CHAPTER 12 OPERATING SEGMENT Introduction Globally, many diversified entities or entities operating in several different industries have emerged. Entities that previously operated in a single industry moved into additional industries as a result of natural growth or by acquiring other entities. ‘These entities diversified their operations for several reasons, including the desire of management to spread the risks of investment over a number of industries and product lines to reduce dependence on any one set of suppliers and customers. When an entity is diversified, the different industry segments in effect operate as separate entities within an overall corporate umbrella. When a highly diversified entity presents only a total erttity information, the results of operations and growth potential of major operating segments cannot be analyzed and compared. One product or geographical area may be performing well and another product or geographical area may not be Performing as well. It becomes necessary to present not only a “total management Performance" but also an "individual segment performance". 359 Scanned with CamScannerSegment reporting PERS 8 now sets out the requirements for disclosy, information about operating segments. ‘closure of ‘The core principle of segment reporting is as follows: “An entity shall disclose information to enable users of financial statements to evaluate the nature and finan, effects of the business activities in which it engages st the economic environments in which it operates" “4 In accordance with the core principle of PFRS 8, segmen reporting is the disclosure of certain financial informet4 about the ‘products and services an entity produces and the geographical areas in which an entity operates. ‘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. Scope of PFRS 8 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. However, 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. 360 oe ee operating segment gn operating se8ment i a component of an entity ‘phat engages in business activities fro a Tyenue and incur expenses, ine} expenses relating to transactioy of the same entity. m which it may earn including revenue and 's with other components ee en Mitty's chief operating decision maierer ened by the to make decisions bout resources to be allocated to the segmems gc its performance. Segment and assess «, And for which discrete financial information is availabe. Accordingly, an operating segment can generally be thought ofas a distinguishable component of an entity that is engaged n business activities which generate revenue and inner expenses. Moreover, to be classified as an operating segment, separate financial information must be available about the segment and ils operating results shall be regularly reviewed by a chief operating decision maker. An operating segment may engage in business activities for which it has yet to earn revenue. For example, start-up operations may be operating segments before earning revenue. an entity is necessarily an operating f an operating segment. Not every For example, corporate headquarters or some functional departments that may not earn revenue or may earn revenue that is incidental only to the activities of the entity would hot be operating segments. An entity's postemployment benefit plan is not also an operating segment. 361 See ee ea Scanned with CamScannerww ion maker jon maker" identifies function and not necessarily a manager with a specific it, ‘This function is "to allocate resources to the segments ang assess their performance’. ‘The chief operating decision maker may be the entity's chi ve officer, chief operating officer or a at executive directors depending on who within the organization is responsible for the allocation of resources and assessing the performance of operating segments. Identifying operating segments ‘The "management approach is used in 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 resources to the segment 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. 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. The idea is that the 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. PFRS 8 has abandoned the “risks and rewards approach” of identifying operations by business segments and geographical segments. 362 peportable segments entity shall report information ao about an mat that meets any of the fol ee lowing quantitative it revenue, including both ‘the seemen ig both sales to external ustomers and intersegment sales or tranafere ic 10ie syore of the combined revenue, internal and enteriey or all operating segments, q 4, The absolute amount of profit or loss of the segment is * ‘10% or more of the greater in absolute amount of a. Combined profit of all operating segments that reported a profit. b. Combined loss of all operating segments that reported a loss. 3. 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. 363 Scanned with CamScannerMlustration Revenue, profit or loss, and assets for each operating are as follows: Segment Revenue Profit (loss) aos an ii asnacalilt tron eoneliteety Seqment S ——_j5,000,000 00.000 rg Sermon: Began (2,000,000) | 900000 SeemensC Sen eno—‘'sun-000, 3.000008 SeementD ono) ¢ 100,000) _900. 000 ted Sete one Based on revenue, A, B and C are reportable segments because revenue associated with each of these segments is at least ‘4,000,000 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 sogments because assets of such segments are at least P4,500,000 which is 10% of the total segment 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. Applying the criterion 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 9g 1,000,000 D 200,000 E 2,400,000 364 the total profit figure is greate; use r than the total seca¥ pp, 400,000 is the basis for identifying repertanis ferent ith profit or loss of P: , segment with P of P240,000 or greater (10% 72,400,000) aqualifies as reportable segment Therefore A C are identified as reportable segment un criterion. ent under the profit jon A, B and C are id conclusion A, © identified as reportabl. tn Tents. D and E are not reportable segments because they go not mect any One of the 10% quantitative thresholds for Grentifcation 98 reportable segment. ‘hus, D and E may be combined for reporting purposes. But A, Band C, being reportable segments, shall be disclosed separately’ overall size test - 75% threshold Ifthe total external revenue of reportable operating segments fonstitutes less than 75% of the entity external revenue, tiiitional 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. Aggregation of segments ting segments may be aggregated into a t” if the segments have similar the segments share a majority e aggregation criteria: 4 © Type or class of customers 4. Marketing method or the method used to distribute the product ©. The nature of the regulatory environment, for example, banking, insurance or publie utility 365 Scanned with CamScanneree Illustration ‘An entity has no intersegment sales and has the fat, operating segments with their corresponding revenye: -™® Segment Revenue Percentage 1 2,400,000 30% 2 1,600,000 2 3 1,200,000 18 4 720,000 ie 5 640,000, a 6 560,000 7 7 480,000 é 8 400,000, 5 8,000,000 100% Based on the revenue criterion, the reportable segments are segments 1, 2 and 8. The remaining segments are not reportable. Assume that the remaining segments did not also satisfy the other criteria of *profit or loss” and "total assets". ‘The total external revenue of the reportable segments is as follows: Revenue Percentage Segment 1 30% 2 20% 5 1s 3,200,000 “G5% 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, 366 egation ting segments ax moe operatin may be aggregated into " eye" threshold. f ever, the operating segments to be aggregated must he a lar economic characteristics and share a majority of the ant geresation criteria, t Segments 7 and 8 have similar products, similar process, similar marketing method and. inder regulated environment. — sgesume that groduction fperating © «cordingly, Segments 7 and 8 can be aggregated as “one AMtrtable sogment” to achieve the 75% threshold Segment 1 30% Segment 2 20% Segment 3 15% Segments 7 and 8 (6% + 5%) 1% ee ‘Thus, the remaining segments 4, 5 and 6 shall be considered nut reportable and lumped in the "other segments" category. it to the number of 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. 367 Scanned with CamScannerEye Segment no longer reportable IF the management judges that an operating segment identi as a reportable segment in the immediately preceding par“d is of continuing significance, information about the seyer'®! shall continue to be reported separately in the current per” even ifit no longer meets any ofthe 10% quantitative threspei for reportability las Segment becoming reportable Iran operating segment is identified as a reportable segmene in the current period in accordance with the 10% quantitat;: thresholds, segment data for a prior period presented fe comparative purposes shall be restated to reflect the nea, reportable segment even if that segment did not satisfy any cy 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. Information to be disclosed for each segment An entity shalll disclose the following for each reportable operating segment: 1. General information about the operating segment 2. Information about profit or loss, in: 8 Specified revenue and expenses included in the measure of profit or loss ation about segment assets and segment ies and the basis of measurement. 4. Reconciliations of the totals 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, 368 _gelosure about general information bi ‘lose the follo yy shall disc wing gener: sjcing ements ali a actors used to identify the reportable segments L information about le, whether management h, cesar, tent has chosen to organiz fhe entity around differences in produets ant see geographical areas, regulatory environment, of a ination of factors, and whether operating ott ennaton fet 6 segments of products and services from which each rey at derives revenue. each reportable tsample of disclosure about type of products and services anentity has three reportable operating segments, namely car jars, motor vessels and software. ‘Te car parts segment produces replacement parts for sale ‘The motor vessels segment produces small motor vessels to save the offshore oil industry and similar businesses, ‘Te software segment produces application software for sale ‘computer m cturers and retailers. Disclosure cf profit or loss, assets and liabilities Anentity shall disclose for each reportable segment a measure ifprofit or loss, total assets and total liabilities. An entity si ‘close a measure of profit or loss under alleircumstances. disclose a measure of total assets ies for each reportable segment if such an jmount is regularly provided to the chief operating ‘cision maker. 369 Scanned with CamScanneray Profit or loss ‘An entity shall disclose the following if the speci amounts are included in the measure of segment n° or loss or otherwise regularly provided to the qntt operating decision maker even if not included in the meat! of segment profit or loss: Sure 1. Revenue from external customers 2 Revenue from transactions with other operat, segments of the same entity ng Interest revenue Interest expense Depreciation and amortization Material items of income and expense as required by paragraph 97 of PAS 1 y 7, The entity's interest in the profit or loss of associate and joint venture accounted for by the equity method Tneome tax expense Material noncash items other than depreciation and amortization oreo 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 these 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. 370 eae segment revere and segment expense * , g does not define any more so = RS expense. fgment revenue and ee consequence, entities shall have a wide dis. fa ming the Measurement ofthese items, ae pas 8 simply states that the amount of segment revenue S gment expense shall be the measure 1 ae ‘operating decision maker. ported to the pe definition in the old standard may be of help t revenue is revenue that is direct); il segment at is directly attributable to Segtment and the relevant portion of entity revenue that 4 spe allocated on a reasonable basis to the segment. specifically, segment revenue includes sales to external Sigomers and intersegment sales. Segment expense is expense resulting from the operating seuvities of the segment that is directly attributable to the Segment and the portion of an expense that can be allocated ona reasonable basis to the segment. Segment assets PERS 8 does not also define segment assets. ‘The amount of total assets disclosed for a reportable segment shall be the measure reported to the chief operating decision maker. ‘The old definition of segment assets may be of help. Segment assets are those operating assets that are employed by a segment in its operating activities that are cither directly attributable to the segment or can be allocated to the segment on a reasonable basis. Examples of segment assets include current assets that are wed in the operating activities of the segment, property, Plant and equipment, intangible wssets and goodwill d:rectly attributable to segment. 371 Scanned with CamScannerDisclosure not required PFRS 8, paragraph 24, provided that segment assets such deferred tax assets, postemployment bencfit assets, finane.® instruments, and rights arising under insurance contract are not required to be disclosed. s Specific information about segment assets ‘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 regulari provided to the chief operating decision maker: a 1. The amount of investment in associate and joint venture acoounted 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, Segment liabilities PFRS 8 does not also define segment lial ‘The amount of total liabilities disclosed for a reportable segment shall be the measure reported to the chief operating decision maker. he Segment liabilities are those liabilities that result from the operating activities of a segment and that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis. ‘The old definition of segment liabilities may be Examples of segment liabilities include trade and other payables, accrued liabilities, customer advances, pro warranty liabilities and other claims relating to provision of goods and services. 372 "sment profit or loss, total entity provided the following financial information relating of the reportable operating segments (amounts are ws oom ‘sumed external internal ross profit, Distabution costs piministrative expenses Doub accounts Hoyee benefit expense Enpieciation and amortization Interest expense Impairment loss Profit or loss 60,000 8,000 t assets sold 5,000 20,000 re relating to the reportable operating he following: tization t assets Note that the amount for profit or loss is disclosed under all reumstances 373 Scanned with CamScannerther items disclosed are specified in PFRS § Feteen only because these are included in the me profit or loss, measure of total assets and measure liabilities reviewed by the chief operating decis and are a8UEE of of total on maker, The impairment loss is disclosed because the amount ig deemed material. Reconciliations ‘An entity shall provide reconciliations of segment amounts ‘and amounts shown in the entity's financial statement 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 disclosed by the reportable segments corresponding amount for the entity, Illustration The Implementation Guidance 3 of PFRS 8 provided the llowing suggested format for disclosing information about reportable segment profit or loss, total assets and total lial In this illustration, the chief operating decision maker decided not to allocate income tax expense to reportable segments as a measure of profit or loss. 374 3 OF ity bas three reportable sogments, namely software ‘He Omics and car parts d ut other segments” which are not reportable include a small sey busines, eaipment rental business and warehouse {asin suamounts are assumed " Software Electronics Car parts Others Total external 12,500 5.000 1,000 35,500 eee internal 000 ne ft even 00 = = 3800 sponse 200 - 2 ho 300 110 > 3.000 4.100 500100 100 00 7000 2.000. 1,000 00 1.500 goo = 2900 16.000 24,000 4000200 4a 200 re following reconciliations are necessary: Revenue Jevenue of reportable segments 39,000 tevenue of nonreportable segments 1,000 Elimination of intersegment revenue 45500) Enity revenue shown in income statement 35,500 Profit or loss Profit orloss of reportable segments 4,000 Profit orloss of nonreportable segments 100 Bimination of intersegment profit (500) ual ion settlement received 500 Corporate expenses (189) tity profit or loss shown in income statement 3,350 P Beintersegment profit is the "gross profit” on intersegment tales, 375 Scanned with CamScanner~~ Total assets Total assets of reportable segments 79,0 Total assets of nonreportable segments 200 Unallocated corporate assets ce Entity total assets shown in statement of financial position 82.509 22.500 Total liabilities ‘Total liabilities of reportable segments: 44,00 ‘Total liabilities of nonreportable segments md Unallocated corporate liabilities 5.000 Entity total ancial position 49,99 Other materi Interest revenue 150 3,950 Interest expense 2,700 100 2/800 Depreciation 3,000 - 3,000 Impairment loss 200 - 200 Expenditure for noneurrent 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. Change in internal organization Ian 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. However, no restatement is made if the corresponding information for earlier periods is not available and the cost to develop it would be excessive. 376 gmity-wide disclosures in disclosures" are additi i ty-wide itional information that d to be disclosed by all entities if such information ie ded as part of the reportable segment information require ot POW an entity shall disclose information about the following 4, Information about products and services & Information about geographical areas > jpformation about major customers, povenue from products and services an entity shall disclose the revenue from external justomers for each product and serviee, or each group Si eimilar products and services, unless the necessary ‘ormation is not available and the cost to develop it would be excessive. Revenue and assets from geographical areas disclose the following geographical An entit information: a Revenue from external customers in the entity's ind in all foreign operations in total. re of material revenue from external lual foreign country. buting revenue from external customers instruments, I . postemployment benefit assets and ler insurance contracts, located in the entity's Je and in all foreign countries in total. country of 377 Scanned with CamScannery Example of entity-wide disclosure ‘An example ofan entity-wie disclosure of information ay geographical areas is as follows: nt Revenue —_Noncurrent assets Philippines 19,000 11,000 Japan 4,000 a China 3,500 6,000, USA 3,000 4,000 Other countries 6,000 3,000 Total 35,500 24,000 Major customer ‘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 following shall be considered a single customer: a. A group of entities under a common control. b. A government and entities under the control of such government. Disclosure about major customer ‘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. 378 one questions _ wat i the core Principle of segment reporting? briefly segment reporting. B 4, What is the scope of PFRS 8? s.pefine an operating segment, «May the following be considered an operating segment? a. Start-up operation i Corporate headquarters 2 Postemployment benefit plan 1.Define a chief operating decision maker. 4.What are the quantitative thresholds in identifying reportable segments? 10. Explain the "75% threshold” in identifying reportable segments. U.What are the criteria for aggregating two or more segments into one reportable segment? 12s there a limit to the number of reportable segments? 13. Explain the treatment of the following? & Segment that is no longer reportable in the current in the immediately preceding b. Segment that becomes reportable in the current period but not reportable in the immediately preceding period 379 Scanned with CamScanner> € 14. Enumerate the information to be disclosed f reportable segment. OF each, 15, Explain the disclosure about general information 16. Explain the disclosure about profit or los, s reportable segment. {or each 17, What are the specified amounts included in the meng asure of profit or loss that are required to be disclosed? 18. Define segment revenue. 19. Define segment expense. 20. Define segment assets. 21. What are the segment assets that are specifically requis to be disclosed? ee 22. Define segment liabilities the disclosure about total assets and tot: s for each reportable segment. ie 24. What reconciliations are required between segment information and amounts shown in the entity's financial statements? 25. What is the treatment of a change in internal organization? 26. What are “entity-wide" disclosures? 27. What is the entity-wide disclosure about products and services? 28. Whats the entity-wide disclosure about geographical areas? 29, What is a "major customer"? 30. Explain the major customer disclosure. 380 pROBLEMS problem 12-1 Multiple choice (PFRS 8) what is the “core principle” of segment reporting? 1 An entity shall disclose significant financial information by business segments act ase geographi An entity shall disclose information to enable user to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates, a be a 2. See gment reporting shall apply to b. Consolidated financial statements of a group. © Both the separate financial statements of an entity and the consolidated financial statements of a group, separate financial statements of an entity lidated financial statements of a group. 3.Segment reporting shall apply to the separate finat statements of an entity, and to the consolidated financial statements of a group with a parent y instruments are traded in a public b ments are traded in a public market. . process of filing the consolidated statements with a securities commission for .e of issuing any class of instruments in @ ‘ket 4 381 Scanned with CamScanner4.1f a financial report contains both the financial statements of a parent and the pan financial statements, segment information consoli ent’s se is requ a, The separate financial statements b, The consolidated financial statements e, Both the separate and consolidated 4 statements *nancial 4. Neither the separate nor the consolidated f, statements nancial 5. An operating segment is a component of an entity a, That engages in business activities from w1 hich it may earn revenue and incur expenses, including raven! and expenses relating to transactions with othe: components of the same entity. b. 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 segment performance. c. For which discrete information is available. d. All of these 6. Which may be considered an operating segment? a. Start-up operation before earning revenue b. Corporate headquarters c. Functional department d. Postemployment benefit plan 7. What is the approach prescribed in identifying an operating segment? Management approach Operating approach Enterprise approach Segment approach BO oR 382 date, aa ' at cee 8 9 what is the function of the chiot operating decision maker? 4, To allocate resources to the ss the performance of p. To asses: of the operating segment: users about operating segments 4. To allocate resources to the op. assess their performance operating segments e. erating segments and Who could be the chief operating decision maker? Chief operating officer Chief executive officer Group of executive directors All those mentioned depending on who within the organization is responsible for the allocation of resources and assessing the performance of operating segments. pose 10.In financial reporting for operating segments, an entity shall disclose all of the following, except a. Types of products and services from which each reportable segment derives revenue. b. The title of the chief operating decision maker of each reportable segment. c. Factors used to identify the reportable segments. 4. The basis of measurement of segment profit or loss and segment assets. 383 Scanned with CamScanner~ Problem 12-2 Multiple choice (PFRS 8) 4 Pe thre! Cannot be considered reportable. f May be considered reportable and separately disclosed ating segments that do not meet any ofthe quantitative olds 1. An entity shall disclose information about a; operay segment when ting a ‘The segment external and internal reve: more of the combined external re operating segments. ue i og venue opt if management believes that information about the segment would be useful to the users of the financial statements. b, The segment external revenue is 10% oF more of, May be considered reportable and separately disclosed combined external and internal revenue op ie © ‘Fthe information is for internal use operating segments. I 4. May be considered reportable and separately disclosed ©. The segment external revenue is 10% or more of th if this is the practice within the economic environment combined external revenue of all operating segments jn which the entity operates, 4. The segment external and internal reve 2. An entity shall disclose information about an segment when the absolute amount of profit or I a "NUE 8 10% or more ofthe combined external and internal reyeeg® of all operating segments. operating loss is 10% or more of the combined profit or loss of al] operating segments, 5, Whatis the quantitatve threshold for the revenue that must be disclosed by reportable operating segments? a, The total external and internal revenue of all reportable segments is 75% or more of the entity external revenue. b. The total external revenue of all reportable segments is ‘75% or more of entity external and internal revenue, b, 10% or more of the combined profit of all operating c. The total external revenue of all reportable segments is ‘segments that reported a profit. 75% or more of the entity external revenue. & 10% or more of the combined loss of all operating 4. The total internal revenue of all reportable segments is a. jeuments that reported a loss 75% or more of the entity internal revenue. segment when 10% or more of the greater between the combined profit of all operating segments that reported profit ard the combined loss of all operating segments that disclose information about an operating ting segments may be aggregated into asingle ig segment if all ofthe following conditions are satisfied, except characteristics. a majority of the nature of product of production process, class of asc thod of product distribution and b. The mts ts of the segment are 10% or more of the ae ak &- The nt aces oy erating Senta « is consistent with the core principle enh weer of {he segment are 10% or more of the a agamon assets of all operati 4. The assets of deed ot all operating segments, 4. The segments have dissimilar characteristics. 385 Scanned with CamScanneroy fig | PI ple 12-3 Multiple choice (PFRS 8) ro tity shall disclose for each reportable segment uve of all of the following, except jenenta 7. What is the treatment of an operating segment id as reportable in the preceding period but it no ft meets the quantitative threshold in the current otser Lie a. The segment is no longer reported separately in i 6 current perio ‘ ul Profi th: The segiuant must ba reported: soperately ty g, Total assets if such amount is regularly provided to c. The segment may be reported separately in the ey, ” the chief operating decision maker. ere ‘Total liabilities if such amount is regularly provided riod 4. The segment shall continue to be reported separ, © ‘to the chief operating decision maker in the current period if management judgect Net assets ‘segment to be of continuing significance. the a 8, What is the treatment if an operating segment g.An entity shall disclose for each reportable segment all identified as reportable in the current period but yi° f the following specified amounts included in the reportable in the prior period? tok Sreasure of profit or loss, except a. Prior segment data presented for comparat purposes shall be restated to reflect the newt eportable segment. ly b, Prior segment data presented for compatative a. Revenue from external customers b. Revenue from transactions with other operating segments of the same entity purposes shall not be restated, «, Inrerest revenue e. The'serment isnot reported separately in th eure ¢. Gain on disposal of investment serio 4. Prict serment data presented for comparative An entity shall disclose for each reportable segment all Tiinecessory, peepee cee sf the following specified amounts included in the re of profit or loss, except 9. Which disclosure is required in relation to operating ett Depreciation and amortization segments? if a, General information about the operating segment b. Interest expense b, Information about segment profit or loss, segment c. Income tax expense assets and segment liabilities d. General corporate expense ¢. Reconcihations of total segment revenue, total segment profit or loss, total segment assets and total 1 disclose for each reportable segment which segment liabilities to e8 4, An entity shall disclose fo pe the entity's fnsretat ete egcomresponding amounts in of the following specified amounts that are included in 4. All of these 5 the measure of segment total assets? 10. An entity shall disclose which general information? 4. ‘The amount of investment in associate and joint a. Factors used to identify the reportable segments venture accounted for by the equity method. b. ‘Type of products and services b. Financial instrument ©. Change in the internal organization that causes the ©. Deferred tax assets composition of the reportable segments to change 4d. Postemployment benefit assets d. Factors used to identify the reportable segments and type of products and services = 386 387 Scanned with CamScannerree cet : 5. Which of the following statements in relation to diseigy of segment information is true? Ure 1. Ifanentity changes the way itis structured inte so that its reportable segments change comparative information for earlier periods restated. mally + the St be U. Disslosure is always required of the profit oF loss o¢ each reportable segment. ° Tonly I only Both I and IT Neither I nor II peoe Which of the following statements in relation to information about profit or loss of a reportable segment is true? 1. The measurement of profit or loss to be disclosed for each reportable segment is defined in PFRS 8, IL. The profit or loss disclosed for a reportable segment shall relate to the total assets attributed to that segment. Jonly only Both | and IT Neither I nor II Bese . Entity-wide disclosures include all of the following, except Information about products and services Information about geographical areas Information about major customers Information about intersegment sales Bose 388 tion about geographical informe areas includes all Mowing, except is 4. Revenue from external customers pb. Revenue from external customers domicile and in all foreign oporety Separate disclosure of material revenue from external customers attributed to an individual foreign country. 4. Noneurrent assets located in the country of dows gs and in all foreign countries in total for each product an the country of ns in total. e q The ‘major customer” disclosure includes all of the following, except a. ‘The fact of the entity's reliance on major customers b. The total amount of revenue from major customers ec. The identity of the segment or segments reporting the revenue from major customers, 4. The identities of the major customers 10.Which of the following statements in relation to major customer disclosure is true? ustomer is defined as one providing revenue mounts to 19% or more of the combined ie of alll operating segments. tities of major customers need not be disclose the total amount of revenue ners and the identity of the segment ue, nents are true about major customer 389 Scanned with CamScanneri Problem 12-4 Multiple choice (IAA) | pra jem 12-5 Multiple choice (AICPA Adapted) 1, Segment revenue includes a. Only sales to unaffiliated customers b. Sales to unaffiliated customers and interse sales. c. Sales to unaffiliated customers and interest reve, 4. Sales to unaffiliated customers and other income® ement, 2. An operating segment is a reportable segment if a. The operating profit is 10% or more of the Gporating probt of profitable segments, bined b. ‘The operating loss is 10% or more of the combine operating loss of segments that incurred an speratied loss. c. The absolute amount of segment operating pr Jose is 10% or more of the combined operating nog or loss. d. None of these. 3. All of the following information about each operating segment must be reported, except a. Unusual items b. Interest revenue ec. Cost of goods sold d. Depreciation expense 4. What is a reasonable upper limit for the number of segments that an entity must disclose? a. Two b. Five c. Six d. Ten 5. In presenting segment information, for which of the following must a reconciliation be provided? Revenue Operating profit or loss Assets and liabilities All of these peep 390 a financial reporting for operating segments of an entity, Ie Brent data ay be aggregated ppefore performing the 10% tests if aggregation criteria are met, If the segments do not meet the 10% bof the aggregation criteria ee Before performing the 10% tests if all o aggregation criteria are met ee ato he 4. If any one of the aggregation criteria is met. 7 majority of the ¢ ‘an industry segment is a reportable segment if it is ‘gnificant to the entity as a whole. An industry segment wetonsidered significant when any of the following Snditions is met, except a a. Segment revenue is 10% or more of the combined revenue of all of the entity's segments. b, Segment assets are 10% or more of the combined assets of all segments. ¢. Segment liabilities are 10% or more of the combined liabilities of all segments. 4. Absolute value of a segment's operating profit or operating loss is 10% or more of the combined operating profit of all segments that did not incur an operating loss. 3, An entity must disclose all of the following about each reportable segment if the amounts are used by the chief operating decision maker, except a. Depreciation expense b. Allocated expense ¢. Interest expense ‘tity-wide disclosures include disclosure about a, Geographic areas Geographic areas and allocated costs Neither geographic areas nor allocated costs 391 Scanned with CamScannercow Problem 12-6 Multiple choice (IFRS) 1. What is the definition of major customers? a. Those customers that individually account for reye, of 10% or more of the entity external revenue.“ "™Y° b. Those customers that individually account for of 10% or more of the external and internal revo ¢. ‘Those customers that individually account for rever = of at least 90% of the entity external revenue. "“ 4. Those customers who have been dealing with th, entity for at least 5 years. e Tevenue 2. A group is organized into a number of business divisions across the world. The group has two main classes of business, namely insurance and banking. The chief operating decision maker receives information from each business division on a quarterly basis and wishes to report segmental information on the basis of these divisions. What should be the basis of the reporting of the segmental information? a, The worldwide business divisions b. The classes of business ¢. The entity should make full disclosure on the basis of the worldwide divisions and the classes of business. d. It would depend on the chief operating decision maker but is likely to be the different classes of business, 3. A chemical entity has no overseas sales and the entity produces different products. The entity sells the products to small businesses, larger national business and multinational entities. Internal reports are reviewed by the chief operating decision maker on this basis. What is the segment reporting? a. Disclose a single business segment. b. Disclose information on three different sets of customers, ¢. No segment disclosure is required. d. Segment reporting is silent on this matter. 392 anentity is in the entertainment industry and organizes 4Miqoor concerts in four different areas of the would ol North America, Australia and Japan, The entity Borts 0 the board of directors on the basis of each of {he four regions. The records show the profitability for {aon of the four regions. The cincerts are of two types: popular music and classical music. What is the Prpropriate basis for segment reporting in this entity? The segments shall be reported by class of business, that is popular and classical music. p, The segments shall be reported by region, so Australia and Japan would be combined. «, The segment information shall be reported as North America and the rest of the world, 4. Segment information shall be reported for each of the four different regions. a 5 An entity is engaged in the manufacturing industry and has recently purchased an 80% holding in a small financial services group. This group does not meet any of the threshold criteria for a reportable segment. Can the entity disclose the financial services group as a separate operating segment? a. The fin ‘ervices group cannot be disclosed as a separate ng segment. b. An entity is allowed to disclose an operating segment separately if management believes that information about the segment would be useful to the users of the financial statements. disclose only 80% of the results and financial services group. 4. The entity shall disclose segmental information on a geographical basis. 393 Scanned with CamScanneryblem 12-7 (AICPA, Adapted) Prol ‘Timmy Company provided the following informati relation to revenue ea! current year: rned by operating segments fore Intersegment sales Total Segment me 3,000 8,000 3a 4000 12°00 a 4,00 Combined 60,000 23,000 83,000 Elimination = 23,000) (23,000) Consolidated 60,000 = 660,009 What total revenue should be disclosed by the reportable segments? a. 60,000 b. 83,000 d. 51,000 Problem 12-8 (AICPA Adapted) Correy Company provided the following data relating to operating segments: Industry Revenue Profit ‘Total assets 10,000,000 =mpoe> How many reportable segments does Correy have? a, Three b. Four c. Five d. Six 394 problem 12-9 (AICPA Adapted) Company provided the folloy aurmorating ‘segments: wing profit (loss) relating v W x Y 5 ( 200,000) what are the reportable segments based on profit or lose? v, W, X and Y : fv, Wand X Wand W §, v,W. X,Y and Z problem 12-10 (IFRS) Macbeth Company, an entity listed on a recognized stock exchange, reports operating results from a Ni geMon 0 the chief operating decision maker meriee ‘The segment information for the current year is as follows: Revenue Profit 3,675,000 en 1,700,000, Number of employees 500 ‘The entity's results for all of its segments in total are: Revenue Profit 0.000 Aseets 17,500,000 Number of employees 18,500 Which piece of information determines that the North imerican division is a reportable segment? a Revenue ». Profit i Assets Number of employees 395 Scanned with CamScannerProblem 12-11 (AICPA) Aris Company provided the following information in rela, to operating divisions for the current year: tion Sales to unaffiliated customers 20, Tntersegment cales of products similar to those sold 000,009 tounaffiliated customers fe Interest eacnedonloanstoother industry cegments 0 ‘The entity and all of its divisions are engaged solely manufacturing operations. Under the revenue test, wha,” the minimum revenue of a reportable segment? is 2,640,000 2,600,000 2,040,000 2,000,000 Problem 12-12 (AICPA Adapted) Grum Company is subject to the requirements of sogmen, reporting. In the income statement for the current year, the entity reported revenue of P50,000,000 excluding intersegment sales of P10,000,000, expe and net income of P3,000,000. Expenses: of P15,000,000. The combined total segments at year-end amounted to P4 wyroll costs ssets of all operating 000,000. What is the minimum amount of sales to a major customer? a. 5,000,000 b. 4,000,000 . 6,000,000 4. 4,500,000 2 What is the minimum amount of external revenue to be disclosed by reportable segments? a. 22,500,000 396 7 problem 1213 (AICPA Adapteg) ¢ Company discloses supplemen 8 Su tal o Gif gain. The following informatgn erating seement infra ea Hae Sale cgooal ales Traceable expenses : 600,000 x 500,000 Y = 350,000 400,000 1,450,000 saaitional expenses, not included above, are as fllows: rect segment expenses inital administrative expenses O00 appropriate common expenses are allocated to se paved on the ratio of segment’ sales to total sales Wren Egmont Z's operating. profit? ‘a. 100,000 b. 130,000 ce. 160,000 d. 250,000 Problem 12-14 (AICPA Adapted) Cley Company has three lines of business, each of which was determined to be reportable segment. Sales aggregated P7,500,000 in the current year, of which Segment One contributed 40%. Traceable costs were P1,750,000 for Segment One out of a total of P5,000,000 for the entity as a whole. The et locates common costs of P1,500,000 based igment's income before common costs to income before common costs. What amount should orted as operating profit for Segment One? @. 1,250,000 6. 1,000,000 © 650,000 4 500,000 397 Scanned with CamScannerine Problem 12:15 (AICPA Adapted) Lovina Company provided the fellowing information fy current year: 7 Segment Sales ‘Traceable expensey Aye 5,000,000, 8,000,000, Bee 4,000,000 2,500,000, Coe 3,000,000 1,500,000 ‘The entity reported indirect expenses of P2,000,000, go corporate expenses of P1,000,000, interest expenye a 500,000 and income tax expense of P400,000. The interest expense and income tax expense are regularly reviewed the chief operating decision maker as a measure of profit 2 loss. Appropriate common expenses are allocated tg segments based on sales. What is Segment Coe's prof ¢° the current year? a. 775,000 b. 525,000 ¢. 875,000 d. 900,000 Problem 12-16 (AICPA Adapted) Hyde Company has three reportable segments. Common costs are appropriately allocated on the basis of sales. In the current year, Segment A had sales of P3,000,000, which was 25% of Hyde's total sales, and had traceable costs of 1,900,000. In the current year, the entity incurred segment costs of P500,000 that were not directly traceable to any of the divisions. Segment A incurred interest expense of ‘P300,000 in the current year. Interest expense is included in the measure of profit or loss. What amount should be reported as Segment A's profit for the current year? a. 875,000 b. c d 398 problem 12-17 (IAA) 1p Company operates in several different industries, Total see ba for the salty {etaled P 14,000,000, and total common, salts amounted to P6,500,000 for the current yoor Pon costenal reporting Purposes, the entity allocates comme, inti pased on the ratio of a segment’s sales to total velar nal information regarding the different segmonte follows: les Costs specific tothe segment wont 1,100,000 2 1,000,000 : 1,300,000 : 880,000 7 400:000 hat is the operating profit of Segment 17 Problem 12-18 (AICPA Adapted) ‘Taylor Company assesses performance and makes operating decisions using the following information for the reportable segments: Total revenue 7,680,000 Total profit and loss "406,000 ‘The total profit and loss included intersegment profit of P61,000. In addition, the entity has P5,000 of common costs for the reportable segments that are not allocated in reports provided to the chief operating decision maker. For purposes of segment reporting, what amount should be reported as segment profit? 340,000 4. 345,000 © 401,000 4 406,000 399 Scanned with CamScannerPatt Problem 12-19 (AA) Diversity Company had total assets of P65.000,099 year-end and provided the following condensed ingot statement for the current ye' 45,000, Sales 009 Expenses Gages Income before income tax 12,000,009 Income tax expense CBsggaee Net income 2. ‘The entity has two reportable segments and has develope the following related information: SegmentA SegmentB Others Sales 25,000,000 15,000,000 5,000,009 Segmentexpenses 18,000,000 9,000,000 4000'009 Segment assets 35,000,000 18,000,000 7,000,009 ‘The total assets of P65,000,000 include general corporate assets of P5,000,000. The total segment expenses of P33,000,000 in corporate expenses of P2,000,000. de general ‘The chief operating decision maker does not al tax as a measure of profit or loss, Required: 1. Prepare the necessary disclosures for Di in relation to operating segments. 2 Prepare the reconciliations between segment information and amount shown in the entity's financia 400 ye plesn 12-20 aaa) pr 1 Company does business in several different industries, conf? densed income statement for ti ‘he trent year is as follows: he entire entity for ae 60,000,000 Jes 000, Seat of goods sold (28,000,000) ross income 32,000,000 sapere (14,000,000) Fiprecation parame tax EXPENSE Netineome entity has two major reportable segments, X and Y. An ‘ms ysis reveals that P1,000,000 of the total depreciation tapense and P2,000,000 of the expenses are related to general forporate activities, ‘The chief operating decision maker allocates income tax expense to reportable segments as a measure of profit or loss. ‘The expenses and sales are directly allocable to segment activities according to the following percentages: SegmentX SegmentY Others Sales 40% 45% 15% Cost of goods sold 35 50 8 Expenses 40 40 20 Depreciation 40 45 15 Income tax ex 50 40 10 Required: 1. Prepare a sch that reports the segment profit or loss. 2 Prepare the disclosures required for operating segments. 3. Prepare t ‘ions between segment information and amounts shown in the entity's financial statements. 401 Scanned with CamScannerHive Problem 12-21 (IFRS) Easy Company provided the following statement of fin, position at year-end and income statement for the” year: ancial ‘Uurrent Current assets 130,009 500,009 a 100,006 eel in associa oot otal assets 800.000 Current liabilities 90,009 Noncurrent liebilities 60,000 Share capital 400,000 Retained earnings 250,009 Gross profit Other income Distribution cost ‘Administrative expenses Other expenses Finance cost Share in profit of associate Income before tax Income tax expense Net income * The entity is organized for management purposes into three major operating segments, namely furniture, stationery and computer products. There are other smaller operating segments. Externalsales — Intersegment sales Purniture 800,000 200,000 Stationery 500,000 150,000 Computer products 400,000 50,000 Other segments 100,000, = 402 Tapenses and finance cost jrniture, 25% to stationery, 9 i jr to other segment” 20% to computer products les related t ‘the cost of sal ‘0 intersegment sal Tt.00 tobe alloc ae geet ant stationery, and 10% to computer product ‘The segment assets and lial ities are as follows: Computer Furniture Stationery products Others nt assets 20,000 40,000 5,000 2,000 Property. plant and 100,000 85,000" 3,000 30.000 10,000 ie 170,000 100,000 5,000 30,000 8000 1,000 20.000 7,000 2.000 50.000 15,000 3,000 ‘The remaining assets and liabilities are general corporate assets and liabilities identified with the entity as a whole. * ‘The other income and other expenses are not allocated to the operating segments as a measure of profit or loss. * The chief operating decision maker does not allocate income tax expense to reportable segments as a measure of profit or loss. Required: 1. Determine the profit or loss for all of the operating segments. 2 Prepare the disclosures required for operating segments. 3 Prepare the necessary reconciligtions between the segment information and’amounts shown in the entity's financial statements. 403 Scanned with CamScannera Problem 12-22 (IAA) Revlon Company provided the following data for the curr, year. me Segment Revenue Profit (loss) Agog 1 620,000 200,000 400, 2 100,000 20,000 30.000 3 340,000 70,000 300,000, 4 190,000 30,000) 140,000 5 180,000 25, 180,000 6 70,000 120,000, 7 120,000 140,000 Others 380,000 140,000 *. ‘The “others” category includes five operating segments, none of which has revenue or assets greater than P80,009 and none with an operating profit. *. Operating Segments 1 and 2 produce very similar products and use very similar production processes, but serve different customer types and use quite different product distribution system. These differences are due in part to the fact that Segment 2 operates in a regulated environment while Segment 1 does not. *. Operating Segments 6 and 7 have very similar products, production processes, product di are organized as separate divisions since they serve substantially different types of customers. Neither ‘Segments 6 and 7 operate in a regulated environment. Required: 1. Determine the reportable segments without regard to aggregation criteria 2. If the 75% overall size test for reportable segments is not yet met, identify additional reportable segments. 3, What are the reportable segments after considering all factors? 404 problem 12-25 (IAA) versal Company has two different ves significant sales both in the Philippieee’, hee and se entity has compiled the following information: Product A, iseett aces ProduetB Phil Philippines Japan 1,000,000 1,600,000 Retin profit or 108s 250,000 goq,9q “e008 2,000,000 Seton i000 2000 500.000 "200,000 Deeg plant and M 800,000 500,000 pment 500,000 “mopman fo2a% 00.600 2560000 1500.00 secoett 2 200,000 1,400,000 6.00000 scou.eee ent liabilities 700,000 00,000 i r 000,000 2,000,000 Capital expenditures 200,000 400,000 1.000.000 son,000, Required: 1, Universal Company has structured its operations: internally into two divisions based on two products, A and B. Prepare the disclosures required in relation to operating segments. Prepare the entity-wide disclosure about geographical areas to conform with the requirement of segment reporting. 405 Scanned with CamScanner