Chapter- 08

Ideas on Accounting for Operating Segment

(IFRS-8)

1. Definition of Segment reporting

Segment reporting is the practice of breaking down accounts in an annual report to detail
activity in particulars section of a business. In many countries, accounting rules mean this
must be done where a business can clearly identify sections of a certain size. The idea is to
give investors a better insight into the way a company is being run and any potential problem
areas.

Most countries which have such rules do so under International Financial Reporting
Standards. These are rules and principles agreed by international bodies with the aim of
making it easier to compare the performance of companies in different countries. The rules
on segment reporting appear in IFRS statement number 8, first issued in 2006 and updated at
several points since.

2. Objectives of Segment Reporting

To enable the users of financial statements to:

 Better understand the performance of the enterprise;

 Better assess the risks and returns of the enterprise; and
 Make more informed (up-to-date) judgments about the enterprise as a whole.

3. Applicability of this standard

 Listed Companies
 Companies in the process of listing their equity or debt securities
 Banks including Co-operative banks
 Financial Institutions
 Insurance companies
 All commercial and business reporting enterprises having turnover exceeding Rs. 50
Crores.
 All commercial and business reporting enterprises having borrowings including
public deposits in excess of Rs. 10 Crore at any time during the accounting period.
 Holding and subsidiary companies of above.

4. Definition of Operating Segment

IFRS defines an operating segment as a component of an entity:

 That engages in business activities from which it may earn revenues and incur
expenses.
  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
asses its performance
 For which discrete (separated) financial information is available.

5. Definition of Reportable segments

A business or geographical segment is a reportable segment only if:

 Its revenue from sales to external customers and from transactions with other
segments is 10% or more of the total revenue, external and internal, of all
segments; or
 Its segment result whether profit or loss is 10% or more of –
 The combined result of all segments in profit; or
 The combined result of all segments in loss,

Whichever is greater in absolute amount; or

Any segment may be treated as reportable segment by the management. If not designated as a
reportable segment, it should be included as an unallocated reconciling item.

 its segment assets are 10% or more of the total assets of all segments.

1. Revenue Test
2. Operating Profit (Loss) Test
3. Identifiable Assets Test

“All reportable segments are operating segments, but all operating segments are not
reportable.”- Explain.

6. Geographical Segment - Definition

‘Geographical segment’ is a distinguishable component of an enterprise:

 that is engaged in providing products or services within a particular economic

environment; and
 that is subject to risks and returns that are different from those of components
operating in other economic environments.

Factors for determination of geographical segment

 Similarity of economic and political conditions;

 Relationships between operations in different geographical areas;
 Proximity (nearness or similarity) of operations;
 Special risks associated with operations in a particular area
 Exchange control regulations
 The underlying currency risks.

7. Disclosing Segmental information

A. General Information:
 IFRS 8 requires disclosure of the following:

Factors for consideration of reportable segment

 Nature of products or services

 Nature of product processes
 Type or class of customers for the product or services
 Methods used to distribute the products or provide the services
 The nature of regulatory environment, for example, banking, insurance or public
utilities.

B. Information about Profit or Loss and Other Segment Items:

For each reportable segment an entity should report:

 A measure of profit or loss

 A measure of total assets
 A measure of total liabilities (if such an amount is regularly used in decision
making).

IFRS 8 does not define segment revenue, segment result (profit or loss) or segment
assets.

 Therefore, the following amounts must be disclosed if they are included in

segment profit or loss:
 Revenues from external customers
 Revenues from inter-segment transactions
 Interest revenues
 Interest expense
 Depreciation and amortization
 Material items of income and expense (exceptional items)
 Interest in the profit or loss of associate and joint ventures accounted
for the equity method
 Income tax expense
 Material non-cash items other than depreciation or amortization.
 The following amounts must be disclosed if they are included in segment
assets:
 Investment in associates and joint ventures accounted for by the equity
method
 Amounts of additions to non-current assets other than financial
instruments

C. Entity wide disclosures

IFRS 8 also requires the following disclosures about the entity as a whole, even if it
only has one reportable segment.

 The revenues from external customers for each product and service or each
group of similar products and services.
 Revenues from external customers split between the entity’s country of
domicile and all foreign countries in total.
  Non-current assets split between those located in the entity’s country of
domicile and all foreign countries in total.
 Revenue from single external customer which amounts to ten percent or move
an entity’s revenue. The identity of the customer does not need to be
disclosed.

D. Measurement

IFRS 8 requires segmental reports to be based on the information reported to and used by
management, even where this is prepared on a different basis from the rest of the financial
statements.

Therefore, an entity must provide explanations of the measurement of segment profit or

loss, segment assets and segment liabilities, including:

 The basis of accounting for any transactions between reportable segments

 The nature of differences between the measurement of segment profit or loss,
assets and liabilities and the amounts reported in the financial statements.
Differences could result from accounting policies and/or policies for the
allocation of common costs and jointly used assets to segments
 The nature of any changes from prior periods in measurement methods
 The nature and effect of any asymmetrical allocations to segments (for
example, where an entity allocates depreciation expense but not the related
non-current assets).

8. Segment Revenue

‘Segment revenue’ is the aggregate of

(i) the portion of enterprise revenue that is directly attributable to a segment.

(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable
basis to a segment, and
(iii) revenue from transactions with other segments of the enterprise.

Exclusions from Segment revenue

(a) Extraordinary items.

(b) Interest or dividend income, including interest earned on advances or loans to other
segments unless the operations of the segment are primarily of a financial nature; and
(c) Gains on sales of investments or on extinguishment of debt unless the operations of
the segment are primarily of a financial nature.

9. Segment Expenses

‘Segment expense’ is the aggregate of

(a) the expense resulting from the operating activities of a segment that is directly
attributable to the segment, and
 (b) the relevant portion of enterprise expense that can be allocated on a reasonable
basis to the segment including expense relating to transactions with other segments of
the enterprise.

Segment Expense- Exclusions

 Extraordinary items
 Interest expense including interest incurred on advances or loans from other segments,
unless the operations of the segment are primarily of a financial nature;
 Losses on sales of investments or losses on extinguishment of debt unless the
operations of the segment are primarily or a financial nature;
 Income-tax expense
 General administrative expenses, head-office expenses, and other expenses that arise
at the enterprise level and relate to the enterprise as a whole.

10. Segment Assets

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

If the segment result includes interest or dividend income, its segment assets should
also include the related receivables, loans, investments, or other interest or dividend
generating assets.

11. Segment Liabilities

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

If the segment result of a segment includes interest expense, its segment liabilities
include the related interest bearing liabilities. It does not include income-tax liabilities.

12. Problems areas in Segment Reporting

Segmental reports can provide useful information, but they also have important
limitations.
 IFRS 8 states that segments should reflect the way in which the entity is
managed. This means that segments are defined by the directors. Arguably,
this provides too much flexibility. It also means that segmental information is
only useful for comparing the performance of the same entity over time, not
for comparing the performance of different entities.
 Common costs may be allocated to different segments on whatever basis the
directors believe is reasonable. This can lead to arbitrary (random) allocation
of these costs.
 A segment’s operating results can be distorted (unclear) by trading with other
segments on non-commercial terms.
Probem-1: (Segment Reporting)

Finlay Corporation is a diversified company that operates in different segments of the

followings:
Segment Revenue Profit Total Segment Revenue Profit Total
s Asset s Assets
s
A 800 100 550 F 60 15 72
B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178

Determine which of the segments are reportable based on the:

i. Revenue Test;
ii. Operating Profit (Loss) Test;
iii. Identifiable Assets Test.
Solution:
1. Revenue Test:
Total Revenue: (800+450+70+100+80+60+30+40+90) = 1,720;
10% of Total Revenue i.e.; 10% of 1720 = 172.
Hence segments A and B meet this test.

2. Operating Profit Test:

Total Operating Profit : (100+70+30+70+20+15+18+21+45) = 389;

10% 0f Total Profit i.e.; 10% of 389 = 38.9.
Hence segments A, B, D, and I meet this test.

3. Identifiable Assets Test:

Total Identifiable Assets: (550+400+80+112+178+72+45+45+60) = 1,542;

10% 0f Total Identifiable Assets i.e.; 10% of 1542 = 154.2.
Hence segments A, B, and E meet this test.

So, Segments A, B, D, E, and I are reportable segments.

Problem-2 (Segment Reporting)

Identify the reportable segments from the following segments information:

Revenue Profit Total Revenue Profit Total
Assets Assets
A 800 100 550 F 60 15 72
 B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178

Problem-3 (Segment Reporting)

Finlay Corporation is a diversified company that operates in five different industries: A, B, C,

D, & E. The following information relating to each segment is available for 2010:

Particulars A (Tk.) B (Tk.) C (Tk.) D (Tk.) E (Tk.)

Sales 40,000 80,000 5,80,000 35,000 55,000
Cost of Goods Sold 19,000 50,000 2,70,000 19,000 30,000
Operating Expenses 10,000 40,000 2,35,000 12,000 18,000
Total Expenses 29,000 90,000 5,05,000 31,000 48,000
Operating Profit (Loss) 11,000 (10,000) 75,000 4,000 7,000
Identifiable Assets 35,000 60,000 5,00,000 65,000 50,000

Sales of segment B & C included inter segment sales of Tk. 20,000 and 1, 00,000
respectively.
Instructions:
i. Determine which of the segments are reportable based on the:
1. Revenue Test;
2. Operating Profit (Loss) Test;
3. Identifiable Assets Test.
ii. Prepare necessary disclosure required by IFRS-08.
Solution:
i) Determination of Reportable Segments:
1. Revenue Test:
Total Revenue: (40,000+80,000+5, 80,000+35,000+55,000) = 7,90,000
10% 0f Total Revenue i.e.; 10% of 7,90,000 = 79,000.
Hence segments B and C both meet this test.

2. Operating Profit Test:

Total Operating Profit : (11,000+75,000+4,000+7,000) = 97,000;

10% 0f Total Profit i.e.; 10% of 97,000 = 9,700.
Hence segments A (11,000), B (10,000, absolute value), and C (75,000) all meet
this test.
3. Identifiable Assets Test:

Total Identifiable Assets: (35,000+60,000+5,00,000+65,000+50,000) = 7,10,000;

10% 0f Identifiable Assets i.e.; 10% of 7,10,000 = 71,000.
Hence only segment C meets this test.

Therefore, Segments A, B, and C are reportable segments.

ii)
Finlay Corporation
Segmental Worksheet
 Particulars A B C Others Total
External Revenues 40,000 60,000 4,80,000 90,000 6,70,000
Intersegment Revenues 20,000 1,00,000 1,20,000
Total Revenues 40,000 80,000 5,80,000 90,000 7,90,000
Cost of Goods Sold 19,000 50,000 2,70,000 49,000 3,88,000
Operating Expenses 10,000 40,000 2,35,000 30,000 3,15,000
Total Expenses 29,000 90,000 5,05,000 79,000 7,03,000
Operating Profit (Loss) 11,000 (10,000) 75,000 11,000 87,000
Identifiable Assets 35,000 60,000 5,00,000 1,15,000 7,10,000

Reconciliation of Revenues:

Particulars Taka
Total Segmented revenues 7,90,000
Revenues from immaterial segments (90,000)
Eliminated of inter segmental Revenues (1,20,000)
Revenues for reportable segments 5,80,000

Reconciliation of Profit/ (Loss):

Particulars Taka
Total Segmented Operating Profit 87,000
Profits from immaterial segments (11,000)
Profits for reportable segments 76,000

Reconciliation of Identifiable assets:

Particulars Taka
Total Segmented Assets 7,10,000
Identifiable assets from immaterial segments (1,15,000)
Identifiable assets for reportable segments 5,95,000

Problem-4 (Segment Reporting)

West Corporation reported the following consolidated data for 2012:

Sales Tk. 8,10,000

Consolidated income before tax 1,28,000
Total Assets 12,00,000

Data reported for West four operating divisions are as follows:

Division Division Division Division

A B C D
Sales to outsiders 2,80,000 1,30,000 3,40,000 60,000
Intersegment 60,000 18,000 12,000
sales
Traceable costs 2,45,000 90,000 2,90,000 82,000
Assets 4,00,000 1,05,000 5,00,000 75,000
Intersegment sales are priced at cost, and all goods have been subsequently sold to non
affiliates. Some joint production costs are allocated to the divisions based on total sales.
These joint costs were Tk. 45,000 in 2012. The company’s corporate center had Tk. 20,000 of
general corporate expenses and Tk. 1,20,000 of identifiable assets, which the chief operating
decision maker did not use in decision making regarding the operating segments.

Required:

i. Prepare a segment disclosure worksheet for the company as per IFRS-8.

ii. Prepare schedule showing which segments are reportable.

a) Segmental Reporting Worksheet:

Corporate
Particulars A B C D Total
Admin
Tk. Tk. Tk. Tk. Tk. Tk.
Revenues:
External Revenues 2,80,000 1,30,000 3,40,000 60,000 8,10,000
Inter segmental
Revenues 60,000 18,000 12,000 90,000
Total Revenues 3,40,000 1,30,000 3,58,000 72,000 9,00,000
Operating Costs:
Traceable Cost (245000) (90000) (290000) (82000) (7,07,000)
Allocated Cost *(17,000) (6,500) (17,900) (3,600) (45,000)
Segmented
Profit/(Loss) 78000 33500 50100 (13,600) 1,48,000
Other Items:
General Corporate
Expenses (20,000) (20,000)
Income from
Continuing Operation 78,000 33,500 50,100 (13,600) (20,000) 1,28,000
Assets:
Segments 4,00,000 1,05,000 5,00,000 75,000 10,80,000
General Corporate
Assts 1,20,000 1,20,000
Total assets 4,00,000 1,05,000 5,00,000 75,000 1,20,000 12,00,000
*(3,40,000/9,00,000)x 45,000 = 17,000
A= (45000/900000) x 340000 = 17000
B = (45000/900000) x 130000 = 6500
b)
1. Revenue Test:
10% of Total Revenue = 10% of 9, 00,000 = 90,000
So, Segments A, B, and C meet this Test.
2. Operating profit Test:
10% of Total Profit = 10% of (78,000 + 33,500 + 50,100) 1, 61,600 = 16,160
So, segments A, B, and C meet this Test.
3. Identifiable Assets Test:
10% of Total Identifiable Assets = (10% of Tk. 10, 80,000) = 1, 08,000
So, segments A, and C meet this Test.

Schedule of 10% Quantitative Test Result

 Name of Segments
Name of Test
A B C D
1.Revenue Test YES YES YES NO
2.Operating profit Test YES YES YES NO
3.Identifiable Assets Test YES NO YES NO

Therefore, Segments A, B, and C are reportable segments.

Problem-05

You are the CFO of Miaco Ltd. And you are asked for prepare a management information
system (MIS) report with the following data for the management for discussion making based
on IFRS-8.

Amount (Tk. Amount (Tk.

Particulars
in millions) in millions)
Sales:
Food products 5,650
Plastic & Packaging 625
Health & scientific 345
Others 162 6,782
Expenses:
Food products 3,335
Plastic & Packaging 425
Health & scientific 222
Others 200 4,182
Others:
General Expenses 562
Income from Investments 132
Interest Expenses 65
Identifiable Assets:
Food products 7,320
Plastic & Packaging 1,320
Health & scientific 1,050
Others 665 10,355

General Assets 722

Others Information:

i) Inter Segment Sales:

Food products Tk. 55 millions
Plastic & Packaging Tk. 72 millions
Health & scientific Tk. 21 millions
Others Tk. 7 millions
ii) Other operating profit includes Tk. 33 millions on intersegment sales;
iii) Information about intersegment expenses is not available.

Required:
Prepare a statement showing financial information about Miaco Ltd.’s operation in different
industry segments as per IFRS-8.
Problem-06:

Data with respect to four operating segments of Wabash Company for the period year ended
November 30, 2013, follows:

Operating Segments (Tk.)

Alpha Beta Gamma Delta
Net sales to outsiders 40,000 20,000 25,000 5,000
Intersegment transfer out 2,000 4,000 1,000 3,000
Intersegment transfer in 4,000 3,000 2,000 1,000
Other traceable expenses 9,000 6,000 5,000 10,000
Non traceable expenses total Tk. 20000
Wabash allocated non traceable expenses to operating segments by the following reasonable
method:

Alpha - 40%
Beta - 30%
Gamma - 20%
Delta - 10%
Alpha= (40000+2000) 42000-4000-9000-8000=21000
Beta = (20000+4000) 24000 – 3000-6000-6000 = 9000
Gamma = (25000+1000) 26000 – 2000-5000-4000=15000
Delta= (5000+3000) 8000-1000-10000-2000 = (5000)
Instructions:
a) Prepare a working paper to compute the segment profit or loss for Wabash
Company’s four operating segments for the year ended November 30, 2013.
b) Identify the reportable segments.
Answer: 21000, 9000, 15000, (5000)

Problem: 07

Lioyd Corporation reports the following information for 2018 for its three operating
segments:
Segment A Segment B Segment C
Sales Tk. 15,00,000 Tk. 12,00,000 Tk. 3,00,000
Traceable operating expenses 10,00,000 7,00,000 3,00,000
Other 2018 expenses for Lioyd Corporation are as follows:
Indirect operating expenses Tk. 9,00,000
Interest expenses 1,20,000
General corporate expenses 2,00,000

Indirect operating expenses are allocated to segments based upon the ratio of each segment's
traceable operating expenses to total traceable operating expenses. Interest expense is
allocated to segments based upon the ratio of each segment's sales to total sales. Required:
i. Calculate the operating profit or loss for each of the segments for 2018.
ii. Determine which segments are reportable, applying the operating profit or loss test as
per IFRS-8.
Problem: 08

Calvin Inc. has operating segments in five different industries: apparel, building chemical,
furniture, and machinery. Data for the five segments for 2019 are as follows:
Apparel Building Chemical Furniture Machinery
(Figures in Taka)
Sales to non affiliates 8,70,000 7,50,000 55,000 95,000 1,80,000
Intersegments sales 5,000 15,000 1,40,000
Cost of goods sold 4,80,000 4,50,000 42,000 78,000 1,50,000
Selling expenses 1,60,000 40,000 10,000 20,000 30,000
Other traceable
expenses 40,000 30,000 6,000 12,000 18,000
Allocated general
corporate expenses 80,000 75,000 7,000 13,000 25,000
Other information:
Segment assets 6,10,000 5,60,000 80,000 90,000 1,40,000
Depreciation expense 60,000 50,000 10,000 11,000 25,000
Capital expenditure 20,000 30,000 15,000
Additional Information:
1. The corporate headquarters had general corporate expenses totaling Tk. 2,35,000. For
internal reporting purposes, Tk. 2,00,000 of these expenses were allocated to the
divisions based on their cost of goods sold. The other corporate expenses are not used
in segmental decision making by the chief operating decision maker.
2. The company had an inter corporate transfer pricing policy that all intersegment sales
shall be priced at cost. All intersegment sales were sold to outsiders by December 31,
2019.
3. Corporate headquarters had assets of Tk. 1, 25,000 that were not used in segmental
decision making by the chief operating decision maker.
4. The depreciation expenses (listed in the section titled, “Other information”) has
already been added into cost of goods sold in accordance with the company’s cost
measurement policies.
Instructions:
i. Prepare a Segment disclosure work paper for Calvin Inc.
ii. Prepare schedules to show which segments are separately reportable as per IFRS-8.