial information is available.
Commentary A component, by definition, should meet this last criterion (see IFRS 5). An entitys post-employment benefit plans are not operating segments. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3103 Corporate headquarters or other departments that may not earn revenues (or only incidental revenues) are not operating segments. 1.2.2 Chief operating decision maker This term describes a function (to allocate resources to and assess the performance of operating segments). This may be a chief executive office, a board of directors or others.
Commentary An operating segment will generally have a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, etc. 1.3 Reportable segments 1.3.1 Separate information Separate information must be reported for each operating segment that: meets the definition criteria or aggregation criteria for two or more segments (see 1.3.2); and exceeds the quantitative thresholds (see 1.3.3). 1.3.2 Aggregation criteria Two or more operating segments may be aggregated into a single operating segment if: aggregation is consistent with the core principle of this IFRS; the segments have similar economic characteristics; and the segments are similar in respect of: the nature of products and services (e.g. domestic or industrial); the nature of the production process (e.g. maturing or production line); types or class of customer (e.g. corporate or individual); distribution method (e.g. door-to-door or web sales); and the regulatory environment (e.g. in shipping, banking, etc).
Commentary An operating segment that does not meet a qualitative threshold may be aggregated with another segment that does only if the operating segments have similar economic characteristics and share a majority of the above aggregation criteria. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3104 1.3.3 Quantitative thresholds Separate information must be reported for an operating segment that meets any of the following quantitative thresholds: reported revenue (including both external and intersegmental) is 10% or more of the combined revenue (internal and external) of all operating segments; profit or loss is 10% or more, in absolute amount, of the greater of: (i) the combined profit of all operating segments that did not report a loss; and (ii) the combined loss of all operating segments that reported a loss; assets are 10% or more of the combined assets of all operating segments.
Commentary IFRS 8 is the only International Financial Reporting Standard with a materiality rule. At least 75% of the entitys revenue must be included in reportable segments. Thus operating segments that fall below the quantitative thresholds may need to be identified as reportable.
Commentary Segments that fall below the threshold may also be considered reportable, and separately disclosed, if management believes that the information would be useful to users of the financial statements. Information about other business activities and operating segments that are not reportable are combined and disclosed in an all other segments category. When an operating segment is first identified as a reportable segment according to the quantitative thresholds, comparative data should be presented, unless the necessary information is not available and the cost to develop it would be excessive.
Commentary The Standard suggests ten as a practical limit to the number of reportable segments separately disclosed as segment information may otherwise become too detailed. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3105
Activity 1
Fireball group has: three significant business lines which make up about 70% of combined revenue; and five small business lines, each of them contributing about 6% to the combined revenue. Required: Explain how many segments Fireball group should report.
Solution
2 Disclosure 2.1 Core principle An entity must disclose information to enable users of its financial statements to evaluate: the nature and financial effects of its business activities; and the economic environments in which it operates. This includes: general information; information about reported segment profit or loss, segment assets, segment liabilities and the basis of measurement; and reconciliations.
Commentary This information must be disclosed for every period for which an income statement is presented. Reconciliations of amounts in the statements of financial position are required for each date at which a statement of financial position is presented. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3106 2.2 General information The factors used to identify reportable segments, including: the basis of organisation (e.g. around products and services, geographical areas, regulatory environments, or a combination of factors and whether segments have been aggregated); and Illustration 1 Basis of organisation
Eparts Cos reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as individual units, and the management at the time of the acquisition was retained.
types of products and services from which each reportable segment derives its revenues. Illustration 2 Types of products and services
Eparts has five reportable segments: machine parts, lazer, prototyping, waterjet and finance. The machine parts segment produces parts for sale to aviation equipment manufacturers. The lazer segment produces lazer cutters to serve the petrochemical industry. The prototyping segment produces plastics for sale to the pharmaceutical industry. The waterjet segment produces cutting equipment for sale to car manufacturers and jewellers. The finance segment is responsible for parts of Eparts financial operations including financing customer purchases of products from other segments and car leasing operations.
2.3 Information about profit or loss, assets and liabilities The following must be reported for each reportable segment: A measure of profit or loss and total assets. A measure of liabilities if such an amount is regularly provided to the chief operating decision maker.
Commentary Note that segment cash flow information is voluntary (IAS 7) and therefore unlikely to be produced as it would provide information to an acquirer to value and target for a takeover bid. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3107 2.3.1 Profit or loss The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision maker (even if not included in the measure of segment profit or loss): revenues from external customers; intersegment revenues; interest revenue;
Commentary Interest revenue may be reported net of its interest expense if the majority of the segments revenues are from interest and the chief operating decision maker relies primarily on reporting of net interest revenue. interest expense; depreciation and amortisation; other material items of income and expense required by IAS 1 Presentation of Financial Statements (i.e. write-downs, restructurings, disposals, discontinued operations, litigation settlements and reversals of provisions); entitys interest in the profit or loss of associates and joint ventures accounted for by the equity method; income tax expense or income; and material non-cash items other than depreciation and amortisation.
Commentary Impairment losses also have to be disclosed (but as an IAS 36 requirement). 2.3.2 Assets The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision maker (even if not included in the measure of segment assets): the investment in associates and joint ventures accounted for by the equity method; and additions to non-current assets (other than financial instruments, deferred tax assets and post-employment benefit assets). SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3108
Illustration 3 Profit or loss, assets and liabilities
Other material non-cash items: Impairment of assets 480 480 Reportable segment assets 4,800 12,000 7,200 28,800 136,800 4,800 194,400 Expenditures for reportable segment non-current assets 720 1,680 1,200 1,920 1,440 6,960 Reportable segment liabilities 2,520 7,200 4,320 19,200 72,000 105,240
(a) Revenues from segments below the quantitative thresholds are attributable to three operating segments of Eparts. Those segments include a small warehouse leasing business, a car rental business and a design consulting practice. None of those segments has ever met any of the quantitative thresholds for determining reportable segments. (b) The finance segment derives a majority of its revenue from interest. Management primarily relies on net interest revenue, not the gross revenue and expense amounts, in managing that segment. Therefore only the net amount is disclosed.
Commentary This company does not allocate tax expense or no-recurring gains or losses to reportable segments. Also, not all reportable segments have material non- cash items other than depreciation and amortisation. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3109 2.4 Basis of measurement The amount of each segment item reported is the measure reported to the chief operating decision maker.
Commentary Segment information is no longer required to conform to the accounting policies adopted for preparing and presenting the consolidated financial statements. If the chief operating decision maker uses more than one measure of an operating segments profit or loss, the segments assets or the segments liabilities, the reported measures should be those that are most consistent with those used in the entitys financial statements. Illustration 4 Measurement
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that pension expense for each operating segment is recognised and measured on the basis of cash payments to the pension plan. Eparts evaluates performance on the basis of profit or loss from operations before tax expense not including non-recurring gains and losses and foreign exchange gains and losses. Eparts accounts for intersegment sales and transfers at current market prices, i.e. as if the sales or transfers were to third parties.
An explanation of the measurements of segment profit or loss, segment assets and segment liabilities must disclose, as a minimum: the basis of accounting for intersegment transactions; the nature of any differences between the measurements of the reportable segments and the entitys financial statements (if not apparent from the reconciliations required);
Commentary Differences could include accounting policies and policies for allocation of centrally incurred costs, jointly used assets or jointly utilised liabilities. the nature of any changes from prior periods in the measurement methods used and the effect, if any, of those changes on the measure of segment profit or loss; the nature and effect of any asymmetrical allocations to reportable segments.
Commentary For example, the allocation of depreciation expense with the related depreciable assets. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3110 2.5 Reconciliations Reconciliations of the total of the reportable segments with the entity are required for all of the following: revenue; profit or loss (before tax and discontinued operations); assets; liabilities (if applicable); every other material item. All material reconciling items must be separately identified and described (e.g. arising from different accounting policies). Illustration 5 Revenue reconciliation
$ Total revenues for reportable segments 93,600 Other revenues 2,400 Elimination of intersegment revenues (10,800)
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Entitys revenues 85,200
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Illustration 6 Profit or loss
$ Total profit or loss for reportable segments 9,528 Other profit or loss 240 Elimination of intersegment profits (1,200) Unallocated amounts: Litigation settlement received 1,200 Other corporate expenses (1,800) Adjustment to pension expense in consolidation (600)
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Income before income tax expense 7,368
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Illustration 7 Assets
$ Total assets for reportable segments 189,600 Other assets 4,800 Elimination of receivable from corporate headquarters (2,400) Other unallocated amounts 3,600
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Entitys assets 195,600
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SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3111
Illustration 8 Liabilities
$ Total liabilities for reportable segments 105,240 Unallocated defined benefit pension liabilities 60,000
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Entitys liabilities 165,240
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Illustration 9
Other material items Reportable Adjustments Entity totals segment totals $ $ $ Interest revenue 9,000 180 9,180 Interest expense 6,600 (120) 6,480 Net interest revenue (finance segment only) 2,400 2,400 Expenditures for assets 6,960 2,400 9,360 Depreciation and amortisation 7,080 7,080 Impairment of assets 480 480 The reconciling item is the amount incurred for the company head office building which is not included in segment information.
2.6 Restatement of previously reported information Where changes in the internal organisation structure of an entity result in a change in the composition of reportable segments, corresponding information must be restated unless the information is not available and the cost to develop it would be excessive. An entity should disclose whether corresponding items have been restated. If not restated, the entity must disclose the current period segment information on both the old and new bases of segmentation, unless the necessary information is not available and the cost to develop it would be excessive. 2.7 Entity-wide disclosures All entities subject to this IFRS are required to disclose information about the following, if it is not provided as part of the required reportable segment information: products and services: geographical areas; and major customers.
Commentary Including those entities that have only a single reportable segment. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3112 The only exemption for not providing information about products and services and geographical areas is if the necessary information is not available and the cost to develop it would be excessive, in which case that fact must be disclosed. 2.7.1 By product and service Revenues from external customers for each product and service (or each group of similar products and service) based on the financial information used to produce the entitys financial statements. Illustration 10 By product group (extract)
Rio Tinto 2006 Annual report and financial statements
2.7.2 By geographical area Revenues from external customers attributed to: the entitys country of domicile; all foreign countries in total; and individual foreign countries, if material. Similarly, non-current assets (other than financial instruments, deferred tax assets and post-employment benefit assets).
Commentary Again based on the financial information used to produce the entitys financial statements. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3113
Illustration 11
Geographical information Revenues (a) Non-current assets $ $ United States 45,600 26,400 Canada 10,080 China 8,160 15,600 Japan 6,960 8,400 Other countries 14,400 7,200
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Total 85,200 57,600
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(a) Revenues are attributed to countries on the basis of the customers location.
2.7.3 Major customers An entity discloses the extent of its reliance on major customers by stating: if revenues from a single external customer amount to 10% or more of the entitys total; the total revenues from each such customer; and the segment(s) reporting the revenues. An entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from that customer.
Commentary For the purposes of this IFRS, a group of entities known to be under common control (including entities under the control of a government) is a single customer. Illustration 12
Revenues from one customer of Eparts Cos prototyping and waterjet segments represent approximately $12,000 of the companys total revenues.
SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3114
Activity 2
Silver is applying IFRS 8 for the first time in financial statements for the financial year ended 31 December 2007. This will cause changes in the identification of Silvers reportable segments and require additional disclosures. Required: Comment on whether Silver should restate the comparative information.
Solution
Focus You should now be able to: discuss the usefulness and problems associated with the provision of segment information; define an operating segment; identify reportable segments (including applying the aggregation criteria and quantitative thresholds); prepare segment information in accordance with IFRS 8. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3115 Activity solutions Solution 1 Reportable segments
Commentary The issue is whether or not it is acceptable to report the three major business lines separately and to include the rest for reconciliation purposes as all other segments. Since the reported revenues attributable to the three business lines that meet the separate reporting criteria constitute less than 75% of the combined revenue, additional segments must be identified as reportable, even though they are below the 10% threshold, until at least 75% of the combined revenue is included in reportable segments. If at least one of the small segments meets the aggregation criteria to be aggregated with one of the three reportable segments, there will be four reportable segments (including all other segments). Alternatively, two or more of the smaller segments may be aggregated, if they meet the aggregation criteria. In this case there will be five reportable segments. If none of the small segments meet the criteria to be aggregated with any of the other business lines one of them must be identified as reportable, though it does not meet the 10% threshold. In this case there will be five reportable segments also. Solution 2 Comparative information Comparative information for all periods presented should be restated (IAS 1) in conformity with IFRS 8. If the necessary information is not available and the cost to develop it would be excessive, this fact should be disclosed.
Commentary In this case there appears to be no requirement to disclose current period segment information on both the old and new bases of segmentation (as there is when there is a change in composition of reportable segments). The difference, perhaps, being that adoption of IFRS 8 is a mandatory change for those complying with IFRS, whereas an internal reorganisation is voluntary. Silver should also disclose early adoption of IFRS 8. SESSION 31 IFRS 8 OPERATING SEGMENTS Accountancy Tuition Centre (International Holdings) Ltd 2008 3116