Tutorial 1: Case Study- IFRS 8
Farso Bhd has five lines of businesses of which the operating segment results are
reviewed regularly by the chief operating decision maker (CODM), to make decisions
about resources to be allocated to the segment and assess its performance, and for
which discrete financial information is available.
Information for these five operating segments appear below.
S T U V W
RM’000 RM’000 RM’000 RM’000 RM’000
External sales 140,00 58,25
0 120,000 0 71,500 58,750
Inter-segment 95,00 7,50
0 12,500 0 39,000
Total revenue 235,00
0 132,500 65,750 110,500 58,750
Operating profit/(loss) 95,00
0 36,250 9,250 (75,000) (12,500)
Identifiable assets 265,00
0 295,000 67,500 52,500 70,000
(i) Farso intends to aggregate segment T and U on the basis that they have
similar economic characteristics due to both divisions are engaged in hotel
operations. Segment T operates hotels and beach resorts in favourite tourism
places in Malaysia. Hotels under Segment U are located in main cities
including Kuala Lumpur, Johor Bahru, Kuching, and Georgetown, targeted at
business travellers. Does segment T and U meet the aggregation criteria in
accordance with IFRS 8 Operating Segment? Justify
ANSWER: Yes, because Segment T and Segment U meet aggregation criteria in
accordance with IFRS 8 Operating Segment which both of the segment had the
similar economic characteristic and are similar according the services , processes,
type of class of customer for their product and services which were operating the
Hotels.When both segment meet the similar characteristic, it can be combined into
single operating segment.
(ii) During the financial year, Farso Bhd acquired a new subsidiary, Lisini Sdn
Bhd, as part of its vertical integration strategy. The total revenue reported by
Lisini Sdn Bhd is RM5,200,000 of which only 12% were external sales. The
results of Lisini Sdn Bhd are reviewed by the CODM. Should Lisini Sdn Bhd
be considered as an operating segment?
ANSWER:
(iii) The CODM refers to the CEO or the person who hold the highest
management position in a company. Is this statement correct?
ANSWER: Yes, because According to IFRS 8, "chief operating decision maker"
refers to a function rather than a specific executive role. Allocating resources to
operating segments and monitoring their performance is the function.
It will be obvious that the CODM is the CEO in many businesses. However, finding
the CODM can be more difficult because the relevant function depends on the
management structure and procedures of the company. The entity's chief executive,
chief operating officer, senior management group, or board of directors, for instance,
may perform the CODM job.The CODM will often be the highest level of
management at which decisions are taken, but if a supervisory body is needed to
approve those decisions, it is up to the CODM to decide if it is or not.
(iv) Determine which of the operating segments are reportable based on the;
(i) Revenue test
(ii) Operating profit (loss) test
(iii) Asset test
I) Revenue Test
10% x ( 235000 + 132500 +65750 +110500 +53750)
= 59750
Segment S ( 235000), Segment T ( 132500), Segment U ( 65750),
Segment V ( 110500) meet this test.
II) Operating profit(loss) test
10% x ( 95000 + 36250 + 9250)
=14050
Segment S (95000) , Segment T ( 36250) Segment V ( 75000)
meet this test.
III) Asset test
10% X ( 265000 + 295000 + 67500 + 52500 + 70000)
= 75000
Segment S ( 265000) and Segment T ( 295000) meet this test.
(v) Based on the 75% revenue threshold test, how many reportable segments
should be presented by Farso Bhd? Explain.
75% x( 140000 + 120000 + 58250 +71500 +58750)
=75% x448500
=336375
The total external reportable segment are 389750 ( 140000 +120000 + 58250
+71500) which is greater than the quantitative threshold.Thus Farso Bhd is not
required to identify additional reportable segment.
So Farco Bhd should disclose 4 operating segment which was Segment S, Segment
T, Segment U and Segment V because it fulfill the qualitative test-10%.
