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MODULE 7 PACKET
AE 17- INTERMEDIATE ACCOUNTING 3
OPERATING SEGMENT

Welcome to Module 7
In this module, we will discuss the concept and core principles of segment reporting specifically the
requirement for preparation and presentation of operating segment. You are expected to understand
fully well these principles as these will be your guidance in preparing the operating segment which at the
end of the lecture will be required from you. You are therefore expected to read in advance the topics
pertaining to segment reporting so that you will be able to familiarize yourself with the requisites and
disclosures required in segment reporting. It is important that during the discussion, you mustactively
participate by giving the examples and illustrate how these shall be presented in the required disclosures.

Our understanding of the financial statements will be challenged by the required disclosures for events
and transactions relating to the business entity that requires presentation on segment reporting. This
challenge will be translated into application where you will be required to prepare a segment reporting
that must be presented in the disclosures to the financial statements.
When you see this symbol that is shown across the printed discussion, thisrepresents an important
point for discussion or appreciation/appraisal to be rendered by the student through either the
understanding of the specific topic, illustration, giving an example or providing a solution for a certain
case or scenario. At the end of this module, you will be answering multiple choice questions and straight
problems focusing on the application of principles in segment reporting as a required disclosure to the
financial statements.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Friday from 8am to 11am and 1pm to 4pm

LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Know and understand the concept and core principle of segment reporting.
2. Identify the criteria for the recognition of a reportable segment
3. Prepare the required disclosures for the segment report and its reconciliation to the reported amounts
in the financial statements.

ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion
2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of home-learning tasks through research online
4. Summative examinations in multiple choice question format

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LEARNING PLAN/SCHEDULE OF ACTIVITIES

STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
ACTIVITIES
COURSE CONTENT COMPLETE
A. Assigned Reading 1. Read the core principles as stated in PFRS 8 2.0 hours
 Read which prescribes the disclosure requirements
1. PFRS 8 for the reporting segment in the financial
2. The concepts of statements.
segment reporting 2. Understand and be able to discuss the
3. Financial statements management approach of identifying operating
of various entities segment
and identify the 3. Familiarize with the identification of reportable
operating segments segments of an entity.
that are reported. 4. Illustrate the operating segments to be
disclosed in the financial statements.
B. Lecture discussion 1. Identify the Core principle of PFRS 8 1.5 hour
1. Read Chapter 8 of IA3 2. Define operating segment 1.5 hour
2. Watch Video 3. Describe management approach of identifying 1.5 hour
operating segment
3. Interactive participation
4. Apply the criteria to identify the reportable
thru Q&A operating segment of an enterprise 2.0 hours
4. Graded recitation 5. Explain the information to be disclosed for each 1.5 hours
segment
6. Distinguish between business segment and 1.0 hour
geographical segment
C. Synthesize the main points 1. Teacher summarizes the main points 1.5 hours
 Graded recitation discussed.
2. Students will be required to recite by sharing 1.5 hour
their understanding/learnings specifically
pointing out the important aspects that have
just been discussed regarding the disclosure
requirements for segment reporting.
3. This will validate the achievement of learning
outcomes.
D. Assignment 1. Prepare operating segment accomplishing the 1.5 hours
disclosure requirements as specified in PFRS
8.
2. Answer all questions and solve all problems
from the textbook.
E. Summative Quiz 1. Take multiple question quiz for (to be 1 hour
announced)

REFERENCES

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1. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Conceptual framework and accounting

standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019
2. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume one.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1
3. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume two.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2
4. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume three.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting
fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City: Bandolin
Enterprise 2016

COURSE CONTENT DISCUSSION

7.1 OPERATING SEGMENT

 What is the core principle of segment reporting?
 An entity shall disclose information to enable users of 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.
 What is segment reporting?
 Segment reporting is the disclosure of certain financial information about the products and
services an entity produces and the geographical areas in which an entity operates.
“
 What is the purpose of the disclosure contained in segment reporting?
 The purpose of such disclosure is to enable investors and users to make a better
assessment of each business activity leading to the understanding of the performance
of the entity as a whole.

 What is the scope of PFRS 8 that requires for segment reporting?

 PFRS 8 shall apply to the separate or individual financial statements of an entity and to the
consolidated financial statements of a group with a parent:
a. Whose debt or equity instruments are traded in a public market
b. That files or is in the process of filing the consolidated financial statements with a
securities commission or other regulatory organization for the purpose of issuing
any class of instruments in a public market.

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 What is the requirement for segment reporting of a parent company?

 If a financial report contains both the consolidated financial statements of a parent and the
parent’s separate financial statements, segment information is required only in the
consolidated financial statements.

 What is an operating segment?

 An operating segment is a component of an entity:
a. That engages in business activities to derive revenue as well as incur expenses, including
revenue and expenses relating to transactions with other groups of the same entity.
b. Whose operating results are regularly reviewed by the entity's chief operating decision
maker regarding the allocation of the resources to the segments and assess its
performance.
c. For which discrete financial information is available.
 An operating segment can generally be thought of as a distinguishable component of an entity
that is engaged in business activities which generate revenue and incur expenses.
 What are required in order to be classified as operating segment?
a. A separate financial information must be available about the segment
b. Its operating results shall be regularly reviewed by a chief operating decision
maker.
c. It may engage in business activities for which it has yet to earn revenue.
 For example, start-up operations may be considered operating segments before
earning revenue.
 What is not considered an operating segment or part of an operating segment?
 Corporate headquarters or some functional departments that may earn revenue or may
earn revenue that is incidental only to the activities of the entity would not be considered
as operating segments.

 What is chief operating decision maker?

 The term “chief operating decision maker” identifies a function and not necessarily a manager
with a specific title whose function is “to allocate resources to the segments and assess their
performance.”

 Who is the chief operating decision maker in the organization of an entity?

 The chief operating decision maker may be the entity's chief executive officer, chief
operating officer or a group of executive directors depending on who within the
organization is responsible for the allocation of resources and assessing the
performance of operating segments.

 How are operating segments identified?

a. The “management approach” is used in identifying operating segments.
 What does the management approach mean?
 The management approach means that the operating segments are identified on the
basis of internal reports about components of an entity that are regularly reviewed
by the chief operating decision maker in order to allocate resources to the
segment and to assess its performance.
b. Operating segments are identified based on the components of the entity that are considered
to be important for internal management reporting purposes.

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 A component of entity that sells primarily or exclusively to other operating segments is

included in the definition of an operating segment if the entity is managed that way.
c. The idea is that reporting of segment information is seen through the “eyes of management”
and users would wish to see the business as the chief operating decision maker sees it.

 When shall an operating segment be considered as reportable segments?

 An entity shall report information about an operating segment that meets ANYof the following
quantitative thresholds:
a. The segment revenue, including both sales to external customers and intersegment sales
or transfers, is 10% or more of the combined revenue, internal and external, of all
operating segments.
b. The absolute amount(no figurative sign is applied) of profit or loss of the segment is
10% or more of the greater in absolute amount of:
1. Combined profit of all operating segments that reported a profit.
2. Combined loss of all operating segments that reported a loss.
c. The assets of the segments are 10% or more of the combined assets of all operating
segments.

 What happens to operating segments that do not meet any of the quantitative thresholds as
mentioned above?
 The operating segment may be considered reportable and separately disclosed on a
voluntary basis if management believes that information about the segments would be
useful to the users of the financial statements.

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Illustration
Revenue, profit or loss, and assets for each operating segments are as follows:

Segment Revenue Profit (Loss) Assets

 Segment A 16,000,000 1,700,000 25,000,000
 Segment B 13,000,000 500,000 11,000,000
 Segment C 6,000,000 (1,000,000) 3,000,000
 Segment D 3,000,000 200,000 2,000,000
 Segment E 2,000,000 (100,000) 4,000,000
40,000,000 1,300,000 45,000,000

 Based on revenues
 A, B and C are reportable segments because revenue associated with each of these
segments is at least P4,000,000 which is 10% of the total revenue of P40,000,000.
 D and E are not reportable segments because revenue of such segments is less than 10%
of the total revenue.

 Based on segment assets

 A and B are reportable segments because assets of such segments are at least
P4,500,000 which is P10% of the total segments assets of P45,000,000.
 C, D and E are not reportable segments because their assets are less than 10% of the
total segment assets.

 Based on profit and loss

 Applying the criteria of 10% of profit or loss is somewhat complicated because some
segments have profit and others have losses.
 The profit must be combined and the losses must be combined to determine which is
greater between the two.

Profit Loss

A 1,700,000
B 500,000
C 1,000,000
D 200,000
E 100,000
2,400,000 1,100,000

 Because the total profit (P2,400,000) figure is greater than the total loss (P1,100,000)
figure (absolute), P2,400,000 is the basis for identifying reportable segment.
 Any segment with profit or loss of P240,000 (10% of P2,400,000) or greater qualifies as
reportable segment.  
 Therefore, A, B and C are identified as  reportable segments under the profit or loss
criterion.

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 In conclusion, A, B and C are identified as reportable segments.

 D & E are not reportable segments because they do not meet any one of the 10% quantitative
thresholds for identification as reportable segments.
 Thus, D & E  may be combined for reporting purposes.
 But A, B and C, being reportable segments, shall be disclosed separately.

 What is the overall size test for external revenues to be classified as reportable segment?
 If the total external revenue of reportable operating segments constitutes less than 75% of
the entity external revenue, additional operating segments shall be identified as reportable
segments even if they do not meet the 10% quantitative thresholds until at least 75% of the
entity external revenue is included in reportable segments.

 When are we allowed to do an aggregation of segments?

 Two or more operating segments may be aggregated into a “single operating segment” if
the segments have similar economic characteristics and the segments share a majority of
the following five aggregation criteria:
a. Nature of product or service
b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product 
e. The nature of the regulatory environment, for example, banking, insurance for public utility

Illustration
An entity has no intersegment sales and has the following operating segments with their
corresponding revenue:

Segment Revenue Percentage

1 2,400,000 30%
2 1,600,000 20%
3 1,200,000 15%
4 720,000 9%
5 640,000 8%
6 560,000 7%
7 480,000 6%
400,000 5%
8,000,000 100%

Based on the revenue criterion, the reportable segments are segments 1, 2 and 3. The remaining
segments are not reportable.

Assume that the remaining segments did not also meet the other criteria of “profit or loss” and
“total assets.”

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The total external revenue of the reportable segments is as follows:

Revenue     Percentage
Segment 1 2,400,000 30%
Segment 2 1,600,000 20%
Segment 3 1,200,000 15%
5,200,000 65%

Observe that the total percentage of the reportable segments is only 65%.

In this case, additional operating segments shall be identified even if they do not meet any of the
10% quantitative thresholds.

Assume that segments 7 and 8 have similar products, similar production process, similar
marketing method and are not operating under regulated environment.

Accordingly, segments 7 and 8 can be aggregated as one reportable segment to achieve the 75%
threshold.

Segment 1 30%
Segment 2 20%
Segment 3 15%
Segments 7 and 8 (6% + 5%) 11%
76%

Thus, the remaining segments 4, 5 and 6 shall be considered not reportable and lump into the
other segments category.

 Is there a limit on the number of segments to be reported?

 There may be practical limit to the number of reportable segments to be disclosed separately
by an entity beyond which segments information may become too detailed.
 Although no precise limit has been determined, as the number increases above ten, the
entity shall consider whether a practical limit has been reached.
 In other words, if the number of reportable segments exceeds ten, it is likely that the
information may become too detailed and consequently lose its usefulness.

 What happens to the segment if it does not meet the criteria for segment reporting anymore?
 If the management judges that an operating segment identified as a reportable segment in the
immediately preceding period is of continuing significance, information about the segments
shall continue to be reported separately in the current period even if it no longer meets any of
the 10% quantitative thresholds for reportability.

 How will a segment that did not previously meet the criteria for segment reporting be reported if it
is now a reportable segment based on the criteria?
 If an operating segment is identified as a reportable segment in the current period in
accordance with the 10% quantitative thresholds, segment data for a prior period presented

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for comparative purposes shall be restated to reflect the newly reportable segment even if that
segment did not satisfy any of the quantitative thresholds in the prior period.
 However, prior period segment information shall not be restated if the necessary
information is not available and the cost to develop it would be excessive.

 What information is required to be disclosed for each segment?

 An entity shall disclose the following for each reportable operating segment:
a. General information about the operating segment
 What is the requirement for the general information as a disclosure for the operating
segment?
o An entity shall disclose the following general information about an operating
segment:
1. Factors used to identify the reportable segments
 For example, whether management has chosen to organize the entity
around differences in products and services, geographical areas, regulatory
environment, or a combination of factors and whether operating segments
have been aggregated.
2. Type of products and services from which each reportable segment derives
revenue
 Example of disclosure about type of products and services
 An entity has three (3) reportable operating segments, namely car parts,
motor vessels and software.
 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.
b. Information about profit or loss including specified revenue and expenses included in the
measure of profit or loss as well as the assets and segment liabilities and the basis of
measurement.
 What should be included in the disclosure of profits and loss for operating segments?
o An entity shall disclose for each reportable segment a measure of profit or loss
under all circumstances.
 What about the segment assets and segment liabilities?
o An entity shall disclose a measure total assets and total liabilities for each
reportable segment if such an amount is regularly provided to the chief
operating decision maker.

Illustration - Disclosure of segment profit or loss, total assets and total liabilities
An entity provided the following financial information relating to one of the reportable
operating segments (amounts are assumed):

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Sales - External 60,000

Sales - Internal 10,000
Total sales 70,000
Cost of goods sold (30,000)
Gross profit 40,000
Interest revenue 3,000
Distribution costs (8,000)
Administrative expenses (4,000)
Doubtful accounts (1,000)
Employee benefit expense (500)
Depreciation and amortisation (2,500)
Interest expense (2,000)
Impairment loss (5,000)
Profit or loss 20,000

Total assets 60,000

Addition to non-current assets 8,000
Carrying amount of noncurrent assets sold 5,000
Total liabilities 20,000

The minimum disclosure relating to the reportable operating segments shall include the
following:

Sales - External 60,000

Sales - Internal 10,000
Interest revenue 3,000
Interest expense (2,000)
Depreciation and amortization (2,500)
Impairment loss (5,000)
Profit or loss 20,000 ۞
Total assets 60,000
Addition to non-current assets 8,000
Total liabilities 20,000

۞Note that the amount of profit or loss is disclosed under all circumstances.

c. What other disclosures are required for the operating segment financial information?
 The other items disclosed are specified in PFRS 8 and are disclosed only because
these are included in the measure of profit or loss, measure of total assets and
measure of total liabilities reviewed by the chief operating decision maker.
 The impairment loss is disclosed because the amount is deemed material.

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 How should the financial information such as the profit and loss, segment assets and segment
liabilities be verified in relation to the entity-wide financial statements?
 The entity shall provide a reconciliation of the amounts of segment revenue, segment profit or
loss, segment assets, segment liabilities and other material segment items to corresponding
items in the entity's financial statements related to ALL of the following:

1. The total revenue of all reportable segments to the entity revenue.

2. The total profit or loss of all reportable segments to the entity profit or loss before income
tax expense and discontinued operations.
3. The total assets of all reportable segments to the entity total assets.
4. The total liabilities of all reportable segments to the entity total liabilities.
5. The total for every other material item of information disclosed by the reportable segments
to the corresponding amount for the entity.

Illustration
The implementing Guidance 3 of PFRS 8 provided the following suggested format for disclosing
information about reportable segment profit or loss, total assets and total liabilities.

In this illustration, the chief operating decision maker decided not to allocate income tax expense
to reportable as a measure of profit or loss.

The entity has three reportable segments namely software, electronics and car parts.

The “other segments” which are not reportable include a small property business, equipment
rental business and warehouse leasing.

All amounts are assumed.

FINANCIAL INFORMATION Software Electronics Car Parts Others Total

Revenue -  external 12,500 17,000 5,000 1,000 35,500
Revenue -  internal 3,000 1,500 4,500
Interest revenue 1,500 2,300 3,800
Interest expense 1,000 1,700 2,700
Depreciation 300 1,600 1,100 3,000
Profit or loss 1,100 2,400 500 100 4,100
Impairment loss 200 200
Total assets 25,000 47,000 7,000 2,000 81,000
Expenditure for non current assets 800 1,500 600 2,900
Total liabilities 16,000 24,000 4,000 200 44,200

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The following reconciliations are necessary:

 
REVENUE
Revenue of reportable segments 39,000
Revenue of nonreportable segments 1,000
Elimination of intersegment revenue (4,500)
Entity revenue shown in income statement 35,500

PROFIT OR LOSS
Profit or loss of reportable segments 4,000
Profit or loss of nonreportablesegments 100
Elimination of intersegment profit (500)
Unallocated amount
Litigation settlement received 500
Corporate expenses (750)
Entity profit or loss shown in income statement 3,350

INTERSEGMENT PROFIT IS THE “GROSS PROFIT”

ON INTERSEGMENT SALES
Total assets
Total assets of reportable segments 79,000
Total assets of nonreportable segments 2,000
Unallocated corporate assets 1,500
Entity total assets shown in statement of financial position 82,500

OTHER MATERIAL INCOME

\

Segment Total Adjustment Entity Total

Interest revenue 3,800 150 3,950
Interest expense 2,700 100 2,800
Depreciation 3,000 3,000
Impairment loss 200 200
Expenditure for non current assets * 2,900 1,000 3,900

*The reconciling item to adjust expenditure for noncurrent assets is the amount incurred for the
corporate headquarters building.

 How will the change in internal organization affecting the operating segment be disclosed?
 If an entity changes the structure of the internal organization in a manner that causes the
composition of the reportable segments to change, the corresponding information for earlier
periods including interim periods shall be restated.

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 However, no restatement is made if the corresponding information for earlier periods is not
available and the cost to develop it would be excessive.

 What is an entity-wide disclosure in relation to segment reporting?

 Entity-wide disclosures are additional information that is required to be disclosed by all
entities if such information is not provided as part of the reportable segment information.

 What is required for entity-wide disclosure related to segment reporting?

 An entity shall disclose information about the following:
a. Information about products and services
 An entity shall disclose the revenue from external customers for each product and
service.
b. Information about geographical areas
 An entity shall disclose the following geographical information:
1. Revenue from external customers in the entity's country of domicile, in all foreign
operations in total.
2. Separate disclosure of material revenue from external customers in an individual
foreign country.
c. Information about major customers
 A major customer is defined as a single external customer providing revenue
which amounts to 10% or more of an entity's external revenue.
 The entity shall disclose the fact of reliance on major customers, the total amount of
revenue from major customers and the identity of the segment or segments reporting
the revenue.
 The entity is not required to disclose the identity of the major customer or the
amount of revenue that each segment reports from that customer.

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