Segments and Related Parties

Who is CODM?

identifies a function, not necessarily a manager with a specific title. - allocate resources to and assess the performance of the operating segments of an entity.

Related party Transaction

o a transfer of resources, services or obligations between related parties, regardless of whether a price is charged (AASB 124 para. 9)

Key management personnel

o those persons having authority and responsibility for planning, directing and controlling an entity's activities either directly or indirectly (e.g., directors) o Close family members are those family members who may be expected to influence or be influenced by an individual in dealings with an entity, including: Children and spouse/partner Children of a spouse/partner Dependants of an individual or their partner/spouse

RELATED PARTY DISCLOSURE - OBJECTIVES AND SCOPE

• (AASB 124 para. 1) "to ensure that an entity's financial statements contain the disclosures necessary to an understanding of the potential effect of transactions and outstanding balances and commitments with related parties"

Why do we need to do segment reporting?

• Entities involved in different activities and operate across dispersed locations • Consolidated financial statements are highly aggregated • AASB 8 para. 1 Operating Segments core principle: An entity shall disclose information to enable users of its financial statement to evaluate the nature and financial effect of the business activities in which it engage and the economic environments in which it operates.

REQUIRED FINANCIAL DISCLOSURE (AASB 8 PARA. 23)

• For each reportable segment an entity must disclose a measure of profit or loss • A measure of assets and liabilities must also be provided if regularly reported to the CODM

IDENTIFYING RELATED PARTIES A party is related to an entity if (AASB 124 para. 9):

• It controls or is controlled by the entity; or • It significantly influences or is significantly influenced by the entity; or • It has joint control over or is subject to joint control by the entity; or • The party is a member of the key management personnel of the entity or the parent of the entity including their close family members

The quantitative thresholds (AASB 8 para. 13): Information about an operating segment must be disclosed if it meets any of the following thresholds:

• Its reported revenue (both external and internal) is 10% or more of the combined external and internal revenue of all operating segments • Its absolute amount of profit or loss is 10% or more of the greater in absolute amount of (1) the combined reported profit of all segments making a profit, and (2) the combined reported loss of all segments that reported a loss • Its assets are 10% or more of the combined assets of all operating segments

Disadvantages of segment reporting

• Management less likely to take risks • Competitors have access to information on segment profitability • Risk of takeover bids • Attract the attention of government/lobby groups

Advantages of Segment reporting

• Segment information is designed to assist users of financial statements: • Better understand the entity's past performance • Better assess the entity's risks and returns • Make more informed judgement about the entity as a whole • Consider Wesfarmers Ltd that is involved in retailing (Coles/Kmart/Target), coal mining, insurance, manufacturing of chemicals, selling natural gas

The 75% threshold (AASB 8 para. 15): AASB 8 para. 15 requires that an entity must identify operating segments (even if they do not meet the criteria in AASB 8 para. 13 on the previous slide) until at least 75% of the entity's revenue is included in reportable segments

• Segment revenue here is external revenue only and total entity revenue is that of the consolidated group • AASB 8 para.19 indicates that ten is a reasonable maximum for the number of reportable segments • Information about operating segments that are not reportable shall be combined and disclosed in an 'all other segments' category (AASB 8 para. 16)

An operating segment is a component of an entity (AASB 8 para. 5):

• 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; and - For which discrete financial information is available

The aggregation criteria (AASB 8 para. 12): Two or more segments can be aggregated if they have similar economic characteristics and are similar in each of the following:

• The nature of the products and services; • The nature of the production processes; • The type or class of customer for their products and services; • The methods used to distribute their products or provide their services; and • If applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

The Basic Criteria: An entity shall report separately information about each operating segment that

• has been identified as an operating segment in accordance with the four steps discussed above, or results from aggregating two or more of those segments in accordance with AASB 8 para. 12; and • exceeds the quantitative thresholds in AASB 8 para. 13

Related Party Issues

Identifying related parties Identifying related-party arrangements Deciding on the type and extent of the disclosure

Examples of disclosed transactions

Purchases or sales of goods/property/other assets Rendering or receiving of services Leases Transfers of research and development Borrowings/loans Provision of guarantees

Related Party Transaction Disclosures

The nature of the related-party relationship Information about transactions and outstanding balances, including (AASB 124 para. 18): o The amount of transactions o The amount and terms of outstanding balances o Provisions for doubtful debts related to outstanding balances o Bad and doubtful debts expense arising from related parties

Why is the Management Approach used?

Allows financial statement users to review operations through the "eyes" of management Less costs for preparers (segment items are measured on the same basis as is used internally by the CODM)

AASB 8

adopts a 'management approach' : Segments disclosed are based upon the internal reports that are reviewed by the chief operating decision maker (CODM)

KMP Disclosures

compensation in total and the total for each of the following categories must be disclosed (AASB 124 para. 17): Short-term employment benefits (e.g., wages, salaries, paid annual leave and sick leave) Post-employment benefits (e.g., superannuation and other retirement benefits) Other long-term benefits (e.g., long-service leave and long-term disability benefits) Termination benefits Share-based payment (e.g., options)