CHAPTER 46; OPERATING SEGMENTS INTING STANDARD Operatin, Core Principle o Segment Report Nature of Opel portin, ting § Identifying Operating Determining Report Dek able Segments Entity-wide Disclosures uch (disclosure allows investors | economic activities of the company, overall performance. Scope of IFRS 8 > IFRS 8 applies to an entity's separate or individual financial statements, as well as the group's consolidated financial statements: ¥ Whose debt or equity securities are traded in a Public market. and users to better assess and analyze the | resulting in a better knowledge of the company’s | a) Y That has filed or is in the process of filing consolidated financial statements with SEC to issue any type of instruments in a public market. Note: If a financial report contains both the parent's consolidated financial statements | | 8nd the parent's separate financial statements, segment information is required only in | | the consolidated financial statements. axe —— Nature of Operating Segment tity: > An operating segmient is a component of an entity: _ a “Phat ang sae in business activities:from which it may generate revenue and incur Boers including revenue and expenses relating to transactions with other components of the same entity. basis by the entity's chief fe reviewed on a regular : aoe Cee riaer ‘to make resource allocation decisions and assess operatin: | the segment’s performance. © And for which discrete financial information is available.Comprchensive Accounting Review Series Volume 1: Financial Accounting and Reporting aoe ‘An operating segment can be regarded as a distinct component of an entity that is engage Ti Fevénue-generating and expense-incurring business activities, > > ri > The term "chief operating decision maker®-refers to a function rather than 4 specific title for a manager. © _ This function is responsible for allocating resources to the segments and evaluating their performance. | © Depending on who inside the firm is responsible for allocating resources and evaluating the performance of operational segments, the ‘chief operating decision-maker may be the entity's chief executive officer or a —group Of executive directors. _ rs * | eratil s >» The management approach shall be used in identifying operating segments, > Operating segments-are identified based on the entity's components that are regarded-relevant for internal reporting. > A component of an entity that sells primarily or exclusively to other ‘operating segments is included in the definition of an operating segment if the entity is Operated in this manner, =~ 3 Note: The main idea is that the reporting of segment information is seen through the | of management and users would like to sée the business through the eyes of the chief operating decision-mal : eportabli ts > An entity shall report information about an operating segment that meets any of the following quantitative thresholds.? © The segment~reventie, including both sales to external customers and ersegment sales or transfers, ig 10% or more of the combined revenue, internal and external, of all operating-segments. © The absolute amount of profit or loss of the segment is 10% or more of the greater, in absolute amount of: vw Combined profit of all operating segments that reported a profit. ¥ — Combined lass of all operating segments that reported a loss. » The assets of the segment are 10% or more of the combined assets of all operating segments. P Note: If the management believes that information about the segment would be relevant to financial statement users, operating segments that dé not Meet any of the quantitative thresholds may be considered reportable and separately disclosed on a voluntary basis.Chapter 46: Operating Segments we, profit oF loss, and ag nen pal Sets for each Operating segment of Funny Boy Company Revenue Profit (Joss) Assets segment GL y, 7177000.000 /“pregrel, ~p26,000 Seament 62 ¥/ 14,000,099 Y so0j000 +/775990000 Segment G3 ¥ 7/909, 999 0 % 12,000,000 segment G4 4,000;009 300,000 ooo oo0 nt GS 3,000,0 0 000. Seame 00.000 —~ (200,000) / 5‘000'000 4,000,009 ee P1,500,000 50,000,000 @ Q-4: Determine the reportable g, @Q-2: Detérmine the reportable Segments bi @Q-3: Determine the reportab| ae @Q-4: Determine the overall @ A-1: Segments 61, 62, and G3 Minimum threshold = 45,000,000 x 10% = 4,500,000 of P45,000,000. Because the revenues of seg are not reportable segments, ments G4 and G5 are less than 10% of total revenue, they @A-2: Segments G1, G2, and G5 Minimum threshold = P50,000,000 x 10% = 5,000,000 Seaments G1, G2 and G5 are reportable segments based on segment assets since their pants amount to at least P5,000,000, or 10% of the Overall segment assets of 50,000,000, Segments G3 and G4 are Not reportable segments because their assets are less than 10% of the total segment assets, & A-3: Segments G1, G2, G3, and G4 hh determining the reportable segments based on the profit or loss, the first step is to Combine all the segments that reported profit and those that reported loss to determine Which is greater in total between the two. Profit Loss Segment G1’ 1,600,000 0,000 coast 2 6 900,000 Segment G4 300,000 10,000 ment G5, =a 2,500,000 P1,000,000 | boca fit of P2,500,000 will be used | The total prot : it exceeds the total loss, T ores \ 3s the base fort tte 10% threshold in determining the reportal ee 1841Aggregation of Segments Minimum threshold = P2,500,000 x 10% = P250,000 | | As a result, the profit or loss criterion identifies G1, G2, G3, and G4 as reportable segments. @ A-4: All segments Revenue Profit (loss) Assets Reportable? v v v Segment G1 Yes Segment G2 v v v Yes Segment G3 v v Yes Segment G4 v Yes Segment G5 v Yes ‘A segment is reportable if it meets any of the following quantitative thresholds: » 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. The absolute amount of profit or loss of the segment is 10% or more of the greater, in absolute amount of: Y Combined profit of all operating segments that reported a profit. ¥ Combined loss of all operating segments that reported a loss. > The assets of the segment are 10% or more of the combined assets of all operating segments. In simple terms, even if only one of these thresholds is met by an operating segment, it will already be considered as reportable segment. ! 5 los Overall Size Test (5% threshold > = Ifthe total nal revenue of reportable segments is less than 75% of the entity's total external revenue, additional operating segments must be identified as reportable segments, even if they do not meet the 10% quantitative thresholds, until reportable segments account for at least 75% of the entity's total external revenue. » Two or more operatin: segments can be combined into a single operating segment if the segments have similar economic features, and the segments share a majonty of the following aggregation criteria: Nature of product or service. Nature of production process. Type or class of customers. Marketing or distribution method. ‘The nature of the regulatory environment (i.e., banking, insuranc utility). yee or publicChapter 46: Operating Segments vig, Seaments may-be combined or aggregated into one reportable segment to achieve tay: ined oF aggregi : O However, the ope leve the (75% threshold. 5 majority of the five ae Segments. that will be aggregated must share a features, regation criteria cited above and have similar economic pitas to the number of seaments f > The practical limit is ig |() ant 0 lor ref le Yepore » If the management believes : that an operati identit reportable segment j . >perating segment that was identified as a ie segmen ee ee tg OU Period is stil important, information regarding fulfils any of the 1004 ort" SeParately in the current Peri6d, even if it no longer fu "6 quantitative reportabilty standards. . ment becoming reportable €cl -( Une i foe quanti eens Segment is identified in the current period based on the comparative purposes no“: Seament data from previous periods presented for even if that segment diy be restated to reflect the newly reportable segment, period. NG not meet any of the quantitative thresholds in the prior Prior period segment informati the necessary info; ‘on, on the other hand, shall not be restated if mda t : ioe ation is not accessible and the cost of developing it would ide Disclosures > An entity shall disclose information about the following: ¥ Information about products and services ¥ Information about geographical areas ¥ Information about major customers Revenue from products and services > An entity is required to disclose the revenue from extemal customers for éach product and service. Revenue from geographical areas > The following geographical information shall be disclosed by an entity: ¥ Revenue from external customers in the entity's country of domicile, and in all foreign operations in total. Y Separate disclosure of material revenue from external customers in an individual foreign country. Disclosures about major customer mA major customer is an external customer who contributes 10% or more of an entity's external revenue. > The entity is required to disclose the following: ¥ The fact of reliance on major customers. a ¥ The total amount of revenue from all major customers. ¥ The segment(s) reporting the revenue above. 1843Comprehensive Accounting Reviewer Series Uolame 1: Financial Accounting and Reporting > The entity is not required to reveal or disclose the identity of its major customers, or the amount of revenue reported by each segment from that customer. - -000- 1844Clapton 46: Operating Segments EXERCISES FINANCIAL ACCOUNTING AND REPO! Segment teporting is reqi A uired for: Separate financial statem RTING THEORIES . 'ents of an enti I. Fi belated financial statements of a aaa © separate financi a : financial statements ofage aaberents Of an entity and the consolidated D. Neither the separate financi . " financial statements of a groan atements of an entity nor the consolidated Tf a financial report contains both the i i Consolidated fi and the parent's Separate financial statements, seat eter brent ‘; information is required in: financial statements only. fe lal statements only, Which of the following entities are A. Publ trade oer Fequired to report on business segments? B. Non-public entities, C. Joint ventures, D. All entities, Which of the following statements best defines the term "operating segment"? A. It is a component of an entity for which discrete financial information is available. B. Itis a component of equity whose operating results are regularly reviewed by the entity's chief Operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. CQ Its a component of equity that is engaged in business activities from which it may earn revenues and incur expenses. D. AandCc E. All of the above. . a licly listed computer hardware dealership company. Querro Inc, is a ee RE of Directors, the entity is managed and eee cae divisions, namely, the "computer spare parts division," controlled betel hop division," and the “computer sales division." Both the San come, vers workshop division deal with external customers nd handle 7 th walk-in customers a5 well as long-term customers who have orders of bot ters through earlier sales through the dealership. The entity's Purchased compu however, only supplies spare parts to its workshop division spare parts sion the demands of any outside customers. In other words, if and does not. cme Neke to purchase spare parts directly from the aes Outside customers they cannot do so unless their computers are ues Y division’ of Querro Inc. sf Querro Inc., and the workshop division purchases a “— the workshop division o rts division for the purposes of undertaking repairs Parts from its sate fen contracted to undertake repair work for. Computers they ha’ 1845Comprehensive Hecounting Reviewer Series Uolume 1: Financial ecauutting and. Reporting For the purposes of IFRS 8 Operating Segments, how many operating segments should Querro Inc. report segmental disclosures for? A. One division B. Two divisions C. Three divisions D. None ing IFRS 8 standards shall not be applied? , _ ee as financial statements of an entity whose debt or equity instruments are not traded in a public market. B. The consolidated financial statements of a group with a parent whose debt or equity instruments are traded in a public market. C. The separate or individual financial statements of an entity that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market. D. The consolidated financial statements of a group with a parent 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. E Bandb. 7. The approach used in segment reporting is known as: A. Segment approach. B. Revenue approach. C.» Management approach, D. Enterprise approach. 8. Under IFRS 8 Operating Segments, the management approach of identifying reporting operating segments means that operating segments are identified on the basis of financial reports about the Components of an entity that are regularly reviewed by the: A. chief accountant. B. chief executive officer. C. chief operating decision maker. D. respective head of each operating segment. 9. The term “chief operating decision maker” . Refers to a manager with a specific title, B. Refers to a function of allocating resources to the Operating segments and assessing their performance. Must be disclosed by tite in the financial reporting for segments. D. Must be described in the disclosures for financial reporting for segments. 1846Chapter 6: Operating Segments Jo, Steffan Inc. is a Philippine publicly listed company. ur major lines of Each major line of business has a chief operating officer (COO) who is responsible for the business component's profitability. The company has a chief executive officer (CEO) who ts overall in charge of the entire business of the entity and reports to tne Board of Directors (Board) on the results of operations of Steffan Inc. Mine as the authority from the Board to decide on the performance bonus = for which the CEO has set key performance indicators (KPIs) against which ie 2re evaluated each year by the CEO. Discrete financial information for cae ey eaerales of business of Steffan Inc. is available. The CEO has been entru A ¥ the Board to allocate funds for the day-to-day operations of the four lines of business, which he does based on criteria such as their comparative profitability, size of business generated, and cash flows from operations. Based on the Previously mentioned details about the functioning of Steffan Inc. nd canes Fefevant information provided, who is the chief Operating decision maker with IFRS 8 Operatir ments? A. Chief executive officer ee B. Chief operating officer of each line of busi C. The board of directors ene D. None of them, 11. For segment reporting purposes, which tests must be applied to determine if a component is a reportable operating segment? L Asset test I. Revenue test TI. _Profit or loss test IV. _ Expense test v. Cash flow test A. Iand Il only. B. 1, I, and Il only. C. 1, and IV only. D. 1, 1, and V only. 42. A significant operating segment for reporting purposes is one which meets any of the three criteria to revenues, profit or-loss, and identifiable assets. Which of the following is the percentage used to measure each of these critetia? A. 10% or more. B. more than 10%. C. 75% or more. D. more than 75%. 13, Which quantitative threshold is not @ requirement in qualifying a reportable ? . Ane wegment revenue, both external and internal, is 10% or more of the * Combined external and internal revenue of all operating segments. B. The segment external revenue is 10% or more of the combined external rever | operating segments. : Cc Th a ra oft or loss is 10% or more the greater between the combined + The Seamer ble segments and combined loss of unprofitable segments. D. OP er acess ‘are 10% or more of the ‘combined assets of all operating . The segments. 1847Comprehensive rlecounting Reviewer Series Volume |: Financial Accounting and. Reporting 14. eee segments that do not meet any of the quantitative thresholds: 15. 16. 17. 18. 19. Cannot be considered reportable. B. May be Considered reportable and separately disclosed if this is the practi within the economic environment. C. May be considered reportable and separately disclosed if the information for management use only. D. May be considered reportable and separately disclosed if manageme believes that information about the segment would be useful to the users financial information. : Which of the following statements is true concerning the 75% overall size test reportable segments? A. The total revenue of all reportable segments (both internal and external) is 75% or more of the entity's total revenue. B. The total external revenue of all reportable segments is 75% of more of the entity's total revenue (both internal and external). C. The total external revenue of all reportable segments is 75% or more of th entity's external revenue. D. The total internal revenue of all reportable segments is 75% or more of the: entity's internal revenue. Which of the following is not a criterion that management should consider wh determining whether the business activities and environments of an operati segment are comparable? The geographical location of the operations. The nature of the production process. The distribution methods. ‘The nature of the regulatory environment, if applicable. The type or class of customer. MOOD> Which of the following conditions, when defining a reportable segment, would sufficient to allow a company to combine two operating segments for testin purposes? A. The products sold by each segment are produced in the same plant. B. Both segments have several customers in common. C. The segments may sell different products, but they have a similar productiot process. D. None of the above. it are the disclosures required in relation to operating segments? General information about the operating segments. Information about segment profit or loss, including specified revenue a expenses included in profit or loss, segment assets, and segment liabilities. Reconciliations of total segment revenue, total segment profit or loss, tot segment assets and total segment liabilities to the corresponding amounts if the entity's financial statements. D. Allof these are required to be disclosed. What A B. CQ Entity-wide disclosures include all, except one. Which is the exception? A. Information about geographical areas. 8. Information about major customers. C. Information about intersegment sales. 184820. Which statement is true abou Chapter 46: Operating Segments D. Information about products and services, it major customer disclosure? A. Amajor customer is defined as one providing revenue which amounts to 10% ‘Ombined external revenue of all operating segments, B. The identities of major customers need Not be disclosed. C. The entity shall disclose the total amount of revenue from major customers. D. All the foregoing statements are true about major customer disclosures. -000-Comprehensive Peecounting Reviewer Series Uolume 1: Financial Hecounting and Reporting SUGGESTED KEY ANSWERS AND EXPLANATIONS | | >Ie | lal | a Vlal9)a|>|alo\a|>\0|>\alalal>la Explanation: a Under the IFRS 8, segment reporting applies to separate or individual financial statements of an entity and to the consolidated financial statements of a group. | If a financial report contains both the parent's consolidated financial statements and the parent's separate financial statements, segment information is required only in the consolidated financial statements. | Only the publicly traded entities are required to report on business segments. TFRS 8 par. 2 states that an operating segment is an entity that | engages in business activities from which it may earn revenues and incur expenses, whose operating results are reviewed regularly by the entity's chief operating decision maker, and discrete financial information is available. See no. 4. All divisions meet the definition of an operating | segment. 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 operated in this manner. See no. 3. 1850Comprchensive Accounting Resiewm Series Aolame |: Financial Accounting and Reporting FINANCIAL ACCOU! INTING AND REPORTING PROBLEMS PROBLEM 46-1 Identifying Reportable Operating Segments The Cassandra Company and its branct re year ended December 31, 2023, the following d hes are mainly involved in manufacturing. For the lata pertain to the industries in which activities were performed: Segments Total Revenue Operating Profit Identifiable Asset A 20,000,000 3,600,000 40,000,000 B 16,000,000 2,800,000 36,000,000 c 12,000,000 2,400,000 28,000,000 D 6,000,000 1,200,000 16,000,000 E 9,000,000 1,400,000 14,000,000 F 3,000,000 600,000 6,000,000 Total 6.000.000 12,000,000 140,000,000 1. In its segment information for 2023, how many reportable segments does Cassandra Company have? A 3 C'S B 4 D6 2. Ifeach segment earns only external revenue, what is the total external revenue of the reportable segments and did the company comply with the external revenue criterion? A. The total is P63,000,000. The company must consider additional segments to be reportable by applying the aggregation criteria to comply with the external revenue criterion. The total is P63,000,000. The external revenue criterion was complied with. The total is P57,000,000. The company must consider additional segments to be reportable by applying the aggregation criteria to comply with the external revenue criterion. D. The total is P57,000,000. The external revenue criterion was complied with. 9p PROBLEM 46-1 Answer and Solution Guide 1. ANSWER: C A segment is considered reportable when it meets any of the following criteria: As to revenue - 10% or more of the combined revenues of all industry seaments. ‘As to operating profit or loss - 10%. or more of the higher of the combined operating profits/losses of all industry segment. As to identifiable assets - 10% or more of the combined assets of all industry segments. As to revenue criterion - the minimum am 0% x 66,000,000). lount of revenue is P6,600,000 (10% As to operating profit - minimum Profit of P1,200,000 (10%x P12,000,000). As to identifiable asset - minimum asset is P14,000,000 (10%x P140,000,000). 1852Chapter 1: Operating Segments eA v v Malin sae Ye Vv ‘es 8 ¥ v v Yes o v v v Yes D v vi Yes E 4 v v Yes F No 2. ANSWER: B seaments To 1e A 20,000,000 B 16,000,000 Cc 12,000,000 D 6,000,000 E 9,000,000 Total 63,000,000 Since 75% of the company’s total revenue of the company’s reportal criterion is complied with. revenue is P49, 500,000 (66M x 75%) and the total ble segments i IS P63,000,000, the external revenue PROBLEM 46-2 Identifying Reportable Operating Segments Logan Company and its divisions are engaged solely in manufacturing operations. The entity reported the following segment profit or loss for the year 2023: Segment: Profit (loss); A P5,100,000 B 1,500,000 S (3,000,000) D 600,000 E (300,000) TOTAL 3,900,000 In the segment information for 2023, what are the reportable segments? A and B, 8. A,B, and. C A,B,C, andb. 0. A,B,C, D, and E. PROBLEM 46-2 Answer and Solution Guide ANSWI ER: B oft Loss Re le? A 5,100,000 is B 1,500,000 c (3,000,000) ies D 000 bn (300,000) ___No__ Total “7,200,000 (3,300,000) = P720,000 Minimum absolute amount (7.2M x 10%) = P720,0 1853Comprchensive Accounting Reviewer Series Uolame 1: Financial Accounting and Reportiog PROBLEM 46-3 Segment Revenue : For the year ended December 31, 2023, the following and its divisions: data applies to Black Coffee Company Sales to unaffiliated customers P10,000,000 Inter-segment sales of products similar to those sold to unaffiliated customers 1,800, oa Interest earned on loans to other segments 50, Black Coffee and its divisions are engaged solely in manufacturing. Black Coffee has a reportable segment if that segment's revenue is A. 11,800,000 C. 1,185,000 B. 10,000,000 D. — 1,180,000 PROBLEM 46-3 Answer and Solution Guide a ANSWER: D ' (10M + 1.8M) x 10% = 1,180,000 Only the sales to unaffiliated customers and inter-segment sales are included in determining the mihimum amount the "10% threshold”, The interest is excluded because it is only incidental to the operations of a manufacturing business. PROBLEM 46-4 Segment Revenue ae Kingsman Company provided the following information pertaining to revenues earned by operating segments for the current year: Seament Sales to unaffiliated Interseament Total customers. sales revenue G P10,000 P6,000 P16,000 E 16,000 *8,000 24,000 B 8,000 - 8,000 I 86,000 32,000 118,000 Total P120,000 P46,000 P166,000 In conformity with the revenue test, what is the total revenue of the reportable segments? A. 102,000 Cc. 142,000 B. 120,000 D. 166,000 PROBLEM 46-4 Answer and Solution Guide ANSWER: C 10% threshold (166T x 10%) = 16,600 Reportable Seqment Total revenue . P24,000 118,000 Total revenue of reportable segments 142,000 Only segments E and Tare reportable segments. 1854Tt 45: tn Seger pROBLEM 46:5 Segment’s Operating Profit # LEM > 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. » The gain on sale of machinery is not included in the determination of the minimum threshold since the nature of the item is only incidental to the operations. 2. ANSWER: A P40M x 10% = P4,000,000 Note: A major customer is an external customer who contributes 10% or more of an entityS external revenue. 3. ANSWER: B P40M x 75% = P30,000,000 ~End of Chapter- 1858