CHAPTER FIVE: OPERATING SEGMENTS

BY: HASSEN MUSTEFA

OPERATING SEGMENTS
Conceptual base of Segment Reporting
 Segment reporting is the act of disaggregating financial information of
an enterprise.
Why disaggregation?
 Different segments of an enterprise have different rates of profitability,
degrees and types of risk, and opportunities for growth,
 But consolidated financial statements do not provide information about
the contribution of each segment; they provide information about
overall measures of profitability, liquidity and efficiency .
 Without the ability to understand which of an entity's major

operations were making the most positive contributions to its results,

users would face problem to make intelligent investment decisions.
 Segment reporting is needed to provide information about the different
business activities in which an enterprise engages

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OPERATING SEGMENTS
Operating segment
 A component of an entity:

(a) 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 entity),
(b) Whose operating results are regularly reviewed by the
entity’s chief operating decision maker (CODM) to make
decisions about resources to be allocated to the
segment and assess its performance, and
(c) For which discrete/separate financial information is
available
 An operating segment may engage in business activities for
which it has yet to earn revenues
 E.g., start-up operations may be operating segments before
earning revenues 3
 Steps in identifying operating segment

Qualitative identification
 Step 1. Identify the CODM
 Step 2. The component generate revenue
and incur expenses from formation its
business activities.
 Step 3. The component’s operating results
regularly reviewed by the CODM.
 Step 4. Discrete financial information
available for the component.
EXAMPLE
 Company A has CEO, COO and an executive
committee comprising the CEO, COO and the heads
of three business units-units X,Y and Z. Every
month, financial information is presented to the
executive committee. Units X,Y and Z each
generate revenues and incur expenses. Unit Y
derives its major revenues from unit Z. Corporate
head quarter costs that are not allocated to units
X,Y and Z are also reported separately each month
to the executive committee.
IFRS8-OPERATING SEGMENTS
….Operating Segment
Key points
 Identifiable/Distinguishable
 Engage in production of goods/services
 The operating results must be reviewed by senior management
for resource allocation and performance evaluation (segment
managers report this)
 Discrete/separate financial information is available
All parts of a company may not be included in an operating
segment.
 Units that incur expenses but do not earn revenues are not
operating segment. Eg. Research and development , Head
offices with incidental revenues, marketing finance,
admin
 The costs of departments not identified as operating
segments are allocated to operating segment
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IFRS8-OPERATING SEGMENTS
Identifying Reportable Segment
 Reportable Segments are segments whose operating results are
prepared and disclosed separately
 The financial information of segments engaged in similar activities can
be combined /aggregated; eg those with similar
 Products and services,
 Production process,
 Class of customer,
 Method for distributing their products and services,
 Regulatory environment

Criteria to Identify Reportable Segment

 The following quantitative thresholds are considered

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IFRS8-OPERATING SEGMENTS
…Identifying Reportable Segment
Quantitative thresholds
 The entity reports only those operating segments that exceed a size
test. The following are quantitative thresholds:
1. Reported revenue is equal to or greater than 10% of the combined
revenues of all operating segments - Includes intersegment sales
2. Absolute amount of profit or loss is equal to or greater than 10% of
combined profits (for those operating segments reporting profits) and
combined losses (for those operating segments reporting losses)
3. Assets are equal to or greater than 10% of the combined assets of all
operating segments
 If an operating segment meets any one of the above criteria, it is
reportableExample1 IFRS 8.doc
 Example 2 segment reporting the 75% test.doc

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IFRS8-OPERATING SEGMENTS
...Quantitative thresholds
• Next steps once management have identified the reporting
segments
– Assess whether additional segments shall be reported
The test:
- Reported segments must include 75% of all external revenue. External
revenue excludes intersegment revenue.
– If the total external revenues for the reportable segments are
less than 75% of the entity’s revenues, the entity identifies
additional reportable segments (smaller segments can be
aggregated if they meet some of the aggregation criteria)
• Once the 75% threshold has been met
– Entity has identified sufficient reportable segments
– Rest of the non-reportable segments are added together under
“other operating segments” and disclosed
• The entity presents comparatives, which include all reportable
segments 9
 EXAMPLE
x Y Z Total Head Others total(C
segmen quarter onsolid
t ated)

Revenu 100(80
es 200 earned 400 700 --- 230 850
from Z)

Profit 30(10
/loss 50 earned 100 180 (25) 20 165
from Z)

Asset 800 300 950 2050 250 200 2500

 CONT…
Revenue % of Profit % of Assets % of
total total total

X 29 28 39
Y 14 17 15
Z 57 55 46
 CONT….
 The reportable segment accounts for 75% of
consolidated revenue.
 620/850=0.73=73%
 Therefore, which is below 75% requirement.
IFRS8-OPERATING SEGMENTS
Disclosure
How to present information
 The entity should present the following categories of
information:
• General information
• Information about the reported segment’s profit or loss,
assets and liabilities, and bases of measurement
• Reconciliations of segment revenues to reported revenues
General information
 The following general disclosures are required:

 Factors used to identify the reportable segments

 How did management choose to organize the entity in order
to make key resource allocation decisions and to assess
performance? (its base of categorization: geographically?, by
type of products/services?)
• Types of products/services 13
IFRS8-OPERATING SEGMENTS
.....Disclosure
Information about Segment’s profit or loss, and
assets/liabilities General
principle:
 The entity must present the amount of profit/loss and totalIf
Segment
assets for each reportable segment manager thinks
 Information is disclosed include: that information
is important for
• Segment liabilities decision-
• Segment revenues (external and intersegment) making, it
• Segment depreciation and amortization should be
presented to the
• Segment material items of income and expense external users
• Segment income tax expense
•Segment material non-cash items other than depreciation and
amortization
• Segment investment in associates/joint ventures accounted for
by the equity method
• additions to non-current assets of the segment 14
IFRS8-OPERATING SEGMENTS
Measurements
 Items should be measured the way they are measured
for presentation to CODM (the manager)
 To understand how these numbers are put together, the
following is relevant and should therefore be disclosed:
• Basis of accounting for intersegment transactions
• Nature of any differences between the segment profit
or loss and the entity profit or loss
• Nature of any differences between the segment
assets/liabilities and the entity assets/liabilities
• Nature of any changes from prior periods
• Nature and effect of asymmetrical allocations to
reportable segments

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IFRS8-OPERATING SEGMENTS
Reconciliations
 Most users focus on the consolidated numbers
 Required reconciliations between reportable segments and
financial statement numbers:
• Revenues
• Profit and loss
• Assets
• Liabilities (if liabilities are presented for the segments)
• Any other material segments amounts presented

 The entity should identify and describe material

reconciling items

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IFRS8-OPERATING SEGMENTS
Items not disclosed:
 Immaterial items: immaterial amounts of interest revenue
and expense,
 An item for which internal financial report is not
generated on a segment basis, (This is consistent with the
rationale that segment reporting should create as little
additional cost to an enterprise as possible).

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IFRS8-OPERATING SEGMENTS
Entity wide disclosures
 This refers to information about Products and Services

The following enterprises are mainly required to disclose

revenues from external customers on the basis of product or
service.
1. Enterprises that are not organized based on products and services; ie
those organized based on geographical location;
2. Enterprises that have only one operating segment but provide a range of
different products and services . However, providing this information is
not required if impracticable; that is, if he information is not available
and the cost to develop it would be excessive.
 The following are required to be disclosed by all entities including those
that have only a single segment:
 Information about products and services
 Information about geographical areas
 Information about major customers

Information about products and services

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IFRS8-OPERATING SEGMENTS
Entity wide disclosures
Information about geographical areas
 External revenues attributed to the entity’s
 Domestic operations (entity’s country of domicile)
 Foreign operations in other countries
 If revenues from external customers attributed to a specific country
are material, this should be disclosed also
 Non-current assets (other than financial instruments, deferred tax
assets, post- employment benefit assets, and rights under insurance
contracts)
 Domestic (located in country of domicile)
 Foreign (located in foreign countries)
 If non-current assets in certain countries are material, this should
also be disclosed
Information about major customers
 If revenues to a customer amount to 10% or more, this fact should be
disclosed along with the amount 19
End of CHAPTER FIVE

Thank you

Questions or Comments

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