1. 21-1 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Financial reporting by segments Chapter 21

2. 21-2 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives Understand that consolidated financial statements provide an aggregated view of the financial performance and financial position of business operations from various business segments and geographical locations Understand that to avoid information loss the consolidated financial statements need to be supplemented by additional disclosures pertaining to the various business and geographical segments in which the organisation operates (Continues)

3. 21-3 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives (cont.) Understand what is meant by ‘segment disclosures’ and understand that segment disclosures provide information to enable a more informed assessment of the performance and associated risks of an organisation’s various activities Understand how ‘business segment’ and ‘geographical segment’ are defined (Continues)

4. 21-4 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives (cont.) Be aware that information about material business and geographical segments must be disclosed in the notes to a reporting entity’s financial statements pursuant to NZ IAS 14 Understand how to determine whether a particular business or geographical segment is of such a magnitude as to be deemed ‘reportable’ Be able to describe the particular disclosures that must be made about business and geographical segments, pursuant to the requirements of NZ IAS 14

5. 21-5 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Advantages and disadvantages of segment reporting Usual for reporting entities to be involved in a number of different activities and to be located in widely dispersed locations Consolidated financial statements provide aggregated results with resulting loss of information Requirement to consolidate all entities that a company controls means there is a need for segment data NZ IAS 14 ‘Segment Reporting’ requires the disclosure of segment information within the notes of a company’s financial statements (Continues)

6. 21-6 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Advantages and disadvantages of segment reporting (cont.) Advantages of segment reporting Highlights performance of the various parts of an organisation Enables users of financial statements to be better able to predict the future profitability of an organisation, particularly where segments are involved in diverse activities (Continues)

7. 21-7 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Advantages and disadvantages of segment reporting (cont.) Disadvantages of providing segment information Will lead to some costs being imposed on an organisation – Management less likely to take business risks in particular segments if each segment’s results available – Competitors will have access to information concerning segment profitability – May also provide encouragement for further entrants into the industry – Risk of takeover bids if losses made

8. 21-8 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An introduction to NZ IAS 14 NZ IAS 14 ‘Segment Reporting’ released in 2004 as part of process of New Zealand adopting IFRSs by 2007 (2005 for early adopters) Replaces previous accounting standard SSAP 23 ‘Financial Reporting for Segments’ which was released in 1989 NZ IAS 14 requires certain organisations to provide segment data with segmentation being done on business and geographic lines Definition of segment very broad (Continues)

9. 21-9 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An introduction to NZ IAS 14 (cont.) Two categories of segment reporting 1. Business segments 2. Geographical segments (Continues)

10. 21-10 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An introduction to NZ IAS 14 (cont.) Requirement for reporting entity to determine ‘primary reporting format’: Based on business or geographic segmentation More information required to be disclosed for primary reporting format Secondary reporting format requires much less disclosure For example, if business segmentation is deemed to be primary reporting format for segment disclosures geographical segments would be secondary reporting format (Continues)

11. 21-11 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An introduction to NZ IAS 14 (cont.) NZ IAS 14 promotes view that segment disclosures can provide useful information NZ IAS 14 (Objectives section): – The objective of this Standard is to establish principles for reporting financial information by segment — information about the different types of products and services an entity produces and the different geographical areas in which it operates — to help users of financial reports: –better understand an entity’s performance –better assess the entity’s risks and returns –make more informed judgments about the entity as a whole (Continues)

12. 21-12 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An introduction to NZ IAS 14 (cont.) Many entities provide groups of products and services or operate in geographical areas subject to differing rates of profitability, opportunities for growth, future prospects, and risks Information about an entity’s different products and services and its operations in different geographical areas — often called segment information — relevant to assessing the risks and returns of a diversified or multinational entity but may not be determined from the aggregated data Thus, segment information is widely regarded as necessary to the needs of users of financial reports

13. 21-13 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments Business segment NZ IAS 14 (par. 9) – A business segment is a distinguishable component of an entity that is engaged in providing an individual product or service or a group of related products or services and that is subject to risk and returns that are different from those of other business segments (Continues)

14. 21-14 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Factors to be considered in determining if products and services are related include: (a)the nature of products or services (b)the nature of the production processes (c)the type or class of customer for the products or services (d)the methods used to distribute the products or provide the services (e)if applicable, the nature of the regulatory environment, e.g. banking, insurance, or public utilities Business segments example: –Organisation with a successful timber segment could provide an argument to justify combining its timber segments with others (e.g. paper manufacturing and wood chipping) (Continues)

15. 21-15 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) NZ IAS 14 adopts a ‘risk and returns’ approach to identifying business (and geographic) segments NZ IAS 14 (par. 11) – A single business segment does not include products and services with differing risks and returns. While there may be dissimilarities with respect to one or several of the factors in the definition of a business segment, the products and services included in a single business segment are expected to be similar with respect to a majority of the factors (identified in par. 9) (Continues)

16. 21-16 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) There is an expectation that there must be some degree of differentiation between the products or services offered by different business segments Even based on requirements of NZ IAS 14 there is a deal of professional judgment required in identifying individual segments It is possible that different management teams will identify segments differently (Continues)

17. 21-17 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Geographical segment NZ IAS 14 (par. 9) – A distinguishable component of an entity 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 (Continues)

18. 21-18 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Factors to consider in identifying geographical segments NZ IAS 14 identifies a number of factors to be considered in identifying geographical segments (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 (f)Underlying currency risks (Continues)

19. 21-19 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Factors to consider in identifying geographical segments (cont.) NZ IAS 14 (par. 12) A geographical segment does not include operations in economic environments with differing risks and returns. A geographical segment may be a region within a country, a single country, or a group of two or more countries (Continues)

20. 21-20 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Factors to consider in identifying geographical segments (cont.) NZ IAS 14 (par. 13) The predominant sources of risks affect how most entities are organised and managed Thus, par. 27 of the standard provides that an entity’s organisational structure and its internal financial reporting system is the basis for identifying segments The risks and returns of an entity are influenced by the geographical location of its operations (where its products are produced or its service delivery activities are based) and by the location of its markets (where its products are sold or services rendered) (Continues)

21. 21-21 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Factors to consider in identifying geographical segments (cont.) Definition allows geographical segments to be based on either: (a)the location of an entity’s production or service facilities and other assets; or (b) the location of its markets and customers NZ IAS 14 (par. 14) An entity’s organisational and internal reporting structure normally provides evidence of whether its main source of geographic risks results from the location of its assets (the origin of its sales) or the location of its customers (the destination of its sales). Thus, an entity looks to this structure to determine whether its geographic segments should be based on the location of its assets or on that of its customers (Continues)

22. 21-22 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Business and geographic segments (cont.) Choice of primary reporting format A ‘risk and returns’ approach is again adopted – Where entity’s risks and returns affected predominantly by differences in products and services compared with geographical areas:  business segment is primary reporting format  geographical segment is secondary reporting format – Where risks and returns affected predominantly by differences in geographical location compared with products and services:  geographical segment is primary reporting format  business segment is secondary reporting format Refer NZ IAS 14, pars 26 and 27

23. 21-23 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Identifying individual segments Management must first determine the entity’s business and geographic segments for reporting purposes NZ IAS 14 requires that consideration be given first to how an organisation provides information internally to its management — this in itself could provide a good basis for determining the segments of a business (Continues)

24. 21-24 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Identifying individual segments (cont.) NZ IAS 14 (par. 28) For most entities, the predominant source of risks and returns determines how the entity is organised and managed An entity’s organisational and management structure and its internal financial reporting system provide the best evidence of its predominant risks and returns for the purpose of its segment reporting Thus, except in rare circumstances, an entity will report segment information in its financial reports on the same basis as it reports internally to top management Its predominant source of risks and returns becomes its primary segment reporting format Its secondary source of risks and returns becomes its secondary segment reporting format (Continues)

25. 21-25 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Identifying individual segments (cont.) NZ IAS 14 (par. 28) (cont.) Where internal information reporting to the chief executive officer and board is not tied to products or services, the next level down in internal management reporting should be used to identify reportable segments Where internal reporting even at the lower levels is not undertaken on a segmental basis, the entity might apply the definitions of business and geographic segments as provided in NZ IAS 14 to determine the respective segments

26. 21-26 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure Rationale Once we have divided the activities of an entity into their respective business and geographical segments, we must determine whether information about these various segments requires separate disclosure NZ IAS 14 adopts the terminology ‘reportable segment’ as business segment or geographical segment for which segment information is required to be disclosed by the standard (Continues)

27. 21-27 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure (cont.) Rationale (cont.) Defined as a reportable segment if: – a business segment or a geographical segment for which segment information is required to be disclosed Identified as a reportable segment if: – a majority of its segment revenues arise from sale to external customers and:  revenues from sale (to external customers or to other segments) are 10% or more of total segment revenue; or  profit or loss is 10% or more of the combined result of all segments that earned a profit or that earned a loss; or  its assets are 10% or more of the total segment assets of all segments (Continues)

28. 21-28 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure (cont.) NZ IAS 14 (par. 35) provides guidelines for determining whether a segment is a ‘reportable segment’ (i.e. separate disclosure required): – A business segment or geographical segment shall be identified as a reportable segment if a majority of its revenue is earned from sales to external customers and: a)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 b)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 the greater in absolute amount; or c)its assets are 10% or more of the total assets of all segments (Continues)

29. 21-29 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure (cont.) Note: Test (b) is based on absolute amounts Only one of the three tests (a) to (c) needs to be satisfied for the segment to be deemed a reportable segment – Apart from preceding requirements, there is a further requirement for the separately identified segments, when aggregated, to constitute at least 75% of the entity’s total revenues, or else additional segments must be identified

30. 21-30 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure (cont.) Under NZ IAS 14 (par. 37) If total external revenue attributable to reportable segments constitutes less than 75% of the total consolidated or entity revenue, additional segments shall be identified as reportable segments, even if they do not meet the 10% thresholds in par. 35, until at least 75% of total consolidated or entity revenue is included in reportable segments Refer to Worked Example 21.1, 'The determination of reportable segments', pp. 888–9 (Continues)

31. 21-31 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining whether information requires separate disclosure (cont.) NZ IAS 14 (par. 36) allows segments that might be individually material to be combined as a single reportable business segment or geographical segment, provided that: – if an internally reported segment is below all of the thresholds of significance in par. 35: a)that segment may be designated a reportable segment despite its size; b)if not designated a reportable segment despite its size, that segment may be combined with a separately reportable segment with one or more other similar internally reported segment(s) that are also below all of the thresholds of significance in par. 35 (two or more business segments or geographical segments are similar if they share a majority of the factors in the appropriate definition in par. 9); and c)if that segment is not separately reported or combined, it shall be included as an unallocated reconciling item

32. 21-32 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities In determining whether a segment is reportable we must determine the segment’s contribution in terms of: – segment revenue – segment result – segment assets – segment expenses – segment liabilities (Continues)

33. 21-33 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment revenue NZ IAS 14 (par. 16) – Revenue reported in the entity’s income statement that is directly attributable to a segment and the relevant portion of entity revenue that can be allocated on a reasonable basis to a segment, whether from sales to external customers or from transactions with other segments of the same entity (Continues)

34. 21-34 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment revenue NZ IAS 14 (par. 16) (cont.) – Segment revenue does not include: (a)interest or dividend income, including interest earned on advances or loans to other segments, unless the segment’s operations are primarily of a financial nature; or (b)gains on sales of investments or gains on extinguishment of debt unless the segment’s operations are primarily of a financial nature – Segment revenue includes an entity’s share of profits or losses of associates, joint ventures, or other investments accounted for under the equity method only if those items are included in consolidated or total entity revenue (Continues)

35. 21-35 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment result NZ IAS 14 (par. 16) — segment revenue less segment expenses Segment expenses NZ IAS 14 (par. 16): – Segment expense is expense resulting from the operating activities of a segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to the segment, including expenses that are related to sales to external customers and expenses relating to transactions with other segments of the same entity (Continues)

36. 21-36 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) NZ IAS 14 (par. 16) (cont.) – Segment expense does not include: (a)interest, including interest incurred on advances or loans from other segments, unless the segment’s operations are primarily of a financial nature (b)losses on sales of investments or losses on extinguishment of debt unless the segment’s operations are primarily of a financial nature (c)an entity’s share of losses of associates, joint ventures, or other investments accounted for under the equity method (d)income tax expense (Continues)

37. 21-37 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) NZ IAS 14 (par. 16) (cont.) – Segment expense does not include: (e) general administrative expenses, head office expenses, and other expenses that arise at the entity level and relate to the entity as a whole. However, costs are sometimes at the entity level on behalf of a segment. Such costs are segment expenses if they relate to the segment’s operating activities and they can be directly attributed or allocated to the segment on a reasonable basis – For a segment’s operations that are primarily of a financial nature, interest income and interest expense may be reported as a single net amount for segment reporting purposes only if those items are netted in the consolidated or entity financial reports (Continues)

38. 21-38 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment assets – NZ IAS 14 (par. 16)  Assets that are employed by a segment in its operating activities and that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis  If a segment’s segment result includes interest or dividend income, its segment assets include the related receivables, loans, investments, or other income-producing assets  Segment assets do not include income tax assets  Segment assets are determined after deducting related items, such as accumulated depreciation from depreciable assets and doubtful debts from accounts receivable, recognised in the entity’s balance sheet (Continues)

39. 21-39 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment assets (cont.) – NZ IAS 14 (par. 19): examples  Examples of segment assets include current assets used in the operating activities of the segment, property, plant, and equipment, assets that are the subject of finance leases (AASB 117 ‘Leases’) and intangible assets  If a particular item of depreciation or amortisation is included in segment expense, the related asset is also included in segment assets  Segment assets do not include assets used for general entity or head-office purposes  Segment assets include operating assets shared by two or more segments if a reasonable basis for allocation exists  Segment assets include goodwill that is directly attributable to a segment or that can be allocated to a segment on a reasonable basis, and segment expense includes related amortisation of goodwill (Continues)

40. 21-40 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment liabilities –NZ IAS 14 (par. 16) 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 If a segment’s segment result includes interest expense, its segment liabilities include the related interest-bearing liabilities Segment liabilities do not include income tax liabilities (Continues)

41. 21-41 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment liabilities: examples –NZ IAS 14 (par. 20) Examples of segment liabilities include trade and other payables, accrued liabilities, customer advances, product warranty provisions, and other claims relating to the provision of goods and services Segment liabilities do not include borrowings, liabilities related to assets that are the subject of finance leases (AASB 117), and other liabilities that are incurred for financing rather than operating purposes If interest expense is included in segment result, the related interest-bearing liability is included in segment liabilities (Continues)

42. 21-42 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Determining segment revenue, results, assets, expenses and liabilities (cont.) Segment liabilities: examples –NZ IAS 14 (par. 20) (cont.) The liabilities of segments whose operations are not primarily of a financial nature do not include borrowings and similar liabilities because segment result represents an operating rather than a net-of-financing profit or loss Further, because debt is often issued at the head-office level, on an entity-wide basis, it is often not possible to directly attribute, or reasonably allocate, the interest- bearing liability to the segment

43. 21-43 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures required Primary reporting format The disclosure requirements in pars 51–67 of NZ IAS 14 are to be applied to each reportable segment based on an entity’s primary reporting format, that is based on either geographical or business segmentation Summary of required disclosures: – An entity is to disclose segment revenue for each reportable segment. Segment revenue from sales to external customers and segment revenue from transactions with other segments is to be separately reported – An entity is to disclose segment result for each reportable segment (Continues)

44. 21-44 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures required (cont.) Primary reporting format Summary of required disclosures (cont.) – An entity is to disclose the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant and equipment, and intangible assets) for each reportable segment – An entity is to disclose the total amount of expense included in segment result for depreciation and amortisation of segment assets for the period for each reportable segment – An entity is encouraged but not required to disclose the nature and amount of any items of segment revenue and segment expense that are of such a size, nature or incidence that their disclosure is required, that were included in segment expense and, therefore, deducted in measuring segment result – An entity is to disclose, for each reportable segment, the aggregate of the entity’s share of the net profit or loss of associates, joint ventures, or other investments accounted for under the equity method if substantially all of those associates’ operations are within that single segment (Continues)

45. 21-45 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures required (cont.) Primary reporting format Summary of required disclosures (cont.): – If an entity’s aggregate share of the net profit or loss of associates, joint ventures or other investments accounted for under the equity method is disclosed by reportable segment, the aggregate investments in those associates and joint ventures are also to be disclosed by reportable segment – An entity is also to present a reconciliation between the information disclosed for reportable segments and the aggregated information in the consolidated or entity financial reports. In presenting the reconciliation, segment revenue is to be reconciled with entity revenue from external customers Example: – Refer to Appendix B to NZ IAS 14, Illustrative segment disclosures where business segments have been used as the primary reporting format – Refer to Exhibit 21.3, p. 896 (Continues)

46. 21-46 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures required (cont.) Secondary segment information NZ IAS 14 (pars 69–72) identifies the disclosure requirements to be applied to each reportable segment based on an entity’s secondary reporting format: (a) if an entity’s primary reporting format is business segments, the secondary-format disclosures are identified in par. 69; (b) if an entity’s primary reporting format is geographical segments based on location of assets (where the entity’s products are produced or where its service delivery operations are based), the required secondary-format disclosures are identified in pars 70 and 71; and (c) if an entity’s primary format is geographical segments based on the location of its customers (where its products are sold or services rendered), the required secondary format disclosures are identified in pars 70 and 72

47. 21-47 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures for secondary reporting format Where primary format is business segments, the following must be disclosed for each geographical segment where total revenues from sales to external customers, or segment assets, are 10% or more of total entity revenues from sales to all external customers, or of entity’s total assets: – segment revenues from external customers – total carrying amount of segment assets – total recognised for acquisition of non-current assets for each geographical segment (Continues)

48. 21-48 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures for secondary reporting format (cont.) NZ IAS 14 (pars 74–83) requires a number of other segment-related disclosures in addition to those concerning the primary and secondary reporting format  If a business segment or geographical segment for which information is reported to the board of directors and chief executive officer is not a reportable segment because it earns a majority of its revenue from sales to other segments, but nonetheless its revenue from sales to external customers are 10% or more of total entity revenue from sales to all external customers, the entity is to disclose that fact and the amounts of revenue from (a) sales to external customers and (b) internal sales to other segments  In measuring and reporting segment revenue from transactions with other segments, inter-segment transfers are to be measured on the basis that the entity actually used to price those transfers. Any change in the basis of pricing inter-segment transfers is to be disclosed in the financial reports (Continues)

49. 21-49 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures for secondary reporting format (cont.) NZ IAS 14 (pars 74–83) (cont.)  Changes in accounting policies adopted for segment reporting that have a material effect on segment information are to be disclosed, and prior period segment information presented for comparative purposes is to be restated unless it is impractical to do so  Such disclosure is to include a description of the change, the reasons for the change, the fact that comparative information has been restated or that it is impractical to do so, and the financial effect of the change, if it is reasonably determinable  If an entity changes the identification of its segments and it does not restate prior period segment information on the new basis because it is impractical to do so, for the purposes of comparison the entity is to report segment data for both the old and the new bases of segmentation in the period in which it changes the identification of its segments (Continues)

50. 21-50 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Disclosures for secondary reporting format (cont.) NZ IAS 14 (pars 74–83) (cont.)  Some changes in accounting policies relate specifically to segment reporting e.g. changes in identification of segments and changes in the basis of allocating revenues and expenses to segments  Such changes can have a significant impact on the segment information reported but will not change aggregate financial information reported for the entity  To enable users to understand the changes and to assess trends, prior period segment information that is included in the financial reports for comparative purposes is to be restated to reflect, if practicable, the new accounting policy  An entity is to indicate the types of products and services included in each reported business segment and indicate the composition of each reported geographical segment, both primary and secondary, if not otherwise disclosed in the financial reports or elsewhere in the financial reports  An explanation of the reasons why a previously reported segment is no longer reported are to be disclosed

51. 21-51 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary Segment reporting provides information about the performance and financial position of various subunits of an organisation divided into business and geographic segments It provides a useful supplement to consolidated financial statements where data is aggregated Benefits of segment reporting include that it allows: – for more informed decision making relating to future profitability and risk exposure of an entity – management to demonstrate greater accountability – interested parties to know in which sectors and locations the entity operates (Continues)

52. 21-52 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary (cont.) Perceived costs in relation to segment data include: – Creation of a competitive disadvantage – Possibly encourages takeover bids for poorly performing segments – Possibility of profitable segments attracting unwelcome attention from government and interest groups (Continues)

53. 21-53 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary (cont.) Relevant accounting standard is NZ IAS 14, which was released in 2004 and requires: – financial information about an entity’s business and geographical segments to be reported – business and geographic segments to be identified normally on the basis of the internal organisation and management structure and the internal reporting system to the chief executive officer and the governing body – entities to distinguish between primary and secondary segments — determined by reference to whether the predominant source and nature of the risks of the entity relate to business or geographic segments (Continues)

54. 21-54 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary (cont.) NZ IAS 14 requires (cont.): – more information to be disclosed for primary reporting format – in determining whether a segment qualifies as a ‘reportable segment’, adherence to certain guidelines (10% of total revenues, 10% of the combined result of all segments, 10% of total segment assets) – that ‘reportable’ segments constitute not less than 75% of the entity’s total revenues – segment disclosures to be prepared using the accounting policies adopted by the reporting entity