Download Operating segments

for Accounting Professionals
IFRS 8 Operating segments
2011
1 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
IFRS 8 Operating segments
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
their knowledge, understanding and skills.
Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of
the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any
additional knowledge is required this is mentioned at the beginning of the section.
Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first
three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of
charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the
European Union.
We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers)
who led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of
Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the
production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and
edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Moscow, Russia
2011 Updated
2
Multiple choice questions
CONTENTS
20
Answers to multiple choice questions ...................... 26
Background
3
Definitions
4
Background
Main features of IFRS 8
5
IFRS 8 - Core principle
6
Standards of financial statements are published to specify
disclosure and/or to move profit from one period to another. IFRS 8
is exclusively about disclosure.
Scope
6
Operating segments
7
Reportable segments
8
Quantitative thresholds
9
As undertakings become larger, understanding how they operate:
- in different markets,
- with different products and services and
Disclosure - General information ............................... 13
- providing to a growing range of clients
Disclosure - Specific information............................... 13
becomes more difficult, unless additional detail is provided.
Disclosure - Information about profit or loss, assets
and liabilities ............... 14
Measurement
16
Reconciliations
17
Information about products and services – total
undertaking ................. 18
Information about geographical areas – total
undertaking ................. 19
Information about major clients areas – total
undertaking ................. 19
3 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Information about components of an undertaking, the products and
services that it offers, its foreign operations, and its major clients is
useful for understanding and making decisions about the
undertaking as a whole. Users observe that the evaluation of the
prospects for future cash flows is the central element of investment
and lending decisions.
The evaluation of prospects requires assessment of the uncertainty
that surrounds both the timing and the amount of the expected cash
flows to the undertaking, which in turn affect potential cash flows to
the investor or creditor. Users also observe that uncertainty results
in part from factors related to the products and services an
undertaking offers and the geographic areas in which it operates.
IFRS 8 Operating Segments
Different segments will generate dissimilar streams of cash flows, to
which are attached disparate risks and which bring about unique
values. Thus, without disaggregation, there is no sensible way to
predict the overall amounts, timing, or risks of a complete
undertaking’s future cash flows.
EXAMPLE – risk assessment
Your group has invested in a country that has become politically
unstable. Segment reporting explains how much (or little)
performance depends on that country, and helps measure the risk
that any loss of business could have on the group.
The additional detail should:
(1) increase the number of reported segments and provide more
information;
Segments based on the structure of an undertaking’s internal
organisation have at least three other significant advantages:
1. An ability to see an undertaking “through the eyes of
management” enhances a user’s ability to predict actions or
reactions of management that can significantly affect the
undertaking’s prospects for future cash flows.
2. As information about those segments is generated for
management’s use, the incremental cost of providing
information for external reporting should be relatively low.
3. Practice has demonstrated that the term ‘industry’ is
subjective. Segments based on an existing internal structure
should be less subjective.
(2) enable users to see an undertaking through the eyes of
management;
IFRS 8 arises from the IASB’s consideration of (US) FASB
Statement No.131 Disclosures about Segments of an Undertaking
and Related Information (SFAS 131), compared with (the nowsuperseded) IAS 14 Segment Reporting.
(3) enable an undertaking to provide timely segment information for
external interim reporting with relatively low incremental cost;
IFRS 8 achieves convergence with the requirements of SFAS 131,
except for minor differences.
(4) enhance consistency with the management discussion and
analysis or other annual report disclosures; and
Definitions
An operating segment is a component of an undertaking:
(5) provide various measures of segment performance.
Knowledge of the structure of an undertaking’s internal organisation
is valuable in itself because it highlights the risks and opportunities
that management believes are important.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(1) 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
undertaking),
4
IFRS 8 Operating Segments
(2) whose operating results are regularly reviewed by the
undertaking’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its
performance, and
Operating segments are components of an undertaking about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
(3) for which discrete financial information is available.
The term ‘chief operating decision maker’ identifies a function, not
necessarily a manager with a specific title. That function is to
allocate resources to and assess the performance of the operating
segments of an undertaking. Often the chief operating decision
maker of an undertaking is its chief executive officer or chief
operating officer but, for example, it may be a group of executive
directors or others.
IFRS 8 Operating Segments sets out requirements for disclosure of
information about an undertaking’s operating segments and also
about the undertaking’s products and services, the geographical
areas in which it operates, and its major clients.
Main features of IFRS 8
IFRS 8 specifies how an undertaking should report information
about its operating segments in annual financial statements and in
interim financial reports. It also sets out requirements for related
disclosures about products and services, geographical areas and
major clients.
IFRS 8 requires an undertaking to report financial and descriptive
information about its reportable segments.
Reportable segments are operating segments or aggregations of
operating segments that meet specified criteria.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Generally, financial information is required to be reported on the
same basis as is used internally for evaluating operating segment
performance and deciding how to allocate resources to operating
segments.
IFRS 8 requires an undertaking to report a measure of operating
segment profit or loss and of segment assets. It also requires an
undertaking to report a measure of segment liabilities and particular
income and expense items if such measures are regularly provided
to the chief operating decision maker.
It requires reconciliations of total reportable segment revenues,
total profit or loss, total assets, liabilities and other amounts
disclosed for reportable segments to corresponding amounts in the
undertaking’s financial statements.
IFRS 8 requires an undertaking to report information about the
revenues derived from its products or services (or groups of similar
products and services), about the countries in which it earns
revenues and holds assets, and about major clients, regardless of
whether that information is used by management in making
operating decisions.
However, IFRS 8 does not require an undertaking to report
information that is not prepared for internal use if the necessary
information is not available and the cost to develop it would be
excessive.
5
IFRS 8 Operating Segments
IFRS 8 also requires an undertaking to give descriptive information
about the way the operating segments were determined, the
products and services provided by the segments, differences
between the measurements used in reporting segment information
and those used in the undertaking’s financial statements, and
changes in the measurement of segment amounts from period to
period.
IFRS 8 - Core principle
An undertaking 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.
IAS 34 Interim Financial Reporting, requires an undertaking to
report selected information about its operating segments in interim
financial reports.
Scope
(2) the consolidated financial statements of a group with a parent:
(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 files, or is in the process of filing, the consolidated financial
statements with a securities commission, or other regulatory
organisation for the purpose of issuing any class of instruments in a
public market.
If an undertaking that is not required to apply IFRS 8 chooses to
disclose information about segments that does not comply with
IFRS 8, it shall not describe the information as segment
information.
If a financial report contains both the consolidated financial
statements of a parent that is within the scope of IFRS 8 as well as
the parent’s separate financial statements, segment information is
required only in the consolidated financial statements.
IFRS 8 shall apply to:
(1) the separate or individual financial statements of an
undertaking:
(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
EXAMPLES-group accounts
1. You produce consolidated accounts for your listed group. You
include the parent company’s full financial statements, and those of
the subsidiaries located in your country.
(ii) that files, or is in the process of filing, its financial statements
with a securities commission or other regulatory organisation for the
purpose of issuing any class of instruments in a public market; and
Only the consolidated accounts need provide segment information.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
6
IFRS 8 Operating Segments
2. You produce consolidated accounts for the group. The parent
company is a privately-owned company, that is not listed on any
stock exchange. The shares of your largest subsidiary is traded on
your national stock exchange. Only the largest subsidiary’s
accounts need provide segment information.
EXAMPLE-associates
1. You produce consolidated accounts for your listed group. You
include the associate company accounts. The associate is a listed
company.
You need provide segment information for group companies, other
than the listed associate. The associate will produce segment
information in its own accounts.
EXAMPLE - listed securities
Does segment reporting apply when an unlisted company has a
subsidiary with listed securities?
E plc is a large unlisted company that is required to prepare
consolidated accounts.
E plc has a subsidiary, F plc,that has debt listed on the London
Stock Exchange.
Do the accounts of E plc fall within the scope of IFRS 8?
the E plc group has listed debt in issue. The question is, then,
whether the definition of the entity in the context of consolidated
financial statements is the parent company or the consolidated
group.
IFRS 10 defines consolidated financial statements as the financial
statements of a group presented as those of a single economic
entity.
Applying this definition leads us to conclude that the entity for IFRS
8 purposes is the consolidated group and not the solus parent
entity.
Thus, the entity (the E plc group) does have listed securities and
should make the disclosures required by IFRS 8. In addition, the
financial statements of F plc fall within the scope of IFRS 8 and
disclosures are also required in that company’s separate financial
statements.
Operating segments
An operating segment may engage in business activities for which it
has yet to earn revenues, for example, start-up operations may be
operating segments before earning revenues.
IFRS 8 applies to entities whose equity or debt securities are
publicly traded (and by entities that are in the process of issuing
equity or debt securities in public securities markets).
Not every part of an undertaking is necessarily an operating
segment or part of 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 undertaking and would not be operating segments.
Although E plc (entity) does not have any publicly-traded securities,
An undertaking’s pension plans are not operating segments.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
7
IFRS 8 Operating Segments
An undertaking may produce reports in which its business activities
are presented in a variety of ways. If the chief operating decision
maker uses more than one set of segment information, other
factors may identify a single set of components as constituting an
undertaking’s operating segments, including the nature of the
business activities of each component, the existence of managers
responsible for them, and information presented to the board of
directors.
EXAMPLE- next lower level of internal segmentation
Your management wants to use segment reporting, but only
receives one set of figures for the group as a whole, with no further
analysis. You will need to look at how the figures are assembled to
identify the next lower level of internal segmentation. It may be
found in the reports to divisional managers.
The characteristics may apply to two or more overlapping sets of
components for which managers are held responsible. That
structure is sometimes referred to as a matrix form of organisation.
In that situation, the undertaking shall determine which set of
components constitutes the operating segments by reference to the
core principle.
EXAMPLE-matrix form of organisation
In some undertakings, some managers are responsible for different
product and service lines worldwide, whereas other managers are
responsible for specific geographical areas. The chief operating
decision maker regularly reviews the operating results of both sets
of components, and financial information is available for both.
Reportable segments
Generally, an operating segment has a segment manager who is
directly accountable to and maintains regular contact with the chief
operating decision maker to discuss operating activities, financial
results, forecasts, or plans for the segment.
An undertaking shall report separately information about each
operating segment that:
(1) has been identified, or results from aggregating two or more of
those segments, and
The term ‘segment manager’ identifies a function, not necessarily a
manager with a specific title.
The chief operating decision maker also may be the segment
manager for some operating segments. A single manager may be
the segment manager for more than one operating segment. If the
characteristics apply to more than one set of components of an
organisation but there is only one set for which segment managers
are held responsible, that set of components constitutes the
operating segments.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(2) exceeds the quantitative thresholds (see below).
Aggregation criteria
Operating segments often exhibit similar long-term financial
performance if they have similar economic characteristics. For
example, similar long-term average gross margins for two operating
segments would be expected if their economic characteristics were
similar.
8
IFRS 8 Operating Segments
Two or more operating segments may be aggregated into a single
operating segment if aggregation is consistent with the core
principle of IFRS 8, the segments have similar economic
characteristics, and the segments are similar in each of the
following respects:
Your production facilities are all in the southern hemisphere. Your
clients are all in the northern hemisphere. Your segments can either
be based on your production facilities, or the locations of your
clients. Your group’s reporting structure will indicate which choice to
take.
(1) the nature of the products and services;
(4) the methods used to distribute their products or provide their
services; and
EXAMPLE-dissimilar services
Your group includes cobblers’ shops and banks. These would not
be included in the same segment.
(2) the nature of the production processes;
EXAMPLE-vertical integration-oil companies
Many international oil companies report their upstream activities
(exploration and production) and their downstream activities
(refining and marketing) as separate business segments, even if
most of the upstream product (crude petroleum) is transferred
internally to the undertaking’s refining operation.
(3) the type or class of client for their products and services;
EXAMPLE-dissimilar locations
Your group provides pharmaceuticals to all areas of the world.
Countries where tropical diseases will have different characteristics
from those where colds and influenza dominate. The two groups
would not be included in the same segment.
EXAMPLE-dissimilar distribution
You have a food business. Part of the business is wholesale: low
profit margins, and high volume. The other part is restaurants:
higher margins, but lower volumes. Both should be separate
segments.
(5) if applicable, the nature of the regulatory environment, for
example, banking, insurance or public utilities.
EXAMPLES-regulatory environment
Among your major investments are a bank and a company that
provides electricity to domestic users. Both have to report to
different state bodies, who can control their profitability. Both should
be separate segments.
Quantitative thresholds
An undertaking shall report separately information about an
operating segment that meets any of the following quantitative
thresholds:
EXAMPLE-geographical segments
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
9
IFRS 8 Operating Segments
(1) Its reported revenue, including both sales to external clients and
intersegment sales or transfers, is 10 per cent or more of the
combined revenue, internal and external, of all operating segments.
(2) The absolute amount of its reported profit or loss is 10 per cent
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
cent of the undertaking’s revenue is included in reportable
segments.
Information about other business activities and operating segments
that are not reportable shall be combined and disclosed in an ‘all
other segments’ category separately from other reconciling items in
the reconciliations (see below). The sources of the revenue
included in the ‘all other segments’ category shall be described.
EXAMPLE - Voluntary disclosure of additional segment
(ii) the combined reported loss of all operating segments that
reported a loss.
(3) Its assets are 10 per cent or more of the combined assets of all
operating segments.
Operating segments that do not meet any of the quantitative
thresholds may be considered reportable, and separately disclosed,
if management believes that information about the segment would
be useful to users.
An undertaking may combine information about operating segments
that do not meet the quantitative thresholds with information about
other operating segments that do not meet the quantitative
thresholds to produce a reportable segment only if the operating
segments have similar economic characteristics and share a
majority of the aggregation criteria.
If the total external revenue reported by operating segments
constitutes less than 75 per cent of the undertaking’s revenue,
additional operating segments shall be identified as reportable
segments (even if they do not meet the criteria) until at least 75 per
Entity B currently prepares segment disclosures in accordance with
IFRS 8
The segment information includes three business segments and the
results of unallocated parts of the business that do not meet the
10% thresholds for assets, segment result or revenue.
B’s management is considering presenting a fourth segment to
reflect a component of the business that is currently included within
the unallocated results.
This fourth component, which generates all of its revenues from
third parties, falls below the 10% thresholds for mandatory
reporting; however, it is a part of the business that is growing
rapidly and is expected to reach the 10% thresholds in the next few
years.
Management therefore believes it would be helpful for readers of
the financial
statements if the results were presented as a separate segment.
Can B’s management present a fourth segment under IFRS 8?
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
10
IFRS 8 Operating Segments
Yes. B’s management may present a fourth segment if it believes
that this information will be useful to the users of the financial
statements. This is permitted by IFRS 8.
If the fourth segment is presented, then the comparatives should be
restated to provide the same presentation.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
11
IFRS 8 Operating Segments
Diagram for identifying reportable segments
Identify operating segments
based on management
reporting system.
YES
Aggregate
segments if
desired
Do some operating segments
meet all aggregation criteria?
NO
Do some operating segments
meet the quantitative
thresholds?
YES
NO
YES
Do some of the remaining
operating segments meet a
majority of the aggregation
criteria?
Aggregate
segments if
desired
NO
Do identified reportable
segments account for 75% of
the total revenue?
YES
NO
Report additional segment if
external revenue of all
segments is less than 75% of
total revenue,
These are
Aggregate remaining segments
reportable
into 'all other segments'
segments.
category.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
12
If management judges that an operating segment identified as a
reportable segment in the immediately preceding period is of
continuing significance, information about that segment shall
continue to be reported separately in the current period even if it no
longer meets the criteria.
Yes. The foreign exchange gains and losses arise directly from the
revaluation of the foreign currency receivables from each segment
and should be included in segment result which is the difference
between segment revenue and expense.
If an operating segment is identified as a reportable segment in the
current period, segment data for a prior period presented for
comparative purposes shall be restated to reflect the newly
reportable segment as a separate segment, even if that segment
did not satisfy the criteria for reportability in the prior period, unless
the necessary information is not available and the cost to develop it
would be excessive.
Segment expense is the directly attributable costs of each segment.
The foreign exchange gains and losses are directly attributable to
the segments from which they arise.
There may be a practical limit to the number of reportable segments
that an undertaking separately discloses beyond which segment
information may become too detailed. Although no precise limit has
been determined, if the number of segments that are reportable in
increases above ten, the undertaking should consider whether a
practical limit has been reached.
(1) factors used to identify the undertaking’s reportable segments,
including the basis of organisation (for example, whether
management has chosen to organise the undertaking around
differences in products and services, geographical areas, regulatory
environments, or a combination of factors and whether operating
segments have been aggregated), and
EXAMPLE - Exchange gains and losses segments
(2) types of products and services from which each reportable
segment derives its revenues.
Entity D has operations in four business segments. The foreign
exchange gains and losses arising from the revaluation of foreign
currency receivable balances are recorded within administrative
expenses and therefore within operating profit.
D presents segment information in accordance with IFRS 8,
including segment result.
Should segment result include the foreign exchange gains and
losses arising from the revaluation of foreign currency receivables
from that segment?
13 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Disclosure - General information
An undertaking shall disclose the following general information:
Disclosure - Specific information
An undertaking shall disclose information to enable users to
evaluate the nature and financial effects of the business activities in
which it engages and the economic environments in which it
operates.
An undertaking shall disclose the following for each period for which
an income statement is presented:
IFRS 8 Operating Segments
(1) general information as described above;
- the basis of measurement,; and
(2) information about reported segment profit or loss, including:
(3) reconciliations of the totals:
- specified revenues and expenses included in reported segment
profit or loss,
- of segment revenues,
- reported segment profit or loss,
EXAMPLE-intersegment pricing
Your policy is that sales between segments should be at list price
minus 15%.
This should be stated as a segment accounting policy.
- segment assets,
EXAMPLE-doubtful debt provision
Your accounts receivable are collected centrally. Your segment
assets will include its share of accounts receivable, and also the
portion of doubtful debt provision relating to those receivables.
- segment assets,
- segment liabilities and
- other material segment items
to total undertaking amounts.
Reconciliations of statement of financial position (balance sheet)
amounts for reportable segments to the undertaking’s balance
sheet amounts are required for each date at which a balance sheet
is presented. Information for prior periods shall be restated.
- segment liabilities and
EXAMPLE-interest-bearing liabilities
You show your segment result after accounting for interest
expense. The segment liabilities should show the liabilities (loans)
that have incurred the interest expense.
EXAMPLE- product warranty provisions
Your segment provides televisions and video equipment. The group
makes a central warranty provision to cover after-sale repairs. Your
segment liabilities should include your share of this product
warranty provision.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Disclosure - Information about profit or loss, assets and
liabilities
An undertaking shall report a measure of profit or loss and total
assets for each reportable segment.
An undertaking shall report a measure of liabilities for each
reportable segment if such an amount is regularly provided to the
chief operating decision maker.
An undertaking shall also disclose the following about each
reportable segment if the specified amounts are included in the
14
IFRS 8 Operating Segments
measure of segment profit or loss reviewed by the chief operating
decision maker, or are otherwise regularly provided to the chief
operating decision maker, even if not included in that measure of
segment profit or loss:
(1) revenues from external clients;
(2) revenues from transactions with other operating segments of the
same undertaking;
EXAMPLE-internal sales and balances
In preparing your segment reports, you eliminate transactions within
the segment, such as sales from one unit to another within the
segment, and also the balances between one unit and another
within the segment.
Transactions with other units of the group, that are outside the
segment, and balances with those units, should not be eliminated
for segment reporting. They will be eliminated in the consolidated
financial statements. These differences will be reconciled within the
segment reporting.
(3) interest revenue;
(4) interest expense;
(5) depreciation and amortisation;
(9) material non-cash items other than depreciation and
amortisation.
An undertaking shall report interest revenue separately from
interest expense for each reportable segment, unless a majority of
the segment’s revenues are from interest and the chief operating
decision maker relies primarily on net interest revenue to assess
the performance of the segment and make decisions about
resources to be allocated to the segment.
In that situation, an undertaking may report that segment’s interest
revenue net of its interest expense and disclose that it has done so.
An undertaking shall disclose the following about each reportable
segment if the specified amounts are included in the measure of
segment assets reviewed by the chief operating decision maker or
are otherwise regularly provided to the chief operating decision
maker, even if not included in the measure of segment assets:
(1) the amount of investment in associates and joint ventures
accounted for by the equity method, and
EXAMPLE-associated company
Your segment assets include your share of profit from an associate,
which acts as a sales agent. You should include the investment in
the associate with in the segment assets.
(6) material items of income and expense (see IAS 1);
(7) the undertaking’s interest in the profit or loss of associates and
joint ventures accounted for by the equity method;
(8) income tax expense or income; and
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(2) the amounts of additions to non-current assets (assets that
include amounts expected to be recovered more than twelve
months after the balance sheet date) other than financial
instruments, deferred tax assets, pension assets and rights arising
under insurance contracts.
15
IFRS 8 Operating Segments
recognised?
EXAMPLE-goodwill
Your segment has benefited from an acquisition of another
company. The segment has been allocated 60% of the goodwill,
related to that acquisition. Later, the goodwill is tested for
impairment, and your segment finds that its share of goodwill is
impaired. Your segment expenses its impairment charge.
EXAMPLE - IFRS 8 and goodwill impairment
C plc is applying IFRS 8 for the first time in its consolidated financial
statements.
C plc has goodwill acquired in business combinations that has been
allocated to each of its cash generating units (CGUs) for the
purposes of impairment testing under IAS 36, Impairment of Assets.
The identification of operating segments in accordance with IFRS 8
has resulted in a change from the segments that were historically
reported under IAS 14.
In accordance with IAS 36, the CGU to which the goodwill is
allocated for the purpose of impairment testing should not be larger
than an operating segment determined in accordance with IFRS 8.
As a result of the limit imposed by IAS 36 on the size of the CGUs
to which goodwill is allocated for the purposes of impairment
testing, C plc has had to reallocate goodwill between CGUs on the
adoption of IFRS 8.
C plc has identified that an impairment charge will arise solely as a
result of this reallocation. How should this impairment be
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
The requirement for C plc to look at operating rather than reporting
segments was a consequential amendment to IAS 36 when IFRS 8
was issued.
So, in accordance with IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, the first-time adoption of IFRS 8
should be accounted for retrospectively.
Hence, any goodwill impairment arising on the reallocation of
goodwill between CGUs should also be treated retrospectively.
Measurement
The amount of each segment item reported shall be the measure
reported to the chief operating decision maker for the purposes of
making decisions about allocating resources to the segment and
assessing its performance.
Adjustments and eliminations shall be included in segment profit or
loss only if they are included in the segment’s profit or loss that is
used by the chief operating decision maker.
Similarly, only those assets and liabilities that are included in the
segment’s assets and segment’s liabilities that are used by the
chief operating decision maker shall be reported for that segment. If
amounts are allocated to reported segment profit or loss, assets or
liabilities, those amounts shall be allocated on a reasonable basis.
EXAMPLE-pension allocation
Group pension calculations may be allocated to segments based on
salary, and demographic, data for the segments.
16
IFRS 8 Operating Segments
If the chief operating decision maker uses more than one measure
of an operating segment’s profit or loss, the segment’s assets or the
segment’s liabilities, the reported measures shall be those that
management believes are most consistent with those used in the
financial statements.
An undertaking shall provide an explanation of the measurements
of segment profit or loss, segment assets and segment liabilities for
each reportable segment. At a minimum, an undertaking shall
disclose the following:
(1) the basis of accounting for any transactions between reportable
segments.
(2) the nature of any differences between:
-the measurements of the reportable segments’ profits or losses,
assets and liabilities and
-the undertaking’s profit or loss before income tax expense or
income and discontinued operations, assets and liabilities (if not
apparent from the reconciliations).
usage of central facilities, such as central research. These
allocations should be included in segment expense.
(3) the nature of any changes from prior periods in the
measurement methods used to determine reported segment profit
or loss and the impact, if any, of those changes on the measure of
segment profit or loss.
(4) the nature and effect of any asymmetrical allocations to
reportable segments.
For example, an undertaking might allocate depreciation expense
to a segment without allocating the related assets to that segment.
EXAMPLE-shared assets
Your segment uses another’s machine, for which you are charged
40% of the depreciation charge. Either your segment assets should
include 40% of the value of asset, and 40% of its accumulated
depreciation to match the charge, or an explanation will be needed
as a “nature and effect of a asymmetrical allocation”.
Reconciliations
Such differences could include accounting policies and policies for
allocation of centrally incurred costs and jointly-used assets and
liabilities that are necessary for an understanding of the reported
segment information.
An undertaking shall provide reconciliations of all of the following:
EXAMPLE-head office expenses
(2) the total of the reportable segments’ measures of profit or loss
to the undertaking’s profit or loss before tax expense (tax income)
and discontinued operations.
You allocate a portion of head office expenses to your operating
divisions (which comprise your segments). All allocations reflect
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(1) the total of the reportable segments’ revenues to the
undertaking’s revenue.
17
IFRS 8 Operating Segments
However, if an undertaking allocates to reportable segments items
such as tax expense (tax income), the undertaking may reconcile
the total of the segments’ measures of profit or loss to the
undertaking’s profit or loss after those items.
(3) the total of the reportable segments’ assets to the undertaking’s
assets.
periods, shall be restated unless the information is not available
and the cost to develop it would be excessive.
EXAMPLES- changes in policies relate specifically to segment
reporting
(4) the total of the reportable segments’ liabilities to the
undertaking’s liabilities if segment liabilities are reported.
Changes in identification of segments, and changes in the basis for
allocating revenues, and expenses, to segments. Such changes
will not change aggregate financial information reported for the
undertaking.
(5) the total of the reportable segments’ amounts for all other
material items disclosed to the corresponding amount for the
undertaking.
The determination of whether the information is not available and
the cost to develop it would be excessive shall be made for each
individual item of disclosure.
EXAMPLES-other material items
Write-downs of inventories and property, plant, and equipment,
provisions for restructurings, disposals of property, plant, and
equipment and long-term investments, discontinued operations,
litigation settlements, and reversals of provisions.
Following a change in its reportable segments, an undertaking shall
disclose whether it has restated the corresponding items of
segment information for earlier periods.
All material reconciling items shall be separately identified and
described.
EXAMPLE-material reconciling item
For example, the amount of each material adjustment needed to
reconcile reportable segment profit or loss to the undertaking’s
profit or loss arising from different accounting policies shall be
separately identified and described.
Restatement of previously reported information
If an undertaking changes its reportable segments, the
corresponding information for earlier periods, including interim
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
If an undertaking has changed its reportable segments and if
segment information for earlier periods, including interim periods, is
not restated, in the year of the change the undertaking shall
disclose segment information for the current period on both the old
basis and the new basis of segmentation, unless the necessary
information is not available and the cost to develop it would be
excessive.
Information about products and services – total undertaking
An undertaking shall report the revenues from external clients for
each product and service, or each group of similar products and
services, unless the necessary information is not available and the
18
IFRS 8 Operating Segments
cost to develop it would be excessive, in which case that fact shall
be disclosed.
If assets in an individual foreign country are material, those assets
shall be disclosed separately.
The amounts of revenues reported shall be based on the financial
information used to produce the undertaking’s financial statements.
The amounts reported shall be based on the financial statements. If
the necessary information is not available and the cost to develop it
would be excessive, that fact shall be disclosed. An undertaking
may provide, in addition to the information required by this
paragraph, subtotals of geographical information about groups of
countries.
Information about geographical areas – total undertaking
An undertaking shall report the following geographical information,
unless the necessary information is not available and the cost to
develop it would be excessive:
(1) revenues from external clients
(i) attributed to the undertaking’s country of domicile and
(ii) attributed to all foreign countries in total from which the
undertaking derives revenues.
If revenues from external clients attributed to an individual foreign
country are material, those revenues shall be disclosed separately.
An undertaking shall disclose the basis for attributing revenues from
external clients to individual countries.
(2) non-current assets other than financial instruments, deferred tax
assets, post-employment benefit assets, and rights arising under
insurance contracts
(i)
located in the undertaking’s country of domicile and
(ii)
located in all foreign countries in total in which the
undertaking holds assets.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Information about major clients areas – total undertaking
An undertaking shall provide information about the extent of its
reliance on its major clients. If revenues from a single external client
amount to 10 per cent or more of an undertaking’s revenues, the
undertaking shall disclose that fact, the total amount of revenues
from each such client, and the segment or segments reporting the
revenues.
EXAMPLE - information about major clients
Revenues from one client of Big Company’s software and
electronics segments represent approximately $150 million of the
Company’s total revenues.
The undertaking need not disclose the identity of a major client or
the amount of revenues that each segment reports from that client.
A group of undertakings under common control shall be considered
a single client
.
19
IFRS 8 Operating Segments
However, judgement is required to assess whether a government
and undertakings under the control of that government are
considered a single customer. In assessing this, the reporting entity
shall consider the extent of economic integration between those
entities.
those described in the summary of significant accounting policies,
except that pension expense for each operating segment is
recorded and measured on the basis of cash payments to the
pension plan. Big Company evaluates performance on the basis of
profit or loss from operations before tax expense, not including nonrecurring gains and losses and foreign exchange gains and losses.
Segment information for prior years that is reported as comparative
information for the initial year of application shall be restated to
conform to the requirements of IFRS 8, unless the necessary
information is not available and the cost to develop it would be
excessive.
Big Company accounts for intersegment sales and transfers as if
the sales or transfers were to third parties, ie at current market
prices.
EXAMPLE - description of the types of products and services from
which each reportable segment derives its revenues
EXAMPLE - factors that management used to identify the
undertaking’s reportable segments
Big Company has five reportable segments: car parts, motor
vessels, software, electronics and finance. --The car parts segment
produces replacement parts for sale to car parts retailers.
-The motor vessels segment produces small motor vessels to serve
the offshore oil industry and similar businesses.
-The software segment produces application software for sale to
computer manufacturers and retailers. --The electronics segment
produces integrated circuits and related products for sale to
computer manufacturers.
-The finance segment is responsible for portions of the company’s
financial operations including financing client purchases of products
from other segments and property lending operations.
Big Company’s reportable segments are strategic business units
that offer different products and services. They are managed
separately because each business requires different technology
and marketing strategies. Most of the businesses were acquired as
individual units, and the management at the time of the acquisition
was retained.
Multiple choice questions
EXAMPLE -measurement of operating segment profit or loss,
assets and liabilities
1. Operating segment information should:
The accounting policies of the operating segments are the same as
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
20
IFRS 8 Operating Segments
(i) increase the number of reported segments and provide more
information;
(ii) enable users to see an undertaking through the eyes of
management;
(iii) enable an undertaking to provide timely segment information for
external interim reporting with relatively low incremental cost;
(iv) enhance consistency with the management discussion and
analysis or other annual report disclosures;
(iii) Practice has demonstrated that the term ‘industry’ is subjective.
Segments based on an existing internal structure should be less
subjective.
(iv) Earnings per share calculations can be compared between
segments.
1 (i)-(ii)
2. (i)-(iii)
3. (i)-(iv)
(v) provide various measures of segment performance:
(vi) reduce staff.
1.
2.
3.
4.
5.
(i)-(ii)
(i)-(iii)
(i)-(iv)
(i)-(v)
(i)-(vi)
2. Segments based on the structure of an undertaking’s internal
organisation have other significant advantages:
(i) An ability to see an undertaking “through the eyes of
management” enhances a user’s ability to predict actions or
reactions of management that can significantly affect the
undertaking’s prospects for future cash flows.
(ii) As information about those segments is generated for
management’s use, the incremental cost of providing information
for external reporting should be relatively low.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
3. An operating segment is a component of an undertaking:
(i) 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
undertaking),
21
IFRS 8 Operating Segments
(iii)
(ii) whose operating results are regularly reviewed by the
undertaking’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its
performance,
(iv)
(v)
differences between the measurements used in reporting
segment information and those used in the undertaking’s
financial statements,
changes in the measurement of segment amounts from
period to period,
the impact of staff development policies on the segment.
(iii) for which discrete financial information is available,
(iv) which is taxed separately from other components.
1 (i)-(ii)
2. (i)-(iii)
3. (i)-(iv)
4.
1 (i)-(ii)
2. (i)-(iii)
3. (i)-(iv)
4. (i)-(v)
6. A component of an undertaking that sells primarily or exclusively
to other operating segments of the undertaking:
IFRS 8 requires an undertaking to report information about:
(i)
(ii)
(iii)
(iv)
1
2.
3.
the revenues derived from its products or services (or
groups of similar products and services),
about the countries in which it earns revenues and holds
assets,
about major clients,
about transactions with governments.
(i)-(ii)
(i)-(iii)
(i)-(iv)
5. IFRS 8 requires an undertaking to give descriptive information
about:
(i)
(ii)
1. Must be classed as an operating segment.
2. Must be excluded from being an operating segment.
3. Is included as an operating segment if the undertaking is
managed that way.
the way the operating segments were determined,
the products and services provided by the segments,
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
7. IFRS 8 requires the following information:
(i) factors used to identify the undertaking’s operating segments,
including the basis of organisation (for example, whether
management organises the undertaking around differences in
22
IFRS 8 Operating Segments
products and services, geographical areas, regulatory
environments, or a combination of factors and whether segments
have been aggregated),
(ii) types of products and services from which each reportable
segment derives its revenues,
(iii) the economic environment of each segment,
(iv) the legal structure of each segment.
1
2.
3.
(i)-(ii)
(i)-(iii)
(i)-(iv)
8. Interest:
1. Net interest revenue must be shown.
2. Neither interest revenue nor interest expense is required to
be shown.
3. Both interest revenue and interest expense are required to
be shown.
4. Both interest revenue and interest expense are required to
be shown, unless a majority of the segment’s revenues are
from interest and the chief operating decision maker relies
primarily on net interest revenue to assess the performance
of the segment.
9. IFRS 8 shall apply to:
(i) listed companies,
(ii) any company reporting under IFRS that wishes to provide the
information,
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(iii) all other companies reporting under IFRS.
1
2.
(i)-(ii)
(i)-(iii)
10. If information is not presented to the directors in sectors:
1. Look to the next lower level of internal segmentation that
reports information along product and service lines or
geographical lines.
2. Construct segments solely for external reporting purposes.
3. Segment information is not required for published financial
statements.
11. If a financial report contains both the consolidated financial
statements of a parent, as well as the parent’s separate financial
statements, segment information is required:
1. only in the consolidated financial statements
2. only in the parent’s separate financial statements
3. both sets of financial statements
12. An operating segment may engage in business activities for
which it has yet to earn revenues, for example, start-up operations:
1. will be operating segments before earning revenues.
2. may be operating segments before earning revenues.
3. will not be operating segments before earning revenues.
13. Head office expenses:
1.
2.
3.
Can be allocated to segments on a reasonable basis.
Must not be allocated to segments.
Must be allocated to segments based on their turnover.
23
IFRS 8 Operating Segments
14. An undertaking’s pension plans :
1. will be operating segments.
2. may be operating segments.
3. will not be operating segments.
15. Two or more operating segments may be aggregated into a
single operating segment if aggregation is consistent with the core
principle of IFRS 8, the segments have similar economic
characteristics, and the segments are similar in each of the
following respects:
(i) the nature of the products and services;
(ii) the nature of the production processes
(iii) the type or class of client for their products and services;
(iv) the methods used to distribute their products or provide their
services;
(v) if applicable, the nature of the regulatory environment, for
example, banking, insurance or public utilities;
16. As a percentage of sales, profits or assets, a segment should
be at least:
1. 5%
2. 7,5%
3. 10%
4. 15%
5. 20%
17. The total amount of revenue that should be covered by
reportable segments is, at least:
1. 50%
2. 60%
3. 70%
4. 75%
5. 80%
6. 100%
18. Operating segments that do not meet any of the quantitative
thresholds:
1. may be considered reportable, and separately disclosed.
2. must be combined and disclosed in an ‘all other
segments’.
3. must be ignored.
(vi) staff numbers.
1
2.
3.
4.
5.
(i)-(ii)
(i)-(iii)
(i)-(iv)
(i)-(v)
(i)-(vi)
19. If an operating segment is identified as a reportable segment in
the current period, segment data for a prior period:
1. is not required.
2. is optional.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
24
IFRS 8 Operating Segments
3. is required unless the necessary information is not available
and the cost to develop it would be excessive.
20. IFRS 8 requires reconciliations of segement totals to total
undertaking amounts:
(ii) revenues from transactions with other operating segments of the
same undertaking;
(iii) interest revenue;
(iv) interest expense;
(i) of segment revenues,
(v) depreciation and amortisation;
(ii) reported segment profit or loss,
(vi) material items of income and expense;
(iii) segment assets,
(iv) segment liabilities
(vii) the undertaking’s interest in the profit or loss of associates and
joint ventures accounted for by the equity method;
(v) other material segment items
(viii) income tax expense or income; and
(vi) staff numbers.
(ix) material non-cash items other than depreciation and
amortisation.
1
2.
3.
4.
5.
(i)-(ii)
(i)-(iii)
(i)-(iv)
(i)-(v)
(i)-(vi)
1
2.
3.
4.
5.
6.
7.
8.
(i)-(ii)
(i)-(iii)
(i)-(iv)
(i)-(v)
(i)-(vi)
(i)-(vii)
(i)-(viii)
(i)-(ix)
21. Information about the segments should include:
(i) revenues from external clients;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
22. An undertaking shall report the following geographical
information:
25
IFRS 8 Operating Segments
(i) revenues from external clients attributed to the undertaking’s
country of domicile and
attributed to all foreign countries in total from which the undertaking
derives revenues.
(ii) non-current assets other than financial instruments, deferred tax
assets, post-employment benefit assets, and rights arising under
insurance contracts located in the undertaking’s country of domicile
and
located in all foreign countries in total in which the undertaking
holds assets.
(iii) non-current liabilities other than financial instruments, deferred
tax liabilities, post-employment benefit liabilities, and rights arising
under insurance contracts located in the undertaking’s country of
domicile and
located in all foreign countries in total in which the undertaking has
liabilities.
1
2.
(i)-(ii)
(i)-(iii)
Question
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
Answer
4
2
2
2
3
3
1
4
1
1
1
2
1
3
4
3
4
1
3
4
8
1
Note: Material from the following PricewaterhouseCoopers
publications has been used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
Answers to multiple choice questions
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
26