Reporting format
Segments are either reported as primary or secondary
segments [IAS14.26]. Business segments is the primary
format if the products and services represent the
predominant source and nature of risks and returns,
and geographical segment is secondary. The order
is reversed if the geographical risks are dominant.
The risks and returns for certain entities are
strongly affected both by differences in the product
groups and by differences in the geographical areas.
Where there is a 'matrix' approach to internal reporting,
IFRS stipulate the use of business segments as the
primary segment reporting format and geographical
segments as the secondary reporting format [IAS14.27(a)]
.
Types of segments
Segments are either business or geographical [IAS14.9].
A business segment is a distinguishable component
that provides products or services that are subject
to different risks and returns from those of other
business segments [IAS14.9] . IFRS mandate specific factors in grouping
activities into particular business segments. These
factors are [IAS14.9]:
| a) |
the nature of the products
or services; |
|
| b) |
the nature of the production processes; |
|
| c) |
the types or class of customer for the
products and services; |
|
| d) |
the methods used to distribute the products
or provide the services; and |
|
| e) |
if applicable, the nature of the regulatory
environment. |
A geographical segment is a distinguishable component
of an entity that provides products or services
within a particular economic environment [IAS14.9].
A geographic segment is subject to risks and returns
that are different from those operating in other
economic environments. The segment may be defined
in terms of the entity's geographical location of
operations or by the location of its customers/markets
[IAS14.9] .
Some factors that should be considered in identifying
geographic segments are [IAS14.9]:
| a) |
similarity of economic and
political conditions; |
|
| b) |
relationships between operations in different
geographical areas; |
|
| c) |
proximity of operations; |
|
| d) |
special risks associated with operations
in a particular area; |
|
| e) |
exchange control regulations; and |
|
| f) |
the underlying currency risks. |
Identification of geographical segments will often
involve considerable judgment. A geographical segment
may be a single country, or group of two or more
countries, or a region within a country [IAS14.12]
.
Identification of segments
The segments identified for external reporting
purposes should be those organisational units for
which financial information is reported to the entity's
senior management [IAS14.31]. There is a presumption
that the source of an entity's risks and returns
can be identified from the way it reports internally
[IAS14.17]. The internal organisational and management
structure and its system of internal financial reporting
may not be based on either individual products/services,
nor on groups of related products/services or on
geography. Management should in this case select
the basis for reporting as either product or geographic.
Segments are not permitted to be based on an organisational
or legal structure that combines unrelated products
or services [IAS14.30] .
Business and geographic segments identified within
the management reporting system must meet the definitions
within IFRS before they can be adopted for external
reporting. Management may need to look to the next
level of internal reporting to identify segments
appropriate for external reporting [IAS14.32-33].
Reportable segments
A segment is a reportable segment if most of its
revenue is earned from sales to external customers,
and one of three other criteria are met [IAS14.35(a)-(c)]
:
| a) |
external and internal sales
revenue is 10% or more of the total revenue
of all segments (external and internal); |
|
| b) |
segment result is 10% of the combined entity result; and
|
|
| c) |
segment assets are 10% or more of the total
assets of all segments. |
A segment that derives substantially all of its
revenue from internal transfers will not be a reportable
segment. This fact should be disclosed [IAS14.74].
A segment may be designated as a reportable segment
despite not meeting these threshold tests [IAS14.36(a)]
. If not designated separately, it
may be combined with other segments if they are
similar [IAS14.36(a)-(b)].
Additionally, it is allowed, but not required,
to report certain vertically-intergrated activities
as separate business segments even if they do not
generate external sales revenue [IAS14.41]. This
is a current practice in some industries .
Two or more internally-reported segments that are
substantially similar can be combined as a single
business or geographical segment despite meeting
the criteria for separate reportable segments. Segments
are substantially similar only if they exhibit similar
long-term financial performance, and they are similar
in all of the factors required for identifying business
and geographic segments [IAS14.34] .
The total external revenue attributable to reportable
segments must cover at least 75% of the consolidated
group's revenue. Additional segments must be identified
as reportable segments if total revenues of reportable
segments are less than 75% of consolidated revenues,
even if they do not meet the 10% thresholds. Segments
are deemed reportable until at least 75% of consolidated
revenues are included in reportable segments [IAS14.37].
All segments that were neither separately reported
nor combined should be included in the segment reporting
format as unallocated reconciliation items [IAS14.36(c)].
The business lines included in this column, as well
as all other unallocated items, should be described
appropriately. This requirement also applies to
internally reported, vertically-integrated activities
that were not presented as separate business segments
or geographical segments in the external segment
reporting format [IAS14.40].
A single business segment can be treated as the
primary segment format in the case that an entity's
operations are only in one business segment, if
the internal organisation and reporting are predominantly
based on this segment. No additional disclosures
are required for the primary segment format if all
the relevant information is already disclosed elsewhere
in the financial statements. However, the fact that
the entity is operating in only one business segment
should be disclosed.
Preparing segment information
Segment accounting policies
Segment accounting policies must conform to policies
in consolidated financial statements [IAS14.44].
Changes in segment accounting policy must be disclosed
[IAS14.76].
Allocations to segments
Segment revenue is defined as revenue that is directly
attributable to a segment, and group revenue that
can be allocated on a reasonable basis. Segment
revenue does not include: interest or dividend income;
gains on sales of investments or gains on extinguishment
of debt unless the segment's operations are primarily
of a financial nature [IAS14.16]. Shares in profit
or loss of investments accounted for under the equity
method should be allocated to segments and presented
separately from segment revenues [IAS14 AppendixB]
.
Segment expense is defined similarly to segment
revenue, but does not include: general head-office
expenses (except where these can be directly attributed
to the segment), share of losses of associates,
joint ventures or other investments accounted for
under the equity method, and income tax expense
[IAS14.16] .
Segment assets include operating current assets,
PPE and intangibles (including goodwill) employed
by the segment. They do not include loans and investments
(unless the segment's operations are primarily of
a financial nature), tax assets and assets used
for general group and head-office purposes. Segment
assets include a venturer's share of assets accounted
for by proportionate consolidation [IAS14.16] Investments
accounted for under the equity method should be
allocated to segments and presented separately from
segment assets [IAS14.AppendixB].
Segment liabilities include all operating liabilities
and do not include borrowings and lease liabilities
(unless the segment's operations are primarily of
a financial nature), tax liabilities and other corporate
liabilities, for example dividends payable. Segment
liabilities include a venturer's share of liabilities
accounted for by proportionate consolidation [IAS14.16].
The total assets appearing in the consolidated
balance sheet should be allocated among segments.
Assets that are jointly used by different segments
should be allocated to segments if, and only if,
their related revenues and expenses are also allocated
to those segments. For example, an asset should
only be allocated between segments if the depreciation
expense is allocated on the same basis [IAS14.47-48].
The same policy should be adopted for liabilities.
Intersegment pricing
Intersegment transfers should be measured using
the entity's actual basis for intersegment pricing.
IFRS require the disclosure of the basis of intersegment
pricing as well as any change therein [IAS14.75].
Reconciliation
IFRS require reconciliation between the segment
information reported for the primary segment format
and the amounts reported in the consolidated financial
statements. Segment revenue should be reconciled
to consolidated external revenue, segment result
to operating profit or loss and net profit or loss,
segment assets and segment liabilities to entity
assets and liabilities respectively. Consequently,
all income statement and balance sheet items that
are not considered specific segment data will be
shown within the reconciliation [IAS14.67] .
Comparatives
Prior-period segment data should be restated to
reflect current changes in segmentation, such as
when a segment becomes a reportable segment for
the first time [IAS14.43].
Alternatively, if a segment satisfied the 10% threshold
criteria in the preceding period, but ceases to
do so in the current period, its status as reportable
segment should be maintained if the entity's management
judges the segment to be of continuing significance
[IAS14.42].
Presentation and disclosure
Primary reporting format
An entity should disclose the types of products
and services included in each reported business
segment and indicate the composition of each reported
geographical segment [IAS14.81]. This disclosure
should be part of the notes to the financial statements,
even if the information is also presented in other
parts of the annual report (e.g. review of operating
results) .
The following disclosures are required where the
primary reporting format is business segments or
geographical segments by location of assets or customers:
| a) |
segment revenue
(analysed between external sales and sales to
other segments) [IAS14.51]; |
|
| b) |
segment result, which is the difference
between segment revenues and segment expenses
before any adjustment for minority interest
[IAS14.52]; |
|
| c) |
the carrying amount of segment
assets, and segment liabilities [IAS14.56,57];
|
|
| d) |
capital expenditure on an accrual
basis [IAS14.57]; |
|
| e) |
depreciation and amortisation,
for segment assets and significant other non-cash
expenses, such as an impairment charge (these
disclosures can be omitted where the entity
discloses voluntarily cash flows by segment)
[IAS14.58]; |
|
| f) |
any amount of segment revenue
or expense of significance, which assists in
explaining the segment's performance (optional)
[IAS14.59]; and |
|
| g) |
share of result of investments
accounted for under the equity method, together
with the related investment, where the investment
is within the reportable segment. [IAS14.64]. |
Secondary segment information
The following information should also be provided
as secondary-format disclosures if an entity reports
business segments as its primary reporting format
[IAS14.69]:
| a) |
segment revenue
from external customers by geographical area
(based on location of customers), for each segment
whose revenue from sales to external customers
is 10% or more of total entity revenue from
sales to all external customers; |
|
| b) |
the total carrying amount of segment assets
by geographical location of assets, for each
segment whose assets are 10% or more of the
total assets of all geographical segments;
and |
|
| c) |
capital expenditure by geographical
location of assets, for each segment whose assets
are 10% or more of the total assets of all geographical
segments. |
The following information should also be provided
as secondary-format disclosures if an entity reports
geographic segments (based on either location of
customers or assets) as its primary reporting format
[IAS14.70]:
| a) |
segment revenue from external
customers by business segment, if such revenue
is 10% or more of total revenue from sales to
all external customers; and |
|
| b) |
the total carrying amount of segment assets
and the total capital expenditure if segment
assets are 10% or more of the total assets
of all business segments. |
|
