Rodel Francis G.

Sanita Financial Accounting Volume 3: Operating Segments End of the Chapter Questions

1.

What is the core principle of PFRS 8? An entity 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.

2.

Explain briefly 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.

3.

Why is segment reporting required? The purpose of such disclosure is to enable investors and users make better assessment of each business activity leading to the understanding of the performance of the entity as a whole.

4.

What is the scope of PFRS 8? PFRS 8 shall apply to the separate or individual financial statements of the entity, and to the consolidated financial statements of a group with a parent: Whose debt or equity instruments are traded in a public market 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

However, if a financial report contains both the consolidated financial statements of a parent and the parents separate financial statements, segment information is required only in the consolidated financial statements. 5. Define an operating segment. An operating segment is component of an entity: That engages in business activities from which it may earn revenue and incur expenses, including revenue and expenses relating to transactions with other components of the same entity. Whose operating results are regularly reviewed by the entitys 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.

Accordingly, 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. Moreover, to be classified as an operating segment, separate financial information must be available about the segment and its operating results shall be regularly reviewed by a chief operating decision maker.

6.

May the following be considered an operating segment? A. Start-up operations B. Corporate Headquarters C. Postemployment benefit plan An operating segment may engage in business activities for which it has yet to earn revenue. Start-up operations may be operating segments before earning revenue. Corporate headquarters or some functional departments that may not earn revenue that is incidental only to the activities of the entity would not be operating segments. An entitys postemployment benefit plan is not also an operating segment.

7.

Define a chief operating decision maker. The term chief operating decision maker identifies a function and not necessarily a manager with a specific title. The chief operating decision maker may be the entitys chief executive officer, chief operating officer or a group of executive directors depending on whom within the organization is responsible for the allocation of resources and the assessing the performance of operating segments.

8.

Explain the Management Approach of identifying operating segments. 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 to the segments and to assess its performance. In other words, operating segments are identified based on the components of the entity that are considered to be important for internal management reporting purposes.

9.

What are the quantitative thresholds in identifying reportable segments? An entity shall report information about an operating segment that meets any of the following quantitative thresholds: The segment revenue, including both sales to external customers and the intersegment sales or transfers, 10% or more of the combined revenue, internal and external, of all operating segments. The absolute amount of the profit or loss of the segment is 10% or more of the greater in absolute amount of: o Combined profit of all operating segments that reported a profit o 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.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable and separately disclosed on a voluntary basis if management believes that information about the segment would be useful to the users of the financial statements.

10.

Explain the 75% threshold in identifying reportable segments. If the total external revenue of the 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.

11.

What are the criteria for aggregating two or more segments into one reportable segment? 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. Nature of the regulatory environment, for example, banking and insurance

12.

Is there a limit to the number of reportable segments? There may be a practical limit to the number of reportable segments to be disclosed separately by an entity beyond which segment 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.

13.

Explain the treatment of the following: 1. Segment that is no longer reportable in the current period but is reportable in the immediately preceding period. 2. Segment that becomes reportable in the current period but not reportable in the immediately preceding period. 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 segment shall continue to be reported separately in the current period even if it no longer meets any of the 10% quantitative thresholds for reportability.] However, 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 presented 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.

14.

Enumerate the information to be disclosed for each reportable segment. An entity shall disclose the following for each reportable operating segment: 1. General Information about the operating segment

2. Information about the profit or loss, including specified revenue and expenses included in the measure of profit or loss, segment assets, segment liabilities, and the basis of measurement. 3. Reconciliations of the totals of segment revenue, profit or loss, segment assets, segment liabilities, and other material segment items to corresponding items in the entitys financial statements. 15. Explain the disclosure about general information. An entity shall disclose the following general information about an operating segment: 1. Factors used to identify the reportable segments, including the basis of organization 2. Type of products and services from which each reportable segment derives its revenue 16. Explain the disclosure about profit or loss for each reportable segment. An entity shall disclose for each reportable segment a measure or profit or loss, total assets and total liabilities. An entity shall disclose a measure of profit or loss under all circumstances but shall disclose a measure of total assets and total liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker. 17. What are the specified amounts included in the measure of profit or loss that are required to be disclosed? 1. Revenue from external customers 2. Revenue from transactions with other operations segments of the same entity 3. Interest revenue 4. Interest expense 5. Depreciation and amortization 6. Material items of income and expense as required by paragraph 97 of PAS 1 7. The entitys interest in the profit or loss of associate and joint venture accounted for by the equity method. 8. Income tax expense 9. Material noncash items other than depreciation and amortization Note that interest revenue and interest expense must be reported separately, unless a majority of the segment revenue is from interest. However, the chief operating decision maker relies primarily on net interest revenue in assessing the performance of the segment and in making decisions about resources to be allocated to the segment. Note also that the specified amounts are disclosed because they are included in the measure of profit or loss reviewed by the chief operating decision maker or otherwise regularly provided to the chief operating decision maker even if not included in the measure of profit or loss.

18.

Define Segment Revenue. Segment revenue is revenue that is directly attributable to a segment and the relevant portion of the entity revenue that can be allocated on a reasonable basis to the segment. It includes sales to external customers and intersegment sales.

19.

Define Segment Expense. Segment expense is expense resulting from the operating activities of the segment that is directly attributable to the segment and the portion of an expense that can be allocated on a reasonable basis to the segment.

20.

Define Segment Assets. Segment assets are those operating assets that are employed by a segment in its operating activities that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis.

21.

What are the segment assets that are specifically required to be disclosed? An entity shall disclose for each reportable segment the following if the specified amounts are included in the measure of total assets or if not included, are regularly provided to the chief operating decision maker: 1. The amount of investment in associate and joint venture accounted for by the equity method. 2. The amount of addition to noncurrent assets, other than financial assets, deferred tax assets, postemployment benefit assets, and rights arising under insurance contracts.

22.

Define Segment Liabilities. Segment liabilities are those liabilities that result from the operating activities of a segment of a segment and that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis.

23.

What reconciliations are required between segment information and amounts shown in the entitys financial statements? 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.

24.

What is the treatment of change in internal organization? If an entity changes structure of its internal organization in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, shall be restated. However, no restatement is made if the corresponding information for earlier periods is not available and the cost to develop it would be excessive

25.

What are entity-wide disclosures? 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. An entity shall disclose information about the following: 1. Information about products and services 2. Information about geographical areas 3. Information about major customers

26.

What is the entity-wide disclosure about products and services? An entity shall disclose the revenue from external customers for each product and service, or each group of similar products and services, unless the necessary information is not available and the cost to develop it would be excessive.

27.

What is the entity-wide disclosure about geographical areas? An entity shall disclose the following geographical information: 1. 2. 3. 4. Revenue from external customers in the entitys country of domicile, and in all foreign operations in total. Separate disclosure of material revenue from external customers in an individual foreign country The basis for attributing revenue from external customers to individual countries. Noncurrent assets, other than financial instruments, deferred tax assets, postemployment benefit assets and rights under insurance contracts, located in the entitys country of domicile and in all foreign countries in total.

28.

What is a major customer? A major customer is defined as a single external customer providing revenue which amounts to 10% or more of an entitys external revenue. The following shall be considered a single customer: 1. A group of entities under a common control 2. A government and entities under the control of such government

29.

Explain the major customer disclosures. The major customer disclosure means that an entity shall provide information about the extent of its reliance on its major customers. The entity shall disclose such 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.