Theory of Accounts

Kings College of the Philippines

College of Accountancy
Pico, La Trinidad, Benguet
Theory of Accounts

PFRS 08: OPERATING SEGMENTS

Overview
PFRS Operating Segments requires particular classes of entities (essentially those with publicly traded
securities) to disclose information about their operating segments, products and services, geographical areas
in which they operates, and their major customers. Information is based on internal management reports,
both in the identification of operating segments and measurement of disclosed segment information.

Core Principle
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.

Scope of PFRS 8
PFRS applies to the separate or individual financial statements of an entity (and to the consolidated financial
statements of a group with a parent):
 whose debt or equity instruments are traded in a public market or
 that files, or is in the process of filing, its (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, when both separate and consolidated financial statements for the parent are presented in a single
financial report, segment information need be presented only on the basis of the consolidated financial
statements.

Identifying operating segments

An operating segment 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
(CODM) to make decisions about resources to be allocated to the segment and assess its
performance, and
c. For which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn revenues; for example,
startup operations may be operating segments before earning revenues.

Not every component of an entity is necessarily an operating segment. For example, a corporate
headquarters or some functional departments may not earn revenues or may earn revenues that are only
incidental to the activities of the entity and would not be operating segments.

It may not be difficult for most entities to identify their operating segments. However, when this is not the
case - for example, if the CODM uses more than one set of segment information - other factors may enable
the operating segments to be identified. These factors are listed below
 The nature of the business activities for each component of the entity, the existence of managers
responsible for them and information presented to the board of directors.
 An operating segment will usually have a segment manager who is directly accountable to, and has
regular contact with, the CODM to discuss the performance of the segment. However, a single
manager may be the segment manager for more than one operating segment. If the characteristics
in the definition of operating segment apply to more than one set of the components of an entity
(e.g., to both products-based and geographical components) but there is only one set for which
segment managers are held responsible, then that set constitutes the operating segments.
 When an entity has a matrix management structure resulting in two or more overlapping sets of
components for which different segment managers are responsible and the CODM regularly reviews
the operating results of both components, an entity must consider the core principle of PFRS 8 in
order to determine its operating segments.

Identifying reportable segments

Once an entity identifies its operating segments, it must determine whether these segments are reportable
segments. An entity shall report separately information about:
a. Each operating segment that has been identified according to the criteria, or results
from aggregating two or more of those segments based on certain criteria, and
b. Each operating segment that exceeds certain quantitative thresholds

Page 1 of 6
Identifying operating segments: flowchart

Aggregation of operating segments

Multiple operating segments may be aggregated into a single reportable segment if they, the segments,
have similar economic characteristics and if segments are similar in all of the following five ways:
1. Nature of the products and services
2. Nature of the production processes
3. Type or class of customer for the products or services
4. Methods used to distribute the products or provide the services
5. If applicable, nature of the regulatory environment; for example, banking, insurance or public
utilities

Quantitative thresholds
If an operating segment (individual or aggregated) meets any of the following quantitative thresholds, it will
need to be disclosed separately as a reportable segment.
 Contributes 10% or more of the entity's total sales (combining revenue from external customers
and intersegment sales or transfers), or
 Has profit or loss (in absolute amount) that is 10% or more of the greater (in absolute amount) of
a) the combined profits of all profitable operating segments, and b) the combined loss of all
operating segments in loss, or
 Has 10% or more of the combined assets of all operating segments

Other practical considerations related to determining reportable segments

- If management determines that an operating segment identified as a reportable segment in the
immediately preceding period is of continuing significance, information about that segment needs to
continue to be reported separately in the current period even if it no longer meets the quantitative
thresholds.
- if an operating segment is identified as a reportable segment in the current period in accordance
with the quantitative thresholds, segment data for a prior period presented for comparative purposes
must be restated to reflect the newly reportable segment as a separate segment, even if that
segment did not meet the qualitative thresholds in the prior period (unless the necessary information
is not available and the cost to develop it would be excessive).
- PFRS 8 notes that there may be a practical limit to the number of reportable segments that an entity
separately discloses beyond which segment information may become too detailed. No precise limit
has been determined, but PFRS 8 suggests that if the number of segments that are reportable in
accordance with the requirements you have learned about increases above ten, then "the entity
should consider whether a practical limit has been reached."
Disclosure requirements
Required disclosures include:
 general information about how the entity identified its operating segments and the types of products
and services from which each operating segment derives its revenues
 information about the reported segment profit or loss, including certain specified revenues and
expenses included in segment profit or loss, segment assets and segment liabilities, and the basis of
measurement
 reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets,
segment liabilities and other material items to corresponding items in the entity's financial
statements
 some entity-wide disclosures that are required even when an entity has only one reportable
segment, including information about each product and service or groups of products and services
 analyses of revenues and certain non-current assets by geographical area – with an expanded
requirement to disclose revenues/assets by individual foreign country (if material), irrespective of
the identification of operating segments
 information about transactions with major customers

Considerable segment information is required at interim reporting dates by PAS 34.

MULTIPLE CHOICE:
1. PFRS 8 need not be applied to the separate or individual financial statements of which of the following
entity
a. Whose debt or equity instruments are traded in a public market
b. Whose debt or equity instruments are traded in an over-the-counter market
c. That files, or is in the process of filing, its financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of instruments in a public market
d. Whose debt or equity instruments are privately held

2. It is a segment for which segment information is required to be disclosed

a. Reportable segment c. Accountable segment
b. Measurable segment d. Ordinary segment

3. Which of the following statements regarding PFRS 8 Operating Segments is correct?

a. If a financial report contains both the consolidated financial statements of a parent that is within the
scope of PFRS 8 as well as the parent’s separate financial statements, segment information is
required to be prepared both in the consolidated and separate financial statements.
b. To be included as operating segments, such segment needs to earn a revenue even if the net result
is an operating loss.
c. If an entity that is not required to apply this PFRS chooses to disclose information about segments
that does not comply with PFRS 8, it shall not describe the information as segment information.
d. A corporate headquarters or any functional departments earning revenue that is within the threshold
should be included in the operating segments.

4. PFRS 8 describes several factors that may enable operating segments to be identified for entities where
business activities are presented in variety of ways. For example, the CODM uses more than one set of
segment information. Which one of the following items is not one of the factors that can be used to help
identify operating segments as described in PFRS 8?
a. Information presented to the board of directors
b. The existence of managers responsible for each component of the entity
c. Information presented to the auditors
d. The nature of the business activities for each component of the entity

5. The first step in identifying operating segments is to identify the CODM. Following that, several questions
must be asked to determine which of the components are operating segments. Which of the following
questions is not part of determining whether a component is an operating segment?
a. Is discrete financial information available for the component?
b. Are the component's operating results regularly reviewed by the CODM as a basis for resource
allocation and performance assessment?
c. Can the component generate revenue and incur expenses from its business activities?
d. Does the component have economic characteristics that are similar to other components?

6. The core principle of PFRS 8 states: "An entity shall disclose information to enable users of financial
statements to evaluate the of the business activities in which it engages and the
economic environments in which it operates."
a. Operating segments c. Nature and financial effects
b. Segment managers d. Nature of the regulatory environment

7. What is a requirement of PFRS 8 in relation to aggregation of operating segments?

a. Aggregation of operating segments requires that they exhibit similar economic characteristics,
including similar long-term gross margins.
b. Aggregation of operating segments does not always require that they exhibit similar economic
characteristics
 c. Aggregation of operating segments requires that they exhibit similar economic characteristics, not
including similar long-term gross margins.
d. None of the above.

8. Which of the following segments need to be disclosed separately?

I. Operating segments that contribute 10% or more of the entity's total sales
II. Operating segments that contribute 10% or more of the combined reported profit of all operating
segments
III. Operating segments that contribute 10% or more of the entity's total cost of sales
IV. Operating segments that have 10% or more of the combined assets of all operating segments
a. I and II are true c. II and IV are true
b. I, II and IV are true d. II, III and IV are true

9. A non-publicly listed entity may be required to comply with PFRS 8 Operating Segment of
a. The entity is a subsidiary whose parent is a listed entity or in the process of issuing securities to the
public even in the entity’s individual (separate) financial statements
b. The entity has foreign operation
c. At least majority of its revenues comes from intercompany transactions
d. It discloses segment information in its general-purpose financial statements

10. The method used to determine what information to report business segments is referred to as the
a. Segment approach c. Operating approach
b. Enterprise approach d. Management approach

11. According to PFRS 8, how do firms identify reportable segments?

a. By geographic regions c. By product lines
b. By industry classification d. By designations used inside the firm

12. Mackerel, a company listed on a recognized stock exchange, reports operating results from its Southern
Philippine activities to its chief operating decision maker. The segment information for the year is:
Revenue P3,675,000
Profit P970,000
Assets P1,700,000
Number of employees 2,500
Mackerel's results for all of its segments in total are:
Revenue P39,250,000
Profit P9,600,000
Assets P17,500,000
Number of employees 18,500
According to PFRS8 Operating segments, which piece of information determines for Mackerel that the
Southern Philippine activities are a reportable segment?
a. Revenue b. Profit c. Assets d. # of employees

13. The equity of Mabaho Company is traded on a recognized stock exchange. Mabaho regularly reports the
financial results of five different business units to its chief operating decision maker. The relevant
revenues for the year ended December 31,2013 for these five operations, as a percentage of total
external and internal revenue, were as follows:
Business % % external % total
operation internal
1 3 35 38
2 10 14 24
3 15 5 20
4 0 9 9
5 0 9 9
Total 28 72 100
In accordance with PFRS8 Operating segments, the reportable segments of Mabaho are
a. 1 and 2 only b. 1, 2 and 3 only c. 1, 2, 3 and 4 only d. All segments

14. Total external revenue reported by operating segments should

a. At least be 75% of the entity’s revenue
b. Not be more than 75% of the entity’s revenue
c. At least be 90% of the entity’s revenue
d. No limit set by PFRS 8

15. Multiple operating segments may be aggregated into a single reportable segment if they meet the
aggregation criteria of PFRS 8, the segments have similar and the segments are similar in
all of the five ways described in the Standard.
a. Products and services c. Regulatory environments
b. Economic characteristics d. Chief operating decision maker

16. Cosmos Corporation sells 5 different types of products. The company is divided for internal reporting
purposes into five (5) different divisions based on these five (5) different product lines. The company
should prepare the note disclosure for disaggregated information based upon
a. The five (5) types of products
 b. The five (5) different divisions
c. The materiality of each product line based on the revenue or operating profits generated by each
product line or the assets utilized by each product line
d. The geographic areas in which the five (5) products are sold
17. Nonreportable segments should
a. Be aggregated and reported as “all other segments”
b. Be aggregated but neither reported nor disclosed
c. Not reported but may be disclosed if included in the necessary reconciliation of segment assets,
liabilities, or profit or loss
d. Not reported but may be disclosed whether or not included in the necessary reconciliation of
segment assets, liabilities, or profit or loss

18. In financial reporting for segments of a business enterprise, segment data may be aggregated
a. Before performing the 10% tests if a majority of the aggregation criteria are met
b. If the segments do not meet the 10% test but meet all of the aggregation criteria
c. Before performing the 10% tests if all of the aggregation criteria are met
d. If any one of the aggregation criteria are met

19. It the total external revenue reported by operating segments does not meet the limit provided under
PFRS 8, additional operating segments shall be identified as reportable segments until the limit is met.
Other operating segments may be included as reportable
a. If they meet all of the quantitative thresholds
b. If they meet any of the quantitative thresholds
c. If they meet at least a majority of the quantitative thresholds
d. Even if they do not meet any of the quantitative thresholds

20. Which of the following is not required under current GAAP for disaggregated information relating to
geographic area information?
a. Revenues from external customers from the home country of the firm and from all foreign countries
in total
b. The total of long-lived assets located in the firm’s home country and located in foreign countries
c. Operating profits from external customers from the home country of the firm and from all foreign
countries total.
d. Revenues for any foreign country for which the revenues from that country are material to the firm.

21. Segment assets include all of the following, except

a. Income tax assets
b. Goodwill directly attributable to a segment
c. Operating assets shared by two or more segments
d. Current assets used in the operating activities of the segment

22. In financial reporting for segments of a business enterprise, the segment results includes a portion of
a. Interest expense c. Indirect operating expenses
b. Extraordinary losses d. General corporate expenses

23. In financial reporting for segments of a business enterprise, which of the following should be taken into
account in computing the amount of an industry segment’s identifiable assets?
Accumulated Marketable securities
depreciation valuation allowance
a. No No
b. No Yes
c. Yes Yes
d. Yes No

24. Entity-wide disclosures include disclosures about

Geographic areas Allocated costs
a. No No
b. No Yes
c. Yes Yes
d. Yes No

25. Entity-wide disclosures are required by publicly held companies with

Only one reportable More than one
segment reportable segment
a. No No
b. No Yes
c. Yes Yes
d. Yes No

26. An enterprise must disclose all of the following about each reportable segment if the amounts are used
by the chief operating decision maker, except
a. Depreciation expense c. Allocated expense
b. Interest expense d. Income tax expense
27. In financial reporting for segments of a business, an enterprise shall disclose all of the following except
a. Types of products and services from which each reportable segment derives its revenues
b. The title of the chief operating decision maker of each reportable segment
c. Factors used to identify the enterprises reportable segments
d. The basis of measurement of segment profit or loss and segment assets

28. Which of the following statements is in accordance with PFRS8 Operating segments?
I. If an entity changes the way it is structured internally so that its reportable segments change, the
comparative information for earlier periods must be restated.
II. Disclosure is always required of the total assets of each reportable segment.
a. I only b. II only c. Both I and II d. Neither I nor II

29. Which of the following statements is in accordance with PFRS8 Operating segments?
I. The measurement of the profit or loss to be disclosed for each reportable segment is defined in
PFRS8.
II. The profit or loss disclosed for a segment should relate to the total assets attributed to that
segment.
a. I only b. II only c. Both I and II d. Neither I nor II

30. Which of the following statements is in accordance with PFRS8 Operating segments?
I. A major customer is defined as one providing revenue which amounts to 10% or more of the
combined revenue, internal and external, of all operating segments.
II. The identities of major customers need not be disclosed.
a. I only b. II only c. Both I and II d. Neither I nor II

" When you feel that you are at the end of your path and there is a ten foot high brick wall right
there in front of you, and you have nowhere to go but backwards, break down that wall and move
forward. There are great and wonderful things on the other side of that wall... and, they have
always been there. Let nothing divide you from what you need to do in life, and see the solutions
that are right in front of you. The key is, you must break down what separates you from them and
choose to find them." -Rich Barnes

" Great people go through the great challenges to prepare them for greatness in their lives. Our
humbleness will swing us above all our great challenges to a place where great, true success
meets our humbleness."

 -- END OF HANDOUTS-- 