Download KPMG Financial Reporting Insights: Operating Segment disclosures

KPMG
Financial
Reporting
Insights
KPMG’s review of 45
ASX200 entities Operating
Segment disclosures
August 2016
kpmg.com.au
2 | KPMG Financial Reporting Insights: Operating Segment disclosures
The headlines
91 %
91 percent of entities reviewed
disclosed multiple reportable
segments
Entities on average disclosed
three to four reportable segments
with the majority of entities
using products and services to
determine their segments
81 %
$
81 percent of entities used a nonIFRS measure when measuring
segment performance
In 81 percent of cases cash
generating units with goodwill
allocated to them aligned with
or were at a lower level than the
reportable segments
Wide range of interpretations
as to what is required to comply
with the entity wide disclosure
requirements on revenue by
product and service type,
geographical location and
major customers
In 78 percent of cases the
reportable segments were
consistent with how the
performance of the business
was disaggregated and discussed
in the Operating and Financial
Review
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entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
3 | KPMG Financial Reporting Insights: Operating Segment disclosures
Introduction
Segment information is required to be disclosed in general
purpose financial reports of listed entities1 in accordance with
AASB 8 Operating Segments. Apart from being required, these
disclosures provide users with the information they need
to evaluate an entity’s business activities and the economic
environment in which it operates and provides insights into how
management assess the performance of and makes decisions
about the business.
The importance of segment disclosures is further highlighted by
the links that exist between these disclosures and information
provided in an operating and financial review (OFR) forming part
of a listed entities directors’ report2 and the requirements of
AASB 136 Impairment of Assets.
Although not an ASIC focus area, ASIC has definitely been
paying more attention to the segment disclosures in recent
times and especially how they interact with the impairment
assessments entities are making for goodwill and the
identification of cash generating units.
Purpose of publication
This publication is intended to assist listed entities assess
how their segment discloses compare to other entities in the
ASX200. This publication provides insights into:
• the basis on which entities determine their segments
• the common measures of segment profit or loss
• other common items of income and expense reported by
entities for each segment
• how entities interpret and address the entity wide
disclosures required by AASB 8
• the interactions between segment disclosures, the OFR
and the impairment requirements, and
• the relationship between segments and Integrated
Reporting.
Given the significance of segment disclosures, KPMG have
undertaken a review of 45 ASX200 entities annual reports for
the 2015 reporting period, focusing on the segment report and
its interactions with the impairment disclosures and the OFR.
What we have seen in the 2015 reporting period
Our review identified that 91 percent of entities have more
than one reportable segment, with entities averaging between
three to four reportable segments each. Further, in 78 percent
of cases, these reportable segments were consistent with
how the performance of the business was disaggregated and
discussed in the OFR and in 81 percent of cases, the cash
generating units with goodwill allocated to them aligned with or
were at a lower level than the reportable segments.
1. ‘listed entities’ under AASB 8, paragraphs Aus2.1(d) & (e) are entities:
(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets); or
(ii) that file, or are in the process of filing, their financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market.
2. Corporations Act 2001, section 299A.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
4 | KPMG Financial Reporting Insights: Operating Segment disclosures
General disclosures
AASB 8 Operating Segments defines an operating segment as a component
of an entity:
• t hat engages in business activities from which it may earn revenues and
incur expenses
• who’s operating results are regularly reviewed by the chief operating decision maker
(CODM) to make decisions about resources to be allocated to the segment and
assess performance, and
• for which discrete financial information is available.³
Number of segments reported in reviewed population
1
Number of segments
2
3
4
5
6
7
10
0
2
4
6
8
10
12
14
Number of entities
Source: KPMG
Our review showed the number of segments disclosed by entities varied from one
to as many as 10, with the majority of entities (55 percent) disclosing – three to four
segments in their segment note. All the following discussion focuses on the subsample of 41 entities that disclosed more than one segment, unless noted otherwise.
How has the entity determined its segments?
5%
27%
Geographical regions
Geographical regions
Products and services
32%
Mix of geographic
regions and products
& servcies
Products and services
Other
36%
Source: KPMG
Mix of geographic
regions and products
& servcies
3. AASB 8, paragraph 5.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
5 | KPMG Financial Reporting Insights: Operating Segment disclosures
Of the 41 entities disclosing more than one reportable
segment, 36 percent used product and service lines as the
basis for determining segments and a further 32 percent used
a combination of product and service lines and geographical
regions to determine segments. This combined approach was
principally applied in one of two ways:
1. Segments were first determined by product line, and then
the predominate product line was broken down further by
country.
2. Segments were first determined by country or region in
which the entity operated, and then the largest market
(typically Australia) was disaggregated further into smaller
segments identified by product lines.
Only 27 percent of entities used purely a geographical basis
for determining their segments.
Corporate segments
AASB 8 indicates that not every part of an entity is necessarily
a segment or part of an operating segment, drawing out
corporate headquarters as an example of such a component.
This is due to the fact that the specific part of the business may
not earn revenues or may earn revenues that are only incidental
to the activities of the entity.4
Seven of the 41 entities disclosing more than one reportable
segment (17 percent) reported a corporate segment with
only three of these disclosing revenue from that segment.
However, for one of these three entities, the corporate
segment was combined with other non-reportable segments
and the revenue in another was minimal. It would therefore
appear that for the majority of these seven entities, the
corporate segment may not have necessarily represented an
operating segment as defined by the standard.
Segment revenue as % of consolidated revenue
5%
2%
5%
<75%
75% - 100%
<75%
32%
100%
75% - 100%
100%
100-120%
100-120%
56%
120+%
120+%
Source: KPMG
Of the 41 entities disclosing more than one reportable
segment, the majority reported total segment revenues
representing at least 75 percent of total consolidated revenues.
There was one entity that reported total segment revenue
below the 75 percent threshold (representing 68 percent of
total revenue), however given this particular entity’s basis for
measuring segment revenue was different to the IFRS basis
used for measuring consolidated revenue, this outcome
is reasonable.
For the 15 entities where segment revenues were higher than
consolidated revenue, this was typically attributable to intersegment sales that eliminated on consolidation.
Accounting for transactions between segments
AASB 8 requires entities to disclose the basis of accounting
for any transaction between reportable segments.6
Basis for accounting for transactions between segments
5%
For entities in similar situations it may be worth reconsidering
whether their corporate segments are in fact an operating
segment or whether it would be more appropriate to rename
them as unallocated or other items used to reconcile the total
segment results back to the consolidated result disclosed in the
financial report.
32%
Arms length
Undisclosed
Arms length
Other
Undisclosed
Other
63%
Aggregating Segments
AASB 8 require entities disclose whether they have aggregated
any operating segments into reportable segments. Although it
would appear to be best practice to make a statement where
there has been no aggregation, only 39 percent of entities
explicitly stated that they did not aggregate any segments.
20 percent of entities disclosed they had aggregated segments
while 41 percent of the entities were silent on whether they
had aggregated any segments or not.
Operating vs Reportable segments
Although an entity may have a specific number of operating
segments, AASB 8 only requires segments meeting specific
quantitative thresholds to be separately reported (reportable
segments).5 AASB 8 requires reportable segments to be
identified until at least 75 percent of external revenues have
been allocated to these segments.
4. AASB 8, paragraph 6.
Source: KPMG
Of the entities reviewed, 32 percent disclosed that transactions
between segments were undertaken on an arm’s length basis,
with 63 percent remaining silent on the basis for accounting.
Although some of these entities may not have had significant
transactions between their segments, it would appear that
describing the basis for accounting between segments is an
area where entities could look to improve their disclosures.
5. AASB 8, paragraph 13 requires an entity to report separate information for an operating segment meeting any of the following criteria:
a) Its reported revenues are 10 percent or more of combined revenues;
b) The absolute amount of reported profit or loss is 10 percent or more of the
greater in absolute amount of (i) the combined reported profit of all operating
segments that did not report a loss and (ii) the combined reported loss of all
operating segments that reported a loss; or
c) Its assets are 10 percent of more of the combined assets of all operating
segments.
6. AASB 8, paragraph 27(a).
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
6 | KPMG Financial Reporting Insights: Operating Segment disclosures
Segment Profit and Loss disclosures
Segment measure of performance
All entities are required to disclose their segment measure of
profit or loss. The measure reported should be the measure
actually used by the CODM to monitor the segments
performance and may be a non-IFRS measure.
Segment measure of profit or loss
17%
19%
Statutory measure
Statutory measure
EBITDA/
Adjusted
EBITDA
EBITDA/
Adjusted
EBITDA
Proportionate
measure
Proportionate
measure
17%
20%
Adjusted PBT
Adjusted PBT
Adjusted EBIT
Adjusted EBIT
Other
20%
7%
Other
Source: KPMG
Our review showed that entities are using a wide variety of
different measures to report on their segment performance.
Only 19 percent of entities disclosed a statutory measure in
compliance with the accounting standards, all other entities
adjusted the statutory figures reported in the income statement
such that they were ultimately non-IFRS segment measures
of performance. The most common non-IFRS measures
of segment performance reported were adjusted earnings
before interest and tax (EBIT); adjusted profit before tax (PBT);
and adjusted earnings before interest, tax, depreciation and
amortisation (EBITDA).
The adjustments between the statutory and non-IFRS measure
typically fit into one of two categories:
1. Items that were significant or considered by management
to be one-off in nature such as impairment charges. Entities
should use caution when referring to items as one-off
where they may recur in the future as it may be considered
misleading and inconsistent with the principals of ASIC
Regulatory Guide 230 Disclosing Non-IFRS Information.
2. Items considered to relate to the whole of the group or head
office operations, such as hedging and foreign exchange
movements, and not related to the underlying performance
of the reportable segments. The fact that these were
excluded from the segment measure of performance is not
unreasonable given their nature.
Our review identified that 7 percent of the entities reported
their segment profit on a proportionate basis. This is where
the profit of joint ventures, associates and subsidiaries with
non-controlling interests (NCI), were all included consistent with
their ownership percentage. For example, for a subsidiary that
had a 10 percent non-controlling interest, only 90 percent of
that subsidiaries profit was included in the relevant reportable
segments profit figure. Interestingly not all entities with equity
accounted investments or NCI took this proportionate approach.
More often than not, entities in this situation reflected their
segment performance more consistently with the IFRS
principals.
The 17 percent of other measures incorporated a wide variety
of measures including cash profit after tax and profit determined
using current replacement cost of key inputs due to their
volatile pricing.
Total reportable segment profit measures as a %
of consolidated profit or loss
17%
17%
100%
100%
12%
Less
than
100%
Less
than
100%
More than 100%
More than 100%
Segment profit &
consolidated
loss &
Segment profit
consolidated loss
54%
Source: KPMG
Typically the basis used to measure the reportable segment
profits resulted in total reportable segment profits being higher
than the consolidated profit or loss for the year.
54 percent of entities reported total segment results higher
than their consolidated profit or loss with a further 17 percent
reporting a total segment profit whilst having reported a
statutory consolidated loss. These findings are not surprising,
given that the items that entities were typically excluding
from their segment profit measures were expenses (see
discussion below).
Entities with a single reportable segment, are still required to
disclose their measure of segment performance. Of the four
entities in our sample with a single reportable segment, two
disclosed a specific segment measure of performance. The
other two entities did not disclose any measure of segment
performance, although interestingly, one had discussed EBITDA
in their OFR.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
7 | KPMG Financial Reporting Insights: Operating Segment disclosures
Reconciliations of segment disclosures to consolidated results
Entities are required under AASB 8 to provide a reconciliation between the total
reportable segments measures of profit or loss to the entity’s consolidated profit
or loss before tax and discontinued operations.7
Consolidated profit that the Segment results were reconciled to
7%
Profit before tax from
continuing
operations
Profit before
tax from
7%
continuing operations
5%
Profit after tax from
continuing
Profit afteroperations
tax from
47%
continuing operations
Statutory profit attributable
toStatutory
members
of the
profit
attributable
to members
parent
entity of the parent entity
EBIT
EBIT
34%
EBITDA
EBITDA
Source: KPMG
Our review identified a number of different statutory measures being used as the
basis for the reconciliation. In particular, 39 percent reconciled back to an after tax
measure whilst 14 percent reconciled back to either EBIT or EBITDA.
The choice of consolidated profit that entities reconciled their segment result to also
had a significant impact on the reconciling items that were presented. The graph
below outlines the most common reconciling items that the entities disclosed.
Common reconciling items between segment results and consolidated profit
Interest
Impairment
Depreciation and amortisation
Tax
Transaction and restructuring costs
Corporate expenses
Derivatives and hedging
Remuneration
Elimination of discontinued operations
General net eliminations
Unallocated amounts
Claims and legal proceedings
Gains and losses on purchases or sale of investments
Share of profits of equity accounted investments
0
Source: KPMG
5
10
15
20
Number of entities disclosing these reconciling items
It appears that most entities did not consider the financing of their segment
operations to be a reflection of the segments performance with 20 entities excluding
interest from their segment result and including it as a reconciling item between the
segment result and the statutory consolidated profit.
A description of each reconciling item identified in the table above is provided in the
Appendix of this report.
Entities are also required to reconcile their segment revenue back to the consolidated
statutory revenue. As discussed above (see Operating vs Reportable segments) the
most common reconciling item from total segment revenue to consolidated revenue
was the elimination of inter-segment sales with 46 percent of entities including this in
their reconciliations.
7. AASB 8, paragraph 28(b).
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
8 | KPMG Financial Reporting Insights: Operating Segment disclosures
Material items
In addition to the segment profit, entities are required to disclose a number of
prescribed income statement line items or any other material income or expense
items for each segment if the specified amounts are included in the segment measure
of profit or loss or otherwise regularly reported to the CODM (even if not included in
the measure of segment profit or loss).8
Material items specifically prescribed by AASB 8 disclosed by segment
Revenues from external customers
Depreciation and amortisation
Revenues from transaction with other operating segments
Interest expense
Share of P&L of associates and JVs (equity accounted)
Income tax expense/ income
Interest revenue
Impairment losses
Reversal of impairment losses
Net interest income
0
5
10
15
20
25
30
35
40
45
Number of entities disclosing this item
Source: KPMG
All of the 41 entities disclosing more than one reportable segment disclosed their
revenue from external customers with depreciation and amortisation and revenues
from other operating segments rounding out the top three most commonly reported
material items. A direct comparison of the number of entities making these disclosures
is not considered relevant as not all entities would have recognised these items in their
income statement e.g. not all entities recognised impairment losses in the period.
It was interesting to note that although 13 entities reported their share of equity
accounted profits, only 46 percent of these entities proceeded to disclose the carrying
amount of their equity accounted investment for each segment which is a required
disclosure if the amount is reported to the CODM.9
On top of the prescribed disclosure highlighted above, 62 percent of entities included
disclosures in relation to 75 other material items as part of their segment disclosures.
On average these entities disclosed an additional three other material items.
The types of other material items disclosed generally depended on the industry that
the entity operated in. For example, an insurance business disclosed underwriting
profit or loss by reportable segment, whilst a mining company disclosed exploration
expenses for each reportable segment. Five entities disclosed share-based payment
expenses related to each reportable segment and a number of entities disclosed
fair value gains and losses on either investment properties, derivatives or foreign
exchange gains or losses.
For the 75 other material items disclosed, in 52 percent of instances the value of
the material item disclosed in the segment note was the same as the corresponding
statutory consolidated amount. However, in 43 percent of cases these amounts
were different to the statutory consolidated amounts and in 5 percent of cases these
specific material items were not disclosed elsewhere in the financial report. For those
43 percent where the segment total differed to the statutory consolidated amount,
only 69 percent were reconciled back to the statutory consolidated figure. Given
AASB 8 requires all items disclosed for reportable segments to be reconciled back to
the consolidated amounts10, entities should ensure where individually material items
are disclosed by segment they provide adequate reconciliations.
8. AASB 8, paragraph 23.
9. AASB 8, paragraph 24.
10. AASB 8, paragraph 28.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
9 | KPMG Financial Reporting Insights: Operating Segment disclosures
Balance Sheet disclosures
Entities are only required to disclose information about their
segment assets and liabilities if this data is included in the
information regularly provided to the CODM.11 Of the 41 entities
with segment disclosures, only 46 percent disclosed their
segment assets and out of those entities 68 percent disclosed
their segment liabilities.
There was a wide variety of reconciling items between
segment assets and liabilities and the consolidated balance
sheet balances including tax assets and liabilities, cash
accounts and interest bearing liabilities.
Entity wide disclosures
In addition to the segment disclosures discussed above,
AASB 8 also requires a number of entity wide disclosures that
should be made regardless of whether an entity has one or
more reportable segments. These disclosures relate to sales by
product line; local and international sales and major customers.
Of the four entities with only one segment, none made any
disclosures regarding revenue by product lines. As they
all operated in a single country the disclosures related to
geographical areas was not relevant and only one entity made
any disclosure regarding major customers that contribute to
more than 10 percent of their revenue.
Any entity with a single segment should be aware of the
additional entity wide disclosures required by AASB 8 and
ensure that they are appropriately included in their financial
reports where material.
Products and services
AASB 8 requires that an entity report the revenues from
external customers for each product and service, or each group
of similar products and services.12
For the 41 entities disclosing more than one reportable
segment, there appeared to be significant inconsistencies in
the way that this requirement was interpreted. Some entities
that determined their segments based on products and
services provided no additional disclosures whilst other entities
provided additional break downs of their revenue to individual
product lines.
For example, one company in the oil and gas industry disclosed
two segments determined by product/service line, one related
to refining and the other to retail and wholesale. The entity then
included an additional breakdown of revenues by each type of
product such as crude, petrol and diesel.
Whether or not the disclosures made by an entity at a
segment level are adequate for the specific product entity wide
disclosures would depend on the following:
11. AASB 8, paragraph 23.
12. AASB 8, paragraph 32.
• where an entity has aggregated segments, whether these
aggregated segments reflect individual product lines
• the level of disaggregation used to determine segments by
product or service, and whether they truly reflect individual
product lines or a broader product type
• if revenue disclosed in the segment note has been
determined on a non-IFRS basis this would not satisfy the
entity wide disclosure requirements which are required to be
based on the statutory consolidated revenue numbers.
Information about geographical areas
AASB 8 requires an entity to disclose revenue and non-current
assets at a minimum from their country of domicile and the
rest of the world, including the basis for attributing revenues
from customers to individual countries.13
Inconsistencies similar to those noted in the product and
service disclosures above were observed in the disclosures
regarding geographical areas. Many entities that prepared their
segment report based on geographical location did not provide
any additional information regarding their revenue or noncurrent assets by geography.
Two key observations were identified from the approach taken
by entities:
1. In some instances the reportable segment disclosed
would be Australia & New Zealand. Strictly speaking, for
an Australian domiciled entity, this would not satisfy the
requirement to disclose the revenues and non-current
assets from Australia separately to those internationally.
2. In some instances entities may have a single international
reportable segment that aggregated the results of
numerous countries. This international segment would
often represent a significant proportion of sales yet no
further breakdown was provided under these geographical
disclosure requirements, even though the standard requires
individual country disclosures where revenues or noncurrent assets attributable that country are material.
13. AASB 8, paragraph 33.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
10 | KPMG Financial Reporting Insights: Operating Segment disclosures
Major customers
AASB 8 requires an entity to disclose the extent of its reliance
on its major customers. Where revenue from a single customer
amounts to 10 percent or more of total revenues this fact is
required to be disclosed along with the amount of revenue from
each such customer and the segment or segments reporting
this revenue.14
Number of customers entity disclosed with
revenues > 10% of the entity’s total revenue
4%
Of the 45 entities reviewed, 69 percent did not include any
disclosures regarding their reliance on major customers and
20 percent disclosed that there were no individual customers
contributing to more than 10 percent of their revenues. Only
7 percent disclosed the number of entities that generated
more than 10 percent of revenue and the amount of that
revenue. The remaining 4 percent disclosed the total amount or
percentage of revenue that came from their major customers,
but did not identify how many customers this represented.
20%
0
0
7%
1-2
1-2
Not disclosed
Not disclosed
Other
Other
69%
Source: KPMG
Impairment
A relationship exists between operating segments and
impairment assessments and disclosures in financial reports as
goodwill cannot be allocated to a cash generating unit (CGU)
larger than an operating segment before aggregation.
AASB 136 Impairment of Assets requires an entity with
goodwill to disclose the carrying amount of goodwill allocated
to each CGU or group of CGUs.
Relationship between CGUs and segments
3%
16%
Did not disclose allocation
of Goodwill to CGU
29%
Did not disclose allocation
CGU same level as
of Goodwill to CGU
segment
CGU same level as
CGU
at a lower level of
segment
aggregation than a segment
Of the 45 entities reviewed, 38 had goodwill. Of these, six
did not disclose the amount of goodwill that was allocated to
individual CGUs, however two of these entities did provide a
narrative description of their CGUs. 52 percent disclosed CGUs
or groups of CGUs consistent with their segments and 29
percent of entities disclosed CGUs that were at a lower level
than their segments. One entity had allocated goodwill to
individual subsidiaries and it was not clear how these related
to their segments which were determined based on their
product lines.
Given ASIC’s continuing focus on impairment and impairment
disclosures15 it would be advisable to ensure the allocation
of goodwill to CGUs is appropriately disclosed and how that
allocation interacts with the segments is clear to reduce
potential questions from the regulator.
CGU at a lower level of
52%
Unable to determine the
aggregation than a segment
relationship between
Unable
determine the
CGU
andtosegment
relationship between
CGU and segment
Source: KPMG
14. AASB 8, paragraph 34.
15. ASIC 16-174MR ASIC calls on directors to apply realism and clarity to
financial reports
RU-004 ASIC focuses for 30 June 2016
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
11 | KPMG Financial Reporting Insights: Operating Segment disclosures
Operating and Financial Review
required by the Corporations Act
Section 299A of the Corporations Act requires a listed entity’s
directors’ report to include information that members of
the entity would reasonably require to make an informed
assessment of the entity’s operations, financial position,
business strategies and prospects for future financial years.
This information is normally contained in what is referred to
as an operating and financial review (OFR) or management
commentary forming part of the directors’ report. The OFR
provides an entity the opportunity to tell their story and focus a
user’s attention on the contributing factors to their performance
as seen through management’s eyes.
An operating or reportable segment as defined by AASB 8 is a
representation of how the CODM views an entity and assesses its
performance to make decisions about the allocation of resources.
Consequently, there are clearly similarities between the
definition of a segment and what would be discussed in an
OFR. As part of our review we have compared the disclosures
made in the segment report to the discussion and analysis in
the OFR in the directors’ report. Our findings were mixed as
noted in the graph below.
Comparision of OFR analysis and segment notes
13%
9%
OFR analysis based on
whole of business
OFR analysis based on
whole
of business
OFR analysis
based on
different
disaggregation
OFR analysis
based on
to
segments
different
disaggregation
to segments
78%
OFR analysis consistent
OFR analysis
with
segmentconsistent
note
with segment note
Source: KPMG
It is not unusual to see additional analysis to that contained in
the segment report in the OFR as although the CODM may
focus on one particular way of analysing the business, other
methods may also be relevant and beneficial in assisting a user
to understand the key drivers of performance in the period.
Of the entities reviewed, 13 percent discussed their
performance in the OFR only on a consolidated group basis.
They did not discuss the business performance at a segment
level. This suggests that although they provide the analysis in
their segment note to comply with the accounting standards,
this is not how management view the business or consider it
more relevant for the users of the financial report to understand
the performance and operations of the entity in its entirety.
In 9 percent of cases entities did not discuss their segments
in the OFR as disclosed in the segment note. Instead they
disaggregated their business on a different basis and discussed
the performance of the business based on this different
disaggregation. Using an inconsistent basis between the
segment note and OFR for analysing an entities performance
could raise questions on the appropriateness of an entities
identification of their reportable segments. We expect how
the CODM views and assesses the business would also be
relevant to a members or users understanding of the business’
performance.
Of the 35 entities that analysed the performance of their
business in their OFR consistent with their segment note,
85 percent used a consistent measure of profit in the OFR
compared to the segment note. Given the measure used in the
segment note is meant to reflect the measure that is regularly
reported to the CODM and is used to monitor performance and
make decisions about resource allocation, we would expect
similar measures to be the focus of discussion in the OFR,
otherwise this may raise questions on the appropriateness of
the disclosures made in the segment note.
In line with our expectations, 78 percent of entities provided an
analysis in their OFR consistent with the segments disclosed in
the financial report. Of these, four provided additional analysis on a
different basis with:
• Three providing additional details, for example, a mining
company providing analysis on individual mine sites where
their segments were by country.
• One providing analysis based on their geographical segments
and then also providing additional analysis based on the
product type.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
12 | KPMG Financial Reporting Insights: Operating Segment disclosures
Integrated Reporting
Segment reporting by geography and/or product is important for
companies as they start to explain their value story using the
IIRC’s integrated reporting framework.
The integrated report starts by explaining the company’s
business model, the markets in which it operates and its
strategy to create and preserve value for its shareholders
and other stakeholders. The discussion in the integrated
report then focuses on explaining value creation at the group
level, including why certain segments are important for
ongoing growth, risk mitigation etc. For example, in GE’s 2015
Integrated Summary Report, we clearly see Jeffrey Immelt, the
Chairman and Chief Executive Officer, explain how the group
has been transformed, at the group and segment level, to
create value for shareholders. He explains why GE has exited
most of the financial services business segment and re-focused
as a high-tech leader, selling more than half the company in the
process.
As more companies develop their integrated reports, the
importance of business segments to long term business value
will be more clearly explained, not in tables, but more around
their importance to the business model and long term creation
of value.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
13 | KPMG Financial Reporting Insights: Operating Segment disclosures
Methodology
To provide observations relevant across a broader cross section of entities,
we focused this review on 45 companies across the ASX200. These 45 entities were
randomly selected for a review from a list of ASX200 entities that was determined
based on their market capitalisation as at 31 May 2016.
ASX ranking
Year end
GIC Industry Group
ASX50:
8 companies
• June (5)
• September (1)
• December (2)
•
•
•
•
•
•
Banks (1)
Energy (2)
Insurance (1)
Real Estate (2)
Transportation (1)
Materials (1)
ASX51-100:
15 companies
•
•
•
•
•
•
March (1)
June (8)
July (1)
August (1)
September (2)
December (2)
•
•
•
•
•
•
•
•
•
•
•
Banks (1)
Consumer Services (1)
Diversified Financials (2)
Energy (1)
Food, Beverage & Tobacco (1)
Materials (2)
Real Estate (1)
Retailing (1)
Software & Services (1)
Telecommunication Services (1)
Utilities (3)
ASX101-150:
12 companies
•
•
•
•
March (2)
April (1)
June (7)
December (2)
•
•
•
•
•
•
•
•
•
•
Commercial & Professional Services (1)
Consumer Services (1)
Food & Staples Retailing (1)
Health Care Equipment & Services (1)
Household & Personal Products (1)
Insurance (1)
Materials (2)
Media (1)
Retailing (2)
Software & services (1)
ASX151-200:
10 companies
• June (8)
• July (1)
• December (1)
•
•
•
•
•
•
•
•
•
Commercial & Professional Services (1)
Consumer Durables & Apparel (1)
Consumer Services (2)
Energy (1)
Media (1)
Pharmaceuticals, Biotechnology & Life Sciences (1)
Software & Services (1)
Telecommunication Services (1)
Transportation (1)
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
14 | KPMG Financial Reporting Insights: Operating Segment disclosures
Appendix
Details of the types of reconciling items discussed in the Reconciliations of segment
disclosures to consolidated results section above.
Reconciling item
Description
Interest
Interest expense on borrowings, the unwind of discounts on
provisions, and interest income on deposits.
Impairments
Impairments relating to property, plant and equipment; goodwill
and other intangibles; equity accounted investments; and write
downs of inventories.
Depreciation and amortisation
Adjustments relate to excluding specific items of depreciation or
amortisation such as amortisation on acquired intangibles.
Tax
Tax on significant/adjusting items; recognition of deferred tax
assets; costs/benefits associated with resolution of uncertain
tax positions with the tax office; or total tax expense/benefit for
the period.
Transaction and restructure costs
Costs relating to acquisitions of businesses, disposals, business
restructures, initial public offerings and takeover defence.
Corporate Expenses
Costs relating to the head office function, in some instances it
may have included central funding costs and investor relation
costs. Entities provided minimal to no details of the composition
of corporate costs.
Derivatives and hedging
Gains and losses relating to fair value adjustments on derivative
financial instruments and the impacts of economic hedges
(accounting for derivatives that do not qualify for hedge accounting
as if they did qualify).
Remuneration
Adjustments relating to voluntary redundancies; share based
payment expenses – excluding all share based payments
expenses or reflecting cash cost; and remuneration adjustments
associated with IPO’s.
Elimination of discontinued
operations
Discontinued operations as disclosed on the income statement
are eliminated to reconcile back to profit from continuing
operations.
General net eliminations
Entities provided one overarching reconciling item, with no
further break down or explanation.
Unallocated amounts
Amounts not attributable to a reportable segment, this may have
been from other operating segments or corporate operations.
Claims and legal proceedings
Costs associated with court cases or other legal proceedings and
the costs attributable to recognising provisions in relation to legal
proceedings.
Gains and losses on purchase or
sale of investments
Gains and losses on sale of assets, businesses, subsidiaries and
associates; gains on business combinations (bargain purchases);
and gains on the acquisition of equity accounted investments.
Share of profits of equity accounted
investments
Profits of associates or joint ventures as disclosed on the face of
the income statement.
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
Contact us
For more information on
this publication please contact:
For more information on
integrated reporting please contact:
Zuzana Paulech
Partner
Department of Professional Practice
Audit & Assurance
+61 2 9335 7329
[email protected]
Nick Ridehalgh
Partner
Audit & Assurance
+61 2 9455 9312
[email protected]
Kristen Haines
Manager
Department of Professional Practice
Audit & Assurance
+61 3 9288 5184
[email protected]
Simon Dubois
Partner
Audit & Assurance
+61 3 9288 6927
[email protected]
kpmg.com.au
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© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
July 2016. NSW N14318AUD