P2:Ch13 - Segment Reporting

What quantitative thresholds must an operating segment meet to be reported separately?

An entity must separately report information about an operating segment that meets any of the following quantitative thresholds: • its reported revenue, including both sales to external customers and inter-segment sales, is ten per cent or more of the combined revenue of all operating segments • its reported profit or loss is ten per cent or more of the greater, in absolute amount, of: - the combined reported profit of all operating segments that did not report a loss and - the combined reported loss of all operating segments that reported a loss. • its assets are ten per cent or more of the combined assets of all operating segments. At least 75% of the entity's external revenue should be included in reportable segments. So if the quantitative test results in segmental disclosure of less than this 75%, other segments should be identified as reportable segments until this 75% is reached.

What are the disclosure requirements for reportable segments?

Disclosure of the following is required: • Factors used to identify the entity's reportable segments, including the basis of organisation (for example, whether segments are based on products and services, geographical areas or a combination of these). • The types of products and services from which each reportable segment derives its revenues.

What are the problematic areas in segmental reporting?

Segmental reports can provide useful information, but they also have important limitations. • IFRS 8 states that segments should reflect the way in which the entity is managed. This means that segments are defined by the directors. Arguably, this provides too much flexibility. It also means that segmental information is only useful for comparing the performance of the same entity over time, not for comparing the performance of different entities. • Common costs may be allocated to different segments on whatever basis the directors believe is reasonable. This can lead to arbitrary allocation of these costs. • A segment's operating results can be distorted by trading with other segments on non-commercial terms. • These limitations have applied to most systems of segmental reporting, regardless of the accounting standard being applied. IFRS 8 requires disclosure of some information about the way in which common costs are allocated and the basis of accounting for inter-segment transactions.

Define operating segments

operating segment is a component of an entity: • that engages in business activities from which it may earn revenues and incur expenses • 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 • for which discrete financial information is available.

How are reportable segments identified?

An entity's reportable segments (its operating segments) are those that are used in its internal management reports. Therefore management identifies the operating segments. • Start-up operations may be operating segments even before they begin to earn revenue. • A part of an entity that only sells goods to other parts of the entity is a reportable segment if management treats it as one. • Corporate headquarters and other similar departments do not earn revenue and are therefore not operating segments. An entity's pension plan is not an operating segment. • Management may use more than one set of segment information. For example, an entity can analyse information by classes of business (different products or services) and by geographical areas. • If management uses more than one set of segment information, it should identify a single set of components on which to base the segmental disclosures. The basis of reporting information should be the one that best enables users to understand the business and the environment in which it operates. • Operating segments can be combined into one reportable segment provided that they have similar characteristics.

What are the entity-wide disclosure requirements?

IFRS 8 also requires the following disclosures about the entity as a whole, even if it only has one reportable segment. • The revenues from external customers for each product and service or each group of similar products and services. • Revenues from external customers split between the entity's country of domicile and all foreign countries in total. • Non-current assets split between those located in the entity's country of domicile and all foreign countries in total. • Revenue from a single external customer which amounts to ten per cent or more of an entity's revenue. The identity of the customer does not need to be disclosed.