1. Chapter 24
Segment reporting

2. Objectives of this lecture
Understand that consolidated financial statements provide an aggregated view of the financial performance and financial position of business operations from various industries and geographical locations
Understand that to avoid information loss the consolidated financial statements need to be supplemented by additional disclosures pertaining to the various operating segments in which the organisation operates
Understand the disclosures required in relation to separate operating segments and know that segment disclosures provide information to enable a more informed assessment of the performance and associated risks of an organisation’s various activities

3. Objectives (cont.) Understand how ‘operating segments’ are defined
Be aware that information about an operating segment’s profit or loss must be disclosed in the notes to a reporting entity’s financial statements to the extent that the segments are deemed to be reportable pursuant to AASB 8 Operating Segments
Understand how to determine whether a particular operating segment is of sufficient magnitude or importance to be deemed ‘reportable’
Be able to describe the particular disclosures that must be made about an operating segment’s products and services, reliance on major customers, and the geographical dispersion pursuant to the requirements of AASB 8

4. Advantages and disadvantages of segment reporting
Usual for reporting entities to be involved in a number of different activities and 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
AASB 8 Operating Segments requires the disclosure of segment information within the notes of a company’s financial statements
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

5. 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 in particular segments and other parties consider that they can manage the particular segment more effectively

6. Introduction to AASB 8
AASB 8 Operating Segments was initially released in and replaced AASB 114
Issued as part of a process of converging standards issued by the IASB with those issued by the FASB
Relative to the requirements of the former standard (AASB 114), AASB 8 has less prescription and relies upon the ‘management approach’ adopted for segment reporting
AASB 8 is more principles-based than rules-based.
AASB 8 requires that the segments identified for internal management purposes should also be the segments that are used for external reporting purposes
Exhibit 24.2 (p. 796) provides an example of segment disclosures

7. Identification of segments
The former standard, AASB 114, required the separate identification of two categories of segments, these being:
business segments
geographical segments
By contrast, AASB 4 refers to ‘operating segments’
Operating segment defined
AASB 8 relies upon how the organisation identifies its operating segments

8. Identification of segments (cont.)
AASB 8 requires identification of operating segments on the basis of internal reports that are regularly reviewed by the entity’s ‘chief operating decision maker’ in order to allocate resources to the segment and assess its performance

9. Can all components of an organisation be deemed to be part of an operating segment?
Not all parts of an entity will be considered to be part of an operating segment. As paragraph 6 of AASB 8 states:
Not every part of an entity is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or some functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the entity and would not be operating segments. For the purposes of this IFRS, an entity’s post-employment benefit plans are not operating segments

10. Inter-firm comparability
Allowing management to determine what components of their operation will constitute ‘operating segments’ leads to concerns about comparing the results of operating segments of different organisations operating across similar industries
However, the standard setters decided that the increased relevance of the information outweighs this concern pertaining to comparability

11. Defining a reportable segment
A reportable segment is an operating segment or an aggregation of operating segments than meet specific criteria provided in AASB 8
A reportable segment is an operating segment for which segment information is disclosed pursuant to AASB 8
In relation to reportable segments, paragraph 11 of AASB 8 requires an entity to report separately information about each operating segment

12. Aggregation of segments
Paragraph 12 of AASB 8 states:
Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of this Standard, the segments have similar economic characteristics, and the segments are similar in each of the following respects:
(a) the nature of the products and services
(b) the nature of the production processes
(c) the type or class of customer for their products and services
(d)the methods used to distribute their products or provide their services, and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities

13. Quantitative thresholds for disclosing operating segments
Paragraph 13 of AASB 8 states: An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds: (a) its reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments (b) the absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss (c) its assets are 10 per cent or more of the combined assets of all operating segments

14. Quantitative thresholds for disclosing operating segments (cont.)
Paragraph 13 of AASB 8 states (cont.):
Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements

15. Combining operating segments for the purposes of disclosure
In relation to combining operating segments that might not otherwise be deemed to be reportable, paragraph 14 of AASB 8 states: An entity may combine information about operating segments that do not meet the quantitative thresholds with information about other operating segments that do not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria listed in paragraph 12

16. Sufficient segment data being disclosed?
In addition to determining whether or not a specific operating segment should be disclosed, we also need to consider whether, in total, a sufficient number of operating segments have been disclosed
AASB 8 requires a specific proportion of an entity’s total revenue to be attributed to operating segments

17. Sufficient segment data being disclosed? (cont.)
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 paragraph 35, until at least 75% of total consolidated or entity revenue is included in reportable segments. Specifically, paragraph 15 requires:
If the total external revenue reported by operating segments constitutes less than 75 per cent of the entity’s revenue, additional operating segments shall be identified as reportable segments (even if they do not meet the criteria in paragraph 13) until at least 75 per cent of the entity’s revenue is included in reportable segments.

18. Combining segments in order to satisfy ‘75% of revenue’ test
Paragraph 16 of AASB 8 states:
Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an ‘all other segments’ category separately from other reconciling items in the reconciliations required by paragraph 28. The sources of the revenue included in the ‘all other segments’ category shall be described
See Worked Example 24.1 (p. 805)—Determination of reportable segments—for details about how to identify reportable segments

19. Growth or contraction of operating segments
Across time, an entity’s operating segments may grow or contract relative to the sizes of other operating segments
This has implications for identifying reportable segments.
It could mean that some operating segments that met the quantitative criteria for disclosure in previous periods no longer do so, and vice versa.
Refer to paragraphs 17 and 18 of AASB 8

20. Measurement of segment items
The previous standard on segment reporting, AASB 114, provided detailed guidance on measuring segment items, such as segment revenue, segment profit, segment assets and segment liabilities
This is no longer the case with our new accounting standard, AASB 8
Now, much discretion is left to management
Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments

21. Measurement of segment items (cont.)
AASB 8 requires the amount (e.g. profit, assets, liabilities) reported for each operating segment item to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance. This can be the case regardless of the accounting methods being used
By contrast, AASB 114 (the former standard) required segment information to be prepared in conformity with the accounting policies adopted for preparing and presenting the external financial statements

22. Measurement of segment items (cont.)
AASB 114 (the former standard) provided relatively detailed definitions of segment revenue, segment expense, segment result, segment assets and segment liabilities
Again, by contrast, AASB 8 does not define these terms, nor require particular measurement approaches to be adopted. But it does require an explanation of how segment profit or loss, segment assets and segment liabilities are measured for each reportable segment
Judgment is being delegated to the management of the reporting entity

23. Measurement of segment items (cont.)
While entities are required to provide segment disclosures based on the measures utilised internally, some accompanying explanation is required to assist users of financial statements to understand the basis of the measurements used. Specifically, paragraph 27 of AASB 8 requires a number of disclosures that provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment (p. 788 provides details of these disclosures)

24. Required financial disclosures
See paragraphs 23 and 24 of AASB 8 for details of the specific disclosure requirements (pages 808 and 809 of textbook)

25. Reconciliation of segment information to financial statements
Financial statements must be compiled in accordance with accounting standards
Segment disclosures are reported on the basis of whatever accounting methods the entity utilises to generate information for the ‘chief operating decision maker’
AASB 8 requires reconciling information to be produced

26. Reconciliation of segment information to financial statements (cont.)
Reconciliations of total reportable segment revenues, total profit or loss, total assets, total liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements
See the reconciliation provided at Exhibit (p. 810)

27. Non-financial disclosures
AASB 8 also requires entity-wide, non-financial information to be disclosed
These disclosures apply to all entities subject to AASB 8
These entity-wide disclosures are required by paragraphs 32–4 of AASB 8, which require that the additional information be provided only if it is not provided as part of the reportable segment information required elsewhere pursuant to AASB 8
See Exhibit 24.4 (p. 811) for an example of the additional disclosures that might be made

28. Summary
Segment reporting provides information about the performance and financial position of various operating 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

29. Summary (cont.)
Perceived costs in relation to segment data include the following:
Creation of a competitive disadvantage
Possibility encourages takeover bids for poorly performing segments
Possibility of profitable segments attracting unwelcome attention from government and interest group
The relevant Australian Accounting Standard pertaining to segment disclosures is AASB 8 Operating Segments, which was released in 2007

30. Summary (cont.)
The standard requires the disclosure of financial information about an entity’s operating segments
Operating segments are identified on the basis of the components of the organisation that the chief operating decision maker reviews in making decisions about resources to be allocated to the segments, and as part of the process of assessing their performance
Once a component of an entity is deemed to be an operating segment, quantitative criteria are provided to determine whether the segment is reportable (any of 10 per cent of total segment revenues; 10 per cent of the absolute amount of the greater of total profitable segments’ profit or the total of the loss-making segments’ losses; 10 per cent of total segment assets)

31. Summary (cont.)
In addition, ‘reportable segments’ are required to constitute not less than 75 per cent of the entity’s total revenues
In providing financial information about operating segments’ revenues, profits, assets and liabilities, the entity is to provide measurements that utilise the amounts used for internal decision making
That is, segment disclosures do not have to be based on the measurements that are required to be used to generate the entity’s financial statements

32. Summary (cont.)
AASB 8 requires a number of financial disclosures relating to reportable segments. It also requires reconciliations of total reportable segment revenues, total profit or loss, total segment liabilities and total segment assets to corresponding amounts in the entity’s financial statements
AASB 8 also requires a number of entity-wide disclosures. Such disclosures relate to the entity’s products and services, geographical information, and information about major customers