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FRS 114-SEGMENT REPORTING

INTRODUCTION
FRS 114 begin 1 Jan 2002 onwards
Cover the presentation of financial information by business and geographical segments Applies to enterprises - whose equity or debt securities are public traded - that are in the process of issuing equity or debt securities in public markets

FRS 114 define business segment as:


a distinguishing component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments
Factors to be considered in determining whether the products and services are related

Nature of products and services

Nature of the regulatory environment

Nature of the production processes Type or class of customer for products and services

Methods used to distribute products or provide services

FRS 114 also define geographical segment as:


a distinguishing component of an enterprise that is engaged in providing product or service within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environment
Factors in identifying geographical segments

Similarity of economic and political condition

The underlying currency risks

Relationships between operation in different geographical area

Exchange control regulation

Proximity of operation

Special risks associated with operation in a particular area

Geographical segments may be based on

Location of enterprises product or service facilities and other assets (origin sales)

Location of its markets or customers (destination of sales)

REPORTABLE SEGMENTS
Q: What made a business/geographical segment reportable??? A: Majority of its revenue is derived from sales to external customers AND satisfies one of these three tests : Revenue test: revenue from sale to external and inter segment sales is 10% or more as compared to the combined revenues. Profit/Loss test: the profit/loss is 10% or more as compared to combined results of segments

Asset test: the segments assets are 10% more of the total asset

Q: What about other segments which does not satisfy the 10% test??? A: Well, they could be : treated as a reportable segment nevertheless despite its size combined with other similar segments for the purpose of meeting the 10% threshold

included as an unallocated reconciling item

REPORTABLE SEGMENTS

Materiality test: reportable segment must be substantial portion of the operations. Hence, additional segments (<10%) should be identified as reportable segment so that combined revenues at least 75% of total revenues. Emphasis on comparability (between current & previous year) :

Segment reported in the previous year. Q: Is it still considered as a reportable segment in the current year?? A: Yes. Segment is reportable in the current period. Q: What about prior period data??? A: It should be presented for comparative purposes. It should also need to be restated to reflect the newly reportable segment as a separate segment, unless it is not practical to do so.

IDENTIFICATION OF PRIMARY & SECONDARY SEGMENTS

Earlier, we learned that there are two types of reportable segments:a) Business segment b) Geographical segment Now, we will learn how to identify which segment is to adopt the primary format or the secondary format. Q: A: How do we determine whether they are primary segment or secondary segment??? A primary segment is the dominant source and nature of an enterprises risks and return. The basis to identify these risks and return is by examining the internal organizational and management structure as well as the internal financial reporting system.

IDENTIFICATION OF PRIMARY & SECONDARY SEGMENTS

When the primary format is business segment and the secondary segment is the geographical segment:i. Where risks and return are affected predominantly by differences in products and services ii. Where risks and return are affected by BOTH products/services differences and differences in geographical operating area. When the primary format is geographical segment and the secondary segment is the business segment:i. Where risks and return are affected predominantly by differences in the operating countries/geographic areas.

Q: A:

What if differences in products/services or geographical areas are NOT the basis for the internal organizational and management structure as well as the internal reporting system? Management and directors will then determine which of these are the dominant source in identifying primary and secondary segment.

Disclosure Requirements Primary Segments

Segment revenue from external customer sales Segment revenue from inter-segment transfers Segment results Segment assets Segment liabilities Capital expenditure Depreciation and amortization expenses Other significant non-cash expenses Share of profit/loss of associate, joint ventures and other equity accounted-for investments* The related aggregate investments, if item * is disclosed

Secondary Segments
1) Primary format-business segments and 2nd-geography Segment from external customer revenues Segment assets Capital expenditure 2) Primary-geographical segments based on location of assets and 2nd-business segments Segment from external customer revenues Segment assets Capital expenditure Also, report revenue for each customer-based geographical segment whose revenue is at least 10%

Continued
3) Primary-geographical segments based on location of customers and 2nd-business segments Segment from external customer revenues Segment assets Capital expenditure Also, disclosure for each asset-based geographical segment whose segment assets are at least 10% of the total assets of the enterprise or group Segment assets Capital expenditure

Other Disclosure Matters


1. 2.

Description of the business and geographical segments. Basis of pricing of inter-segment transfers, and any change therein. Revenue-(business or geographical segment) whose total

3.

revenue is > 10% of enterprise revenue but not a


reportable segment because a majority revenue come from internal transfers.
4.
5.

Changes in accounting policies-have material effect.


Changes to the identification of segments.

Voluntary Disclosure (Encourage)


i.

All the primary segments disclosure for each of its reportable secondary segment.

ii.

The nature and amount of any items of segment revenue and segment expense (i.e.-size, nature, or incidence) relevant to performance of each

reportable segment.

Definition of segment disclosure items

Segment Revenue

Revenue reported in the enterprise or groups income statement that is


Directly attributable to a segment; and Can be allocated on a reasonable basis to a segment

Segment Expense

Expense from the operating activities of a segment that is:


Directly attributable to a segment; and Can be allocated on a reasonable basis to a segment

Segment Result

Definition of segment disclosure items


Segment revenue less segment expense. Determined before any adjustment of taxation, share of profits or losses from equity method investment and minority interest.

Definition of segment disclosure items

Segment Assets

Operating assets employed by a segment in its operating activities that are:


Directly attributable to a segment; AND Can be allocated on a reasonable basis to a segment

Determined based on the net book values in BS and do not include income tax assets. Cost incurred to acquired the asset during the accounting period that are expected to be used for more than one period is referred to as capital additions or capital expenditure.

Definition of segment disclosure items

Segment Liabilities
Operating liabilities that result from the operating activities of the segment that are:

Directly attributable to a segment; AND Can be allocated on a reasonable basis to a segment

Do not include income tax liabilities

Above definitions are interrelated, i.e.;

If segment result include interest-segment liabilities include the related interest-bearing cost If segment result includes dividend income-segment assets must include investment related. If segment asset include goodwill- segment expenses should include the amortization of goodwill.

SUMMARY

Segment Reporting
Identification of Business Segment Products or Service facilities (origin of sales) Location of markets or Customers (destination of sales)

Business

Geographical

Identification of Primary and Secondary Segments Dominant Source and nature of risks and returns

Primary

Ext

Revenue Int Results Assets Liabilities Capital Expenditure Depreciation/Amortization other non-cash expenses

Information to be disclosed

Secondary
Revenue ext Assets Capital expenditures

Reportable Segment 10% Rule 75% Rule