International Accounting Standard 14 Segment Reporting

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International Accounting Standard 14Segment
Reporting
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Will the Egg Reveal a Duckling or a Swan?
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Objective

• Principles for reporting financial information by
  segment about
• Different types of products and services an
  enterprise produces
• Different geographical areas in which it operates

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Scope

• IAS 14 applies to enterprises
• Whose equity or debt securities are publicly
  traded, or
• In process of issuing such securities
• Who reports segment information voluntarily

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Business Segment

• Group of similar products/services
• Same profile of risks and returns
• Different from other business segments
• Determination should consider
• Nature of product or production process
• Type or class of customers
• Distribution method
• Regulatory environment

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Business Segment

• Nature of products and services
• Similar applications
• Similar structure or appearance
• Nature of the production process
• Assembly vs. Sub-contract

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Business Segment

• Type or class of customer
• Similar marketing methods
• One marketing department or several
• Distribution methods of products services
• Catalog vs. Retail
• Distributors vs. Direct to customer

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Geographical Segment

• Particular economic environment
• Same profile of risks and returns
• Different from other economic environments
• Determination should consider
• Economic and political conditions
• Relationship/proximity of operations in different
  geographical areas
• Special risks of operations in certain areas

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Segment Result
net profit 100
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Segment Result

• extraordinary items
• interest
• dividend income
• income taxes
• overhead, general administration
• sales of investments
• share of profit of associates, joint ventures
  (accounted at equity)

not allocated to segment result
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Segment Assets/liabilities

• Assets employed in and liabilities resulting from
  operational activity
• Directly attributable or
• Allocated on a reasonable basis
• Allocation of related revenues/ expenses should
  be considered

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Reportable Segments

• Identifying reportable segments
• 1 - identify primary and
  secondary reporting format

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2 - Identify Business and Geographical Segments

• 3 - identify reportable segments

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1 Primary Secondary Reporting Format
predominant source of risk and returnsbusiness
or geographical segments?
primaryreporting format
internal financial reporting
secondary reporting format
Slide level 1 and 2
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2 Identification of Segments
Do internally reported segments meet definition
of a business or geographical segment?
NO analyse next lower level of internally
reported segments
Yes no further segmentation required
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3 Reportable Segments
Conditions for reportable segments
yes
no
reportablesegment

• combine
• report despite size
• report as unallocated

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Reportable Segments

• Additional requirements
• Segment revenue result include transactions
  with other segments
• Reported segments should include 75 of total
  external revenues
• Comparative data should be reported

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Segment Accounting Policies

• Must conform with accounting policies of
  financial statements
• Should specify an appropriate basis of allocation
  to segments
• e.g. Consistent allocation of assets and related
  revenue

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Disclosures

• Very extensive disclosures required
• Primary reporting format
• Composition of segment result
• Segment assets and liabilities
• Other additional detailed information
• Secondary reporting format
• External revenues
• Segment assets

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Competitive Harm

• Comparability
• Gross margin
• Different management approach
• Different allocation methods
• Competitive disadvantage
• Non-public companies
• Larger public conglomerates

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Competitive Harm

• Extra work to prepare segment information
• Need to prepare segment PL
• Allocating general costs not currently included
• Interim disclosures

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US GAAP Comparison

• Different objectives
• Information about enterprise activities and
  economic environments
• mixed segmentation (information about products,
  geographical area, customers)
• measurement of performance not standardised
• accounting policies of internal reporting

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Changes to Segment Reporting

• Management approach
• Operating vs. reportable segments
• May aggregate similar segments
• Quantitative threshold
• More detailed disclosures
• Measurement basis
• Enterprise-wide disclosures
• Selected disclosures for interim periods

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Operating SegmentDefinition

• An operating segment is a component of an
  enterprise
• That engages in business activities from which it
  may earn revenues and incur expenses,
• Whose operating results are regularly reviewed by
  the enterprises chief operating decision maker
  to make decisions about resources to be allocated
  to the segment and assess its performance, and
• For which discrete financial information is
  available

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Chief Operating Decision Maker (CODM)

• Who is the CODM?
• President or CEO
• Sr. Vice-President(s) or Vice-President(s)
• Executive Committee with a Majority Vote
• Executive Committee without a Majority Vote

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Operating Segments (contd.)

• An operating segment is not required to earn any
  revenues. For example
• Start-up entities
• Vertically integrated enterprises
• Not every part of a business may be a segment or
  part of a segment(e.g., services incidental to
  the enterprises products such as payroll)
• Pension and OPEB plans are NOT considered segments

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Operating Segments (Contd.)

• Matrix organizationthe presentation which is
  based on products and services should be used

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Reportable SegmentsSimilar Economic
Characteristics

• Common economic characteristics
• Gross margin
• Return on assets
• Return on investment
• Contribution margin
• Operating cycle
• Similar market indicators impact results
• Others

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Reportable SegmentsAggregation Criteria

• Combining segments must be similar in each of the
  following areas
• Nature of products and services
• Nature of the production process
• Type or class of customer
• Distribution methods of products services
• The regulatory environment

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Reportable SegmentsAggregation Criteria

• Combining segments must be similar in each of the
  following areas
• Nature of products and services
• Nature of the production process
• Type or class of customer
• Distribution methods of products services
• The regulatory environment

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Reportable Segments Quantitative Thresholds

• Revenue is 10 or more of total operating segment
  revenue
• The absolute amount of profit/loss is 10 or more
  of the greater, in absolute, of
• The combined profit of all operating segments
  reporting a profit, or
• The combined loss of all operating segments
  reporting a loss
• Identifiable assets are 10 or more of the
  combined assets of all operating segments

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Reportable SegmentsOperating Segments Not
Satisfying Thresholds

• Operating segments not meeting quantitative
  thresholds may be aggregated if they meet a
  majority of the specific aggregation criteria.
  For example
• Segment AB may be aggregated with segment CD if
  they have similar products, customers and
  regulatory environments.
• Segment AB could not be aggregated with segment
  EF if they only had similar products and
  regulatory environments.

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Reportable Segments Miscellaneous

• Operating segments not meeting thresholds

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Reportable Segments Miscellaneous

• Operating segments of continuing significance
• Segments which have historically met the
  quantitative thresholds, but did not meet them in
  the current year, should still be presented
  separately if they are expected to meet the
  quantitative thresholds in future periods
• Segments which do not meet the quantitative
  thresholds in the current year because they are
  in the growth phase may still be presented
  separately if the enterprise expects them to meet
  the quantitative thresholds in future periods

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Reportable Segments Miscellaneous (contd.)

• Operating segments not meeting thresholds
• Operating segments of continuing significance
• Must report at least 75 of total consolidated
  revenue
• Separately identified segments must total at
  least 75 of consolidated revenue
• Essentially, the other category cannot be
  greater than 25 of consolidated revenues

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Reportable Segments Miscellaneous (contd.)

• Must restate prior periods for comparative
  purposes unless impracticable
• If management determines that a previously
  unreported operating segment needs to be reported
  separately in the current period, the prior
  periods must be restated for comparative purposes
  unless it is impracticable to do so

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Reportable Segments Miscellaneous (contd.)

• Practical limit on the number of segments
• SFAS 131 does not define a limit on the number of
  segments that can be presented. However, SFAS
  131 does state, as the number of segments that
  are reportable in accordance with (the Statement)
  increases above ten, the enterprise should
  consider whether a practical limit has been
  reached.

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Segment Disclosures

• General information
• Information about segment profit or loss
• Information about segment assets
• Measurement basis
• Reconciliations of segment disclosures to
  corresponding amounts in general purpose
  financial statements
• Interim period information

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Segment DisclosuresMeasure of Segment Profit or
Loss

• SFAS 131 requires that each operating segment
  present a measure of profit or loss
• The measure of profit or loss will vary by
  enterprise and may be a non-GAAP measure such as
  EBITDA

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Segment DisclosuresMeasure of Segment Profit or
Loss

• The measure of profit or loss must be reconciled
  on a combined basis to a similar measure in the
  GAAP based financial statements (typically,
  operating income or income before income taxes)

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Segment DisclosuresMeasure of Segment Profit or
Loss

• Must be the measure of profit or loss reviewed by
  the CODM on a regular basis to assess performance
• If more than one measure of profit or loss is
  used by the CODM the measure that is closest to a
  GAAP measure must be used

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Segment Disclosures Profit or Lossother
Information

• Revenues (external and intersegment)
• Interest revenue and expense
• Depreciation, depletion, and amortization
• Unusual or infrequent items

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Segment Disclosures Profit or Lossother
Information

• Equity in the income of equity method investees
• Income tax expense or benefit

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Segment Disclosures Profit or Lossother
Information

• Extraordinary items
• Other significant noncash items
• Must be disclosed if included in the measure
  of profit or loss reviewed by the CODM. EITF
  topic D-70 clarifies that if any of these items
  are included in any information provided to the
  CODM, as opposed to included in the measure of
  profit or loss, they must be disclosed

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Segment DisclosuresSegment Assets (contd.)

• Total segment assets
• Total segment assets are required to be disclosed
  for each operating segment if total assets by
  operating segment are provided to the CODM
• If assets are not allocated by segment and
  reported to the CODM, then they are not required
  to be disclosed

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Segment DisclosuresSegment Assets (Contd.)

• The following items are required to be disclosed
  if included in total operating segment assets
  reviewed by the CODM
• Amount of investment in equity method investees
• Total expenditures for additions to long-lived
  assets other than
• Financial instruments
• Long-term customer relationships (financial
  institutions)
• Mortgage and other servicing rights
• Deferred policy acquisition costs
• Deferred tax assets

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Segment DisclosuresMeasurement Basis

• Use measurement basis reported to the chief
  decision maker
• Any amounts allocated to reported segment profit
  or loss or assets must be reasonable
• If more than one measure used by chief decision
  maker
• Use measure more consistent with those used in
  consolidated financial statements

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Segment DisclosuresMeasurement Basis Disclosures

• Required disclosures
• Basis for any intersegment transactions
• Nature of measurement differences between
  segments and general purpose financial statements
• Nature of any changes in measurement basis
• Nature of any asymmetrical allocations to segments

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Segment DisclosuresReconciliations

• Total revenues
• Total measure of profit or loss
• Total assets
• Total for other significant items disclosed
• All significant reconciling items should be
  separately identified and described

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Questions and Answers