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Book Portion		
Book Title :	Company accounting	
Book Author :	Jubb, Peter ; Haswell, Ian et al	
Edition :	5th	
Portion Title :	Chapter 27 : Segment Reporting	
Portion Author :	Jubb, Haswell, Langfield-Smith	
Publisher :	Cengage	
Place Of Publication :	South Melbourne	
Year :	2009	
Page From :	943	
Page To :	965	
Isbn Or Issn :	9780170181	

This article was originally digitised for the following unit. Articles may be reused in future semesters in other units by different lecturers.

Unit code :	AYB340	
Unit title :	COMPANY ACCOUNTING	
Lecturer’s Name :	Luke, Belinda	
Faculty/School :	Accountancy	
Request ID :	282905	

DIGITAL COPY MADE FOR QUEENSLAND UNIVERSITY OF TECHNOLOGY

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on 09-MAR-10

Page 943

Chapter twenty-seven

Segment reporting

Learning objectives

1	To understand why the provision of segment information is potentially useful to financial report users.

2	To appreciate the nature of the process used in the identification of operating segments.

3	To understand and be able to explain the nature of segment revenue, segment expense, segment profit or loss, segment assets and segment liabilities.

4	To be able to allocate revenues, expenses, assets and liabilities to operating segments and determine the amount of segment profit or loss.

5	To understand and apply the basis on which reportable segments is determined.

6	To be able to prepare tabulated segment data.

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Introduction

The aggregation of information in the financial statements, particularly consolidated financial statements, may cause difficulties when interpreting the financial report if an entity operates in diverse industries or businesses that can have different financial characteristics or different risk profiles, or both. In addition, the distribution of activities within the group means that information on individual operating segments may not be reflected in the financial statements of individual group members. To overcome this problem, it is common to present segment financial information. In Australia, segment reporting has been required since 1986, first under AASB 1005: Financial Reporting by Segments, then under AASB 114: Segment Reporting, and from January 2009 under AASB 8: Operating Segments. Initially regulation was limited to listed entities; it was extended to all reporting entities in 1991. Segment reporting is now mandatory for listed entities or entities that file (or are in the process of filing) its consolidated financial statements with a securities market regulator ‘for the purpose of issuing any class of instrument in a public market’ (AASB 8.Aus2.1). If an entity is a parent entity of a group for which consolidated financial statements are required, the segment information need only be presented on a consolidated basis. However, if segment information is also presented for the parent entity, it must comply with AASB 8.

The financial statements required by AASB 101 do not include one dealing with operating segments; therefore, the segment information is a component of the notes to the financial statements.

Terminology

For a proper understanding of segment information, we need to be familiar with the key terms: operating segment, segment revenues, segment expenses, segment profit or loss, segment assets, segment liabilities and segment accounting policies. We will consider the meaning of each term. Unfortunately, only operating segment is defined, and the meaning given to the other terms is determined by the entity’s internal reporting processes. Accordingly, they will not produce financial information that is reasonably capable of being compared with that presented by other entities. Two members of the IASB were concerned by the absence of definitions of revenue and expense, which in their view ‘allows the reporting of any measure of segment profit or loss’ and that ‘[i]tems of revenue and expense directly attributable to a segment need not be included in the reported profit or loss of that segment’ (IFRS 8.BCDO2).

Reporting on operating segments

Two reporting tasks arise. The first is the need to identify the entity’s operating segments, and the second is to determine which of those operating segments (called reportable segments in AASB 8) are to be included in the segment report.

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Identification of operating segments

Operating segments are defined as:

... a component of entity:

(a)	that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other 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 its performance, and

(c)	for which discrete financial information is available. (AASB 8, Appendix A)

In this chapter, we use the term senior management rather than ‘the entity’s chief operating decision maker’ used in the definition.

We make the following points about the way in which the definition is applied:

•	The segment need not currently be generating revenues (AASB 8.5).

•	We do not have to allocate 100% of the entity to operating segments because some parts of the entity may not relate to an identifiable operating segment (AASB 8.6).

•	While no guidance is given in AASB 8 on the factors to be considered in identifying operating segments, the factors to consider when combining reportable segments can be helpful to this task as well (see discussion of AASB 8.12 below).

•	As the identification of operating segments is largely dependent on existing internal reporting structures, complications can arise when multiple reporting structures are adopted. In such cases, other factors can be used to identify the operating segments including ‘the nature of the business activities of each component, the existence of managers responsible for them, and information presented to the board of directors’ (AASB 8.8).

Allocation to segments

The allocation of items to segments is discretionary. The allocation of revenues and expense and assets to segments depends on allocation rules used for internal reporting, and these may be inconsistent with the approach taken in the comprehensive profit statement and balance sheet. The allocation of liabilities to operating segments is only required if they are allocated for internal reporting purposes (AASB 8.23).

The measures used are those utilised for internal reporting purposes and need not be those used in the comprehensive profit statement and the balance sheet (AASB 8.25, 27 and 28). If the amounts are allocated to segment profit or loss, assets or liabilities, they must be allocated on a reasonable basis (AASB 8.25).

The discussion of the allocation process in AASB 8 uses ‘revenues’ rather than ‘income’, and in doing so it is unclear if the term includes items that would under the Framework be classified as gains, but which are classified as revenues under AASB 118. In the context, we suspect that the AASB 118 definition is being used (it was expressly used in AASB 114).

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Identification of reportable segments

Segment reporting is limited under AASB 8 to those operating segments classified as reportable segments (AASB 8.11). Reportable segments are those segments that exceed the quantitative threshold in AASB 8.13 (AASB 8.11(b)). Further, the effect of AASB 1031 (see chapter 11) is that segment information is only required if the resulting information is material. In applying AASB 8, it is important to know how to identify a reportable segment. To do this, we must first identify all operating segments, and once this is done determine which of them are reportable segments.

Two or more operating segments can be aggregated to be a single operating segment if doing so is;

•	consistent with the ‘core principles’ of AASB 8;

•	the segments have ‘similar economic characteristics’; and

•	they are similar in each of the following respects:

the nature of the products and services;

the nature of the production processes;

the type or class of customer for their products and services;

the methods used to distribute their products or provide their services; and

if applicable, the nature of the regulatory environment (AASB 8.12).

If similarities in the five respects identified above are a basis for concluding that there is only one reportable segment, then we believe they can be used in identifying segments in the first place, as was the case for business segments under prior standard (AASB 114.9; definition of business segment).

Identification rules

The test for identifying operating segments can result in a very large number of segments being identified. Therefore, the requirements of AASB 8.13-19 are designed to produce a manageable number of segments - these segments are called reportable segmenta, the ones for which we must include segment information. It is suggested that if more than 10 reportable segments are identified the entity should consider if the segment information has become so detailed that a practical limit has been reached (AASB 8.19).

The identified segments are classified as being either reportable segments or non-reportable segments, by the following requirements;

1	A segment must be classified as a reportable segment if any of the following conditions is satisfied;

(a)	its reported revenue - including both sales to external customers and inter-segment sales or transfers - is 10% or more of the combined revenue (internal and external) for all operating segments; or

(b)	the absolute amount of its reported profit or loss is 10% or more of the greater of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported losses of all operating segments reporting a loss; or

(c)	its assets are 10% or more of total assets for all operating segments (AASB 8.13).

2	If ‘total external revenues reported by the operating segments’ constitutes less than 75% of the ‘entity’s revenue’, additional reportable segments must be identified, even though they do not meet the test in 1 above, until at least 75% of the entity’s revenue is included in the reportable segments (AASB 8.1 5).

3	Internally reported segments that are ‘substantially similar’, that is they meet the requirements of AASB 8.12 discussed above, may be combined (AASB 8.14).

Page 947

4	An internally reported segment that is not classified as reportable under 1 above is treated in one of three ways:

(a)	it is designated as reportable despite its size because management believes information about the segment will be useful to users (AASB 8.13); or

(b)	it is combined, in accordance with 3 above, into a separately reportable segment with one or more ‘substantially similar’ segments that do not satisfy 1; or

(c)	information about other non-reportable segments and that relating to other business activities are combined and reported as ‘all oilier segments’ and is distinguished from the items in the reconciliation required by AASB 8.28 (AASB 8.16).

5	If ‘the management judges’ that an operating segment that was a reportable segment in the prior reporting period ‘is of continuing significance’, information about that segment must be reported separately in the current period. Despite test 1 not being satisfied it must be classified as a reportable segment in the current reporting period (AASB 8.17).

If, in the current reporting period, a segment is now reportable under 1, prior-period segment data are restated to reflect this newly reportable segment, unless it is impracticable to do so (AASB 8.18).

There is uncertainty about test 1(a). Is the ‘reported revenue’ the amount included in determining segment profit or loss, or does it also include other revenues relating to the segment that is similarly reported to management? These other revenues must be disclosed because AASB 8.23 requires (in part) that the amount of the revenues and expenses disclosed in the segment report are of two types: (i) those included in the measure of segment profit or loss reported internally and (ii) those that are otherwise reported internally even if they are not included in that measure or profit or loss. Since such revenues are disclosed, we believe that they must, consequently, be ‘reported’ even if they are not included in the measure of segment profit of loss reported to senior management; this is consistent with the use of ‘reported’ in AASB 8.23.

It is unfortunate that the lack of precision in the words used leads to such uncertainty over what is required to identify the reportable segments. The resulting confusion increases the lack of comparability between entities.

Rules for presentation and disclosure in segment reports

Segment reporting disclosures are extensive and there are two broad types. The first is the reporting of segment revenues, expenses, profit or loss, and segment assets and liabilities. The second type is supplementary information designed to enhance an understanding of each reportable operating segment and to reconcile the information to the information contained in the financial statements.

Page 948

Disclosure about segments

The general principle is that the disclosures must allow users to ‘evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates’ (AASB 8.20), and in order to do so both general and detailed information is required - see the summary in table 27.1. The detailed disclosures of revenues and expenses is not limited to those included in the segment profit or loss reported to senior management (AASB 8.23). Similarly, asset disclosures need not be confined to those assets included in internally reported total assets for the segment, but they must be items that are regularly reported to senior management (AASB 8.24). In limited circumstances, rather than reporting separately interest revenue and interest expense, a net interest revenue may be disclosed instead (AASB 8.23).

Table 2

General information

•	factors used to identity reportable segments including the basis of organisation (AASB 8.22(a))

•	for each reportable segment, the types of revenue producing products and services (AASB 8.22(b)) General Information on profit or loss, assets and liabilities (AASB 8.23)

•	for each reportable segment:

­	a measure of (I) profit or loss and (ii) total assets; and

­	if reported internally, a measure of liabilities

For each reportable segment detailed information on profit or loss (AASB 8.23(a)–(i)) – need not be included in reported segment profit or loss

•	revenues from external customers

•	revenues from transactions with other operating segments of the entity

•	interest revenue

•	interest expense

•	depreciation and amortisation expenses

•	material items of revenue and expense disclosed under AASB 101.97

•	the entity’s interest in profit or loss of associates and joint ventures accounted for by the equity method

•	income tax expense or revenue

•	material non-cash items other than depreciation and amortisation

Detailed information on segment assets internally reported (even if not included in reported total segment assets) (AASB 8.24)

•	carrying amount of investments in associates and joint venture accounted for by the equity method

•	amounts of additions to non-current assets (excluding financial assets, deferred tax assets, post-employment benefits and rights under insurance contracts)

Page 949

Measure of profit or loss

How does one determine the measure of profit or loss reported for a segment in the notes to the financial statements? Is it the amount reported to senior management or is it some other measure? Does it include internally reported expenses and revenues that are not included in the internally reported segment profit or loss? The answers to these questions are round in AASB 8.23, which provides:

An entity shall report a measure of profit or loss and total assets for each reportable segment. An entity shall report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker. An entity shall also disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit or loss . . . (emphasis added) [Note: A listing of the items to be disclosed is included in table 27.1.]

This suggests that the measure of profit or loss presented for a segment in the notes to the financial statements need not be the same as that reported internally. If so, this simplifies the presentation as it avoids the need to report revenues and expenses not included in segment profit or loss.

Supplimentary disclosures

Measurement related disclosures

For each reportable segment, an explanation must be provided of the measurements of segment profit or loss, segment assets and segment liabilities (AASB 8.27). The minimum disclosure include:

•	The basis of accounting for any transactions between reportable segments, and any changes in the basis, must be disclosed (AASB 8.27(a)).

•	The nature of any difference between the measurements of reportable segment profit or loss and those for the entity’s period profit or loss before income tax and discontinued operations if not apparent from the reconciliation required by AASB 8.28 (discussed below) (AASB 8.27(b)).

•	The nature of any differences between measurement of the reportable segments assets and segment liabilities, and those for the entity’s assets and liabilities if not apparent from the reconciliation (AASB 8.27(c) and (d)).

•	The nature of any change in the measurement method used to determine reported segment profit or loss and the effect (if any) of those changes (AASB 8.27(e)).

•	The nature and effect of asymmetrical allocations of assets, liabilities, revenues and expenses, to reportable segments (for example, allocation of depreciation to a segment, but not the related asset; or interest expense to a segment, but not the related liability) (AASB 8.27(f)).

Reconciliations

Reconciliations are required for the following items:

•	the total amount of the revenues for the reportable segments and the entity’s revenue;
•	the total amount of the profit or loss for the reportable segments and the entity’s profit or loss before income tax and discontinued operations (if items such as income tax are allocated to segments, the entity may reconcile the total segment profit or loss with the entity’s profit or loss after those items);

Page 950

•	total assets of the reportable segments and the entity’s assets;

•	total liabilities of the reportable segments and the entity’s liabilities, if liabilities are allocated to reportable segments; and

•	the total amounts of every other material item reported for the reportable segments and corresponding amount for the entity (AASB 8.28).

All material reconciling items must be separately identified and described. The need for reconciliations is reduced because the initial data allocation to segments includes one described as ‘all other segments’. That segment includes ‘[i]nformation about the business activities and operating segments that are not reportable’, and it is separate from the reconciliation required by AASB 8.28 (AASB 8.16). Essentially, the information included in the disclosures made for each operating segment depends on the information that is regularly reported to senior management. In doing so, some of the information for particular categories of revenues, expenses, assets or liabilities, may not relate to one of the identified operating segments. Therefore, the measure of segment profit or loss for ‘all other segments’ will be of limited usefulness if it includes revenues or expenses that do not relate to operating segments, since the internal reporting of such information may be different.

If these non-operating segment amounts had not been arbitrarily included in the segment disclosure, they would have been included in the reconciliation between the amounts reported for segments and the amount reported in the financial statements. Therefore, the reconciliation is less extensive than it would otherwise be.

Implication of including non-operating data

When we are applying quantitative tests to determine which segments are reportable, do we include amounts that do not in fact relate to operating segments? Including amounts that do not relate to operating segments is counterintuitive. Those amounts are included in the report and presumably the intention is that they are treated in the same way as other reported amounts. Accordingly, in this chapter it has been assumed that these amounts are to be included in the relevant calculations.

In example 27.1 we have differentiated the non-operating segment data by placing it in a column headed ‘reported but not for a segment’ to differentiate it from data relating to the identified operating segments.

Cash flow disclosures

Under AASB 107.50(d), the disclosure of cash flows for each of operating activities, financing activities and investing activities is required for each reported segment.

Other disclosures

Disclosures are required about restatement of previously reported information due to changes in the identified segments or changes in the internal structure of the entity. There are also entity-wide disclosures that must be made (including those entities that have only one reportable segment), that require disclosure (if not otherwise reported) in relation to (i) products and services, (ii) geographical areas and (iii) major customers. For geographical areas, the entity must report the following (unless the information is not held by the entity and the cost to obtain it would be excessive):

Page 951

•	revenues from external customers (i) attributable to the entity’s country of domicile and (ii) attributable to all foreign countries (and if material, to individual foreign countries); and

•	non-current assets (excluding deferred tax, post-employment benefits and insurance contacts) located in (i) the entity’s country of domicile and (ii) in all foreign countries (and, if material, to individual foreign countries) (AASB 8.33).

Additional information may be provided through subtotals for information relating to groups of foreign countries, The information reported is based on the information used to produce the entity’s financial report. If geographical information is not provided clue to data availability difficulties, that fact must be disclosed together with a statement that the cost of developing the information would be excessive.

Comparative information

If a segment is classified as a reportable segment in the current reporting period, prior-period segment information must be presented as if all reportable segments for the current period were reportable segments in the prior period. That is, if there is a newly recognised reportable segment, the prior-period segment information must be restated using the current-period reportable segments unless the necessary information is not held and the cost to develop it would be excessive (AASB 8.18).

Applying AASB 8

While the application of the quantitative tests is relatively straightforward, the most difficult part of applying the standard is in determining the operating segments. In practice, while the identification of operating segments is an important task, it is difficult to develop a realistic example of the process. Given the complexities of that process, we believe that, for present purposes, all that is needed is an understanding of the framework within which these decisions are made. (For a full understanding of that framework, AASB 8 must be consulted.) However, it is feasible to develop an example showing how the quantitative tests are applied in determining which segments are reportable segments, and the consequent disclosure.

Example 27.1 Segment reporting

The following information relating to operating segments has been extracted from the financial records of Diverse Ltd and its subsidiaries. The tasks are to determine which operating segments are reportable segments, and to present operating segment information as required for financial report disclosures.

The Information includes data in a column headed ‘Reported but not for a segment’. This is data included in the segment report because, though not related to an operating segment, it is reported to senior management with data about operating segments, As indicated earlier, the amounts in this column are included in the calculations made to determine if a particular segment is a reportable segment and, in the segment report contained in the notes to the financial statements, is combined with non-reportable segments under the heading ‘All other segments’ as required by AASB 8.16. These amounts differ from those described as ‘unallocated amounts’, which are needed to reconcile the segment data with the data in the financial statements. For convenience, we have included reconciling information in the total column of the segment data summary for some items, although it does not relate to segments. These reconciliation items are not complete; a complete reconciliation is provided in the segment report, which, we present as an extract from the notes to the financial statements.

>>

Page 952

DIVERSE LTD and its subsidiaries

Segment data ***
				Segments				Reported but not for a segment	Intra-group	Total	
	1	2	3	4	5	6	7	

	
	$	$	$	$	$	$	$	$	$	$	
Segment revenue:											
Revenue from external customers	700 000	495 000	175 000	305 000	345 000	255 000	255 000	55 000	—	2 585 000	
Revenue from transactions with other segments											

	180 000	65 000	50 000	—	65 000	—	25 000	—	(385 000)	—	
Total segment sales revenue	880 000	560 000	225 000	305 000	410 000	255 000	280 000	55 000	(385 000)	2 585 000	
Other segment revenues:											
Interest in profit or loss of associates and joint ventures accounted for by the equity method											

	18 750	25 000	—	—	—	—	—	—	—	43 750	
Total segment revenue	898 750	585 000	225 000	305 000	410 000	255 000	280 000	55 000	(385 000)	2 6287 50	
Segment expenses:											
Depreciation and amortisation expense	153 000	650 00	55 000	7 500	5 000	7 000	20 250	145 000	—	457 750	
Non-cash expenses other than depreciation and amortisation											

	41 000	45 000	350 00	6750	14 000	15 300	12 000			169 050	
Other expenses	300 000	209 500	155 000	67500	126 000	127 500	112 500		(175 000)	923 000	
Income tax expense	185 500	68 550	10 000	43 000	64 500	320 00	650 00			468 550	
	679 500	388 050	255 000	124 750	209 500	181 800	209 750	145 000	(175 000)	2 018 350	
Segment profit (loss)	219 250	196 950	(30 000)	180 250	200 500	73 200	70 250	(900 00)	(210 000)	610 400	
Unallocated revenue										175 000	
Unallocated expenses (other than tax)										(109 400)	
Unallocated income tax expense										(85 320)	
Period profit or loss										590 680	
										>>	

Page 953

				Segments				Reported but not for a segment	Intra-group	Total	
	1	2	3	4	5	6	7	

	
	$	$	$	$	$	$	$	$	$	$	
Segment assets	750 000	450 000	175 000	225 000	110 000	100 000	75 000	—	(210 000)	1 675 000	
Unallocated assets										285 000	
Total Assets										1 960 000	
Segment liabilities	500 000	205 000	75 000	25 000	—	—	—	—		805 000	
Unallocated liabilities										850 000	
Total liabilities										1 655 000	
Investments in associates and joint ventures accounted for using the equity method	125 000	100 000	45 000	—			—	—		270 000	
Cost to acquire property plant and equipment and intangibles	550 00	150 00	25 000	—	—	—	—	—		950 00	

Page 954

***

				Segments				Reported but not for a segment			
	1	2	3	4	5	6	7	
	Total		
	$	$	$	$	$	$	$	$	$		
Test 1 (a) Sales revenue analysis [AASB 8 13(a)] Total segment revenue (including inter-segment sales)	898750	585000	225000	305000	410000	255000	280000	55000	3013750		
(Segment external revenue + inter-segment revenue) - (Total revenue for all segments)	29 822%	19 411%	7 466%	10 120%	13 604%	8 461%	9 291%				
Passes test?	Yes	Yes	No	Yes	Yes	No	No				
Test 1(b) Segment profit analysis [AASB 8 13(b)]											
Profit	219 250	196950	—	180 250	200 500	73200	70 250	—	940 400		
Loss	—	—	(30000)	—	—	—	—	(90000)	(120000)		
Percentage calculation (segment profit - total profit of profitable segments)	23 315%	20 943%	3 190%	19 167%	21 321%	7 784%	7 470%				
Passes test?	Yes	Yes	No	Yes	Yes	No	No				
Test 1 (c) Asset analysis [AASB 8 13(c)]											
Segment assets	750 000	450000	175000	225000	110 000	100000	75000	0	1885 000		
Segment assets - Total											
segment assets for all segments	39 788%	23 873%	9 284%	11.936%	5 836%	5 305%	3 979%				
Passes test?	Yes	Yes	No	Yes	No	No	No				
Segment is reportable?											
Passes tests in AASB 8 13?	TRUE	TRUE	FALSE	TRUE	TRUE	FALSE	FALSE				
Test 2 Total external revenues for reportable segments -entity’s revenue [AASB 8 15] Total revenue for reportable segments (including other revenue)	898750	585000		305000	410000				2198750		
less Inter-segment revenues for reportable segments	180000	65000		—	65000				310000		
Total external revenues of reportable segments [including other segment revenue]				1888 750	(1)	
Total entity revenue											
Total segment revenue less inter-segment revenue (see data)						2628750		
Unallocated revenues									175000		
Total entity revenue	

	

	
	
	27803750	(2)	
Ratio									67 365%	(1)/(2)%	

Page 955

Discussion of the data

The data show a breakdown of segment revenues, segment expenses, and the segment profit or loss; segment profit or loss is the difference between segment revenue and segment expense. It is Important to remember that only selective disclosure is required of segment revenues and segment expenses so the totals for each may be greater than the aggregate of those disclosed, although this is not the case here. In the disclosure of expenses section, the item ‘other expenses’ is not expressly required - it has been included to show the derivation of total expenses. Including this amount also minimises the reconciliation with financial statement amounts. Inter-segment transactions result in revenue being recognised by one segment and an expense by another segment, and both must be eliminated. The amounts eliminated are $385 000 for revenue (In the inter-segment column) and $175 000 for expenses, The two amounts differ by $210 000 because of the mark-up on the inter-segment transfer for assets still held by the company, and the total profit reported excludes the aggregate mark-up. The same amount is eliminated from segment asset in the first step of the reconciliation with the assets reported in the balance sheet.

Explanation of the segment data analysis: Identification of reportable segments

Identification of reportable segments requires consideration of five requirements.

Requirement 1 (AASB 8.13)

We need to consider segment revenues, segment result and segment assets.

1a Segment revenue analysis: For each segment, the ratio of segment external sales plus inter-segment transactions to total revenue for all segments is calculated. Total revenue for all segments is $3 013 750 ($2 628 750 + $385 000). The aggregate percentage will be less than 100% because the denominator includes items excluded from the numerator. Segments 1 and 2, 4 and 5 pass the 10% test and are reportable.

1b Segment result analysis: The first step is to determine the denominator, which is the sum of losses for loss-making segments or the sum of profit for profit-making segments, whichever has the higher absolute amount. We see from the data analysis that profits exceed losses, so the denominator is $940 400, Next, the percentage for each segment is calculated. Segments 1, 2, 4 and 5 pass the 10% test and are reportable. Because there are both loss and profit segments, the sum of the ratios is greater than 100%.

1c Segment asset analysis: Segments 1, 2, 4 and 5 pass the 10% test and are reportable segments.

Segments 3, 6 and 7 fail requirement 1, and are not reportable segments unless required by one or more of requirements 2 to 5.

Requirement 2 (AASB 8.15)

The total of the segment revenues for reportable segments must be at least 75% of the entity’s revenues. As explained in the text, we use total external segment revenues for all segments (Including other segment revenues) plus unallocated revenues as the measure of entity revenues.

The percentage is 67.365%, which is less than 75%, and an additional reportable segment must be created, Of the three segments that are not reportable under requirement 1, the measures for the three tests are:

	Segment 3	Segment 6	Segment 7	
Test 1(a): Sales revenue analysis [AASB 8.13(a)]				
(Segment external revenue + inter-segment revenue) ÷ (Total revenue for all segments)	7.466%	8.461%	9.291%	
Test 1(b): Segment profit analysis [AASB 8.13(b)]				
Profit (loss)	$(30 000)	$73 200	$70 250	
Percentage calculation	3.190%	7.784%	7.470%	
Test 1(c): Asset analysis [AASB 8.13(c)]				
Segment assets ÷ Total segment assets for all segments	9.284%	5.305%	3.979%	

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•	No segment has more than one score over 9%.

•	Segment 3: The score for 1 (c) is over 9%, but it is significantly below segment 7’s 1 (a) score. The scores for the two other tests are well below 9%.

•	Segment 6 has no measure over 9%, and is a poor candidate.

•	Segment 7 is close to meeting test 1 (a) and it has the second highest score for text 1 (b), but the lowest score for test 1 (c).

The ultimate selection is likely to depend on qualitative rather than quantitative factors. Here we have decided to reclassify segment 7 as reportable, but we could have decided on segment 3. The total revenue for reportable segments is then increased to $2143750 ($1 888750 + $255000), which is 76.460% of entity revenues ($2 803 750), so requirement 2 is now satisfied.

Requirement 3 (AASB 8.14)

There are insufficient data to apply the ‘substantially similar’ test to segments 3, 6 and 7.

Requirements 4 and 5

There are insufficient data to apply those requirements; it is assumed that they do not result in additional reportable segments.

Preparation of the segment report

The next step is to prepare the segment Information as required by AASB 8. Extracts from the ‘Notes to the financial statements’ of Diverse Ltd are presented below. Segments 1, 2, 4, 5 and 7 are included as reportable segments. The column headed ‘all other segments’ contains the data for segments 3 and 6, and the amounts in the ‘reported but not for a segment’ column. The segment report is presented on page 957.

A reconciliation has been presented for the revenues and expenses, but is not needed for assets and liabilities as the unallocated amounts are already reported. This reconciliation is presented below.

Notes to the financial statements—extract						
Segment reporting: Expense and revenue collection			Revenues			
Item	From external customers	Equity accounting		Interest	
Total for segment	2 585 000		43 750			
Unallocated amount					175 000	
Amount in financial statements	2 585 000		43 750		175 000	
			Expenses			
	Non-cash expenses				
Item	Depreciation and amortisation	Other	Interest	Other expenses	Income tax expense	
Total for segment	457 750	169 050		923 000	468 550	
Unallocated amount			64 400	45 000	85 320	
Amount in financial statements	457 750	169 050	64 400	968 000	55 3870	

Page 957

Diverse LTD: *** statements***

Note #: Information about the group’s operating segments									
			Segments			All other segments	Intra-group		
	1	2	4	5	7	
	
	Total	
	$	$	$	$	$	$	$	$	
Segment revenues:									
Revenue from external customers	700 000	495000	305000	345000	255000	485000	—	2585000	
Revenue from transactions with other segments	180000	65000	—	65000	25000	50000	(385000)	—	
Total segment sales revenue	880 000	560000	305000	410000	280000	535000	(385000)	2585000	
Other segment revenues:									
Interest in profit or loss of associates and joint ventures accounted for by the equity method	18 750	25 000	—	—	—	—	—	43750	
Total segment revenue	898750	585000	305 000	410000	280000	535000	(385000)	2628750	
Segment expenses:									
Depreciation and amortisation expense	153000	65000	7500	5000	20250	207 000	—	457750	
Non-cash expenses other than depreciation and amortisation	41 000	45000	6750	14 000	12000	50300	—	169050	
Other expenses	300000	209500	67500	126000	112500	282500	(175000)	923000	
Income tax expense	185500	68550	43000	64500	65000	42000	—	468550	
	679500	388 050	124750	209500	209750	581 800	(175000)	2018350	
Segment profit (loss)	219 250	196 950	180250	200500	70250	(46800)	(210000)	610400	
Unallocated revenue								175000	
Unallocated expenses (other than tax)								(109400)	
Unallocated income tax expense								(85320)	
Period profit (loss)								590 680	
Segment assets	750000	450 000	225000	110000	75000	275000	(210000)	1 675 000	
Unallocated assets								285000	
Total Assets								1 960000	
Segment liabilities	500000	205 000	25000	0	0	75000		805000	
Unallocated liabilities								850000	
Total liabilities								1 655 000	
Investments in associates and joint ventures accounted for using the equity method	125000	100000		0	0	45 000		270000	
Cost to acquire property, plant and equipment and intangibles	55 000	15000	0	0	0	25000		95000	

Page 958

The data analysis and the information reported in the segment report depends on the nature of the internally reported data, therefore presentation of the report in example 27.1 is merely one of many possible presentations. However, once the relevant data are identified, the process to be followed is common. Data differences may include allocation of interest revenue or interest expense to segments. The amounts of the eliminations will also depend on how the data reported is determined. For example, when the amount of reported segments assets and liabilities include amounts payable to or receivable from other segments, those amounts will be eliminated through the eliminations column. Similarly, amounts related to interest on inter-segment debt would also be eliminated.

Summary

Segment information is designed to deal with the information loss inherent in aggregating within the financial reporting process, particularly on consolidation. In this sense, it is a form of supplementary disclosure, and is provided as part of the notes to the financial statement rather than as a separate statement. While segment information may assist in making evaluations about the performance of a particular entity over time, the method by which reportable segments are determined, mean that it will be difficult, if not impossible, to make meaningful comparisons between entities. This is exacerbated if different measurement rules are used for segment reporting; the additional disclosures have limited ability to remedy the effects of such differences. Therefore, segment information is of limited use to users of general purpose financial reports.

The potential usefulness of segment information is limited further by the extent to which arbitrary allocations are made to segments, particularly of assets, liabilities and income tax expense. To the extent that the decision to allocate an item to (i) a segment, (ii) the ‘all other segments’ (which can include amounts that do not relate to an operating segment) segment, or (iii) include it in the unallocated amounts is left to managerial discretion, comparability between entities is further reduced. Management decides what information is to be reported internally and if it is to be reported in a manner that allows or requires it to be allocated to particular operating segments, and this then becomes the information to be reported for operating segments.

In the terminology section at the beginning of the chapter it was noted that most of the critical terms used in AASB 8 are not defined – AASB 1008 is unusual in having only one defined term and in not applying the rules in other standards (including their definitions) to determine the revenues, expenses, assets and liabilities that are reported for individual segments. The result is segment information that is unlikely to be comparable. However, the application of comprehensive and well-formulated definitions will not necessarily produce comparable segment information because of the discretion applied in identification of segments and their classification as reportable segments. The use of standard industry or lines of business classification will not in practice produce comparable outcomes if the experience with the initial version of AASB 1005 is representative of such usage. It may well be impossible to develop a segment reporting model producing information that is comparable between entities. The only certainty is that high level of managerial discretion under AASB 8 makes comparability less likely rather than more likely.

Page 959

QUESTIONS

27.1 Explain why it will potentially assist users if segment information is contained in a financial report.

27.2 Docs the absence of definitions in AASB 8 adversely affect the quality of the disclosures made about operating segments? Give reasons to support your position.

27.3 Briefly explain how we determine an entity’s operating segments.

27.4 What is a reportable segment? How do we classify a segment as a reportable segment?

27.5 Describe the information that must be included when providing segment information for operating segments.

27.6 Describe the requirements of the reconciliation required by AASB 8.28. What is the purpose of this reconciliation?

27.7 On what basis is information included in ‘all other segments’ rather than being included in the reconciliation required by AASB 8.28?

27.8 Outline how segment information prepared under AASB 8 can be used in evaluating the performance of an entity over time.
27.9 Explain how segment information prepared under AASB 8 can be used in comparing the performance of different entities, both in the current period and over time.
27.10 Simple identification of reportable segments

The information on the next page relates to the operating segments of Ramsay Ltd for the financial year ending 30 June 20X8.

Other information:

•	Unallocated revenue comprised sales to external customers of $200 and interest of $35.

•	Unallocated expenses comprised depreciation of $20, other non-cash of $15, interest of $175 and other expenses of $85.

Required:

Determine which of the segments are reportable segments for 20X8.

27.11 Simple segment reporting disclosures

This question builds on the information in question 27.10.

Required:

Prepare segment disclosures as required by AASB 8 for the financial year ending 30 June 20X8.

27.12 Comprehensive segment reporting

The information on page 961 relates to Powell Ltd for the financial year ending 30 June 20X8.

Other information:

•	Unallocated revenue comprised sales to external customers of $110 and interest of $15.

•	Unallocated expenses comprised depreciation of $150, other non-cash of $100, interest of $125 and other expenses of $250.

Required:

(a)	Determine which operating segments are reportable segments for 20X8.

(b)	Prepare segment reporting information complying with AASB 8 for the reporting period ending 30 June 20X8.

Page 960

RAMBAY LTD and subsidiaries

Operating segment data

			Segments					
	A	B	C	D	E	Intra-group	Group	
	$000	$000	$000	$000	$000	$000	$000	
Segment revenues:								
Revenue from external customers	400	150	600	750	575	0	2475	
Revenue from transactions with other segments	100	20	100	50	75	(345)	0	
Total segment sales revenue	500	170	700	800	650	(345)	2475	
Other segment revenues:								
Interest in profit or loss of associates and joint ventures accounted for by the equity method	20	0	10	(15)	5	0	20	
Interest revenue	95	0	85	20	30	0	230	
Total segment revenue	615	170	795	805	685	(345)	2725	
Segment expenses:								
Interest expense	58	20	85	60	65	0	288	
Depreciation and amortisation expense	130	40	140	175	90	(140)	435	
Non-cash expenses other than depreciation and amortisation	8	30	25	30	20	(25)	88	
Other expenses	250	85	350	390	390	(165)	1 300	
	446	175	600	655	565	(330)	2111	
Segment profit (loss)	169	(5)	195	150	120	(15)	614	
Unallocated revenue							235	
Unallocated expenses (other than tax)							(295)	
Unallocated Income tax expense							(200)	
Period profit or loss							354	
Segment assets	1 000	450	1 200	900	1 100		4650	
Unallocated assets							420	
Total Assets							5070	
Segment liabilities	575	200	850	600	650	0	2875	
Unallocated liabilities							1 750	
Total liabilities							4625	
Investments in associates and joint ventures accounted for using the equity method	85	0	105	125	70	0	385	
Cost to acquire property, plant and equipment, and intangibles	250	300	350	115	200	0	1215	

Page 961

POWELL LTD and subsidiaries

Operating segment data

			Segments					
	A	B	C	D	E	F	Intra-group	Group	
Segment revenues:	$000	$000	$000	$000	$000	$000	$000	$000	
Revenue from external customers	1 120	1 064	560	140	1 400	3 500	—	7784	
Revenue from transactions with other segments	357	140	0	259	119	2100	(2975)	0	
Total segment sales revenue	1 477	1 204	560	399	1519	5600	(2975)	7784	
Other segment revenues:									
Interest in profit or loss of associates									
and joint ventures accounted for by the equity method	100	—	—	—	—	10	—	110	
Interest revenues	175	140		70		25		410	
Total segment revenue	1 752	1 344	560	469	1 519	5635	(2975)	8304	
Segment expenses:									
Interest expense	140	105	185	50	75	265		820	
Depreciation and amortisation expense	505	400	135	145	450	1190	(1 295)	1 530	
Non-cash expenses other than depreciation and amortisation	120	100	85	115	280	1 330	(190)	1 840	
Other expenses	420	525	245	266	595	1 750	(900)	2 901	
Income tax expense	200	70	(30)	(45)	(70)	300	(250)	175	
	1 385	1 200	620	531	1330	4835	(2635)	7266	
Segment profit (loss)	367	144	(60)	(62)	189	800	(340)	1 038	
Unallocated revenue								125	
Unallocated expenses (other than tax)								(625)	
Unallocated income tax expense								(143)	
Period profit or loss								395	
	1 650	1 400	550	600	1250	3000		8 450	
Segment assets								350	
Unallocated assets								8 800	
Total assets									
	1 400	1 330	245	560	910	3 500		7 945	
Segment liabilities								1 250	
Unallocated liabilities								9 195	
Total liabilities									
Investments in associates and joint ventures accounted for using the equity method	45					115		160	
Cost to acquire property, plant and equipment and intangibles	175	350	105	168	280	735		1 813	

Page 962

27.12 Comprehensive segment reporting

The information on the next page relates to Serry Ltd for the financial year ending 31 December 20X3.

Other information:

•	Unallocated revenue comprised sales to external customers of $90 and interest of $35.

•	Unallocated expenses comprised depreciation of $200, other non-cash of $110, interest of $105 and other expenses of $210.

Required:

(a)	Determine which operating segments are reportable segments for 20X3.

(b)	Prepare segment reporting information complying with AASB 8 for the reporting period ending 31 December 20X3.

27.14 Complex identification of reportable segments

The information (on pages 964-65) relates to the operating segments of Mather Ltd for the financial year ending 30 June 20X9. The negative oilier segment revenue for segment 5 is caused by a negative equity accounting revenue.

Other information:

•	Unallocated revenue comprised sales to external customers of $525 and interest ($325).

•	Unallocated expenses comprised depreciation of $55, other non-cash of $45, interest of $395 and other expenses of $115.

Required:

Determine which of the segments are reportable segments for 20X9.

27.15 Complex segment reporting disclosures

This question builds on the information in question 27.14.

Required:

Prepare segment reporting information complying with AASB 8 for the reporting period ending 30 June 20X9.

Page 963

SERRY LTD and subsidiaries

Operating segment data

				Segments					
	1	2	3	4	5	6	7	Intra-group	Group	
	$	$	$	$	$	$	$	$	$	
Segment revenues:										
Revenue from external customers	3 500	400	400	150	250	600	260	—	5560	
Revenue from transactions with other segments	1 585	—	100	0	120	320	0	(2125)	—	
Total segment sales revenue	5 085	400	500	150	370	920	260	(2125)	5 560	
Other segment revenues;										
Interest in profit or loss of associates and joint ventures accounted for by the equity method	(20)	—	—	100	—	—	—	—	80	
Interest revenue	145	80		30		40			295	
Total segment revenue	5 210	480	500	280	370	960	260	(2 125)	5 935	
Segment expenses:										
Interest expense	243	48	68	15	50	40	20		484	
Depreciation and amortisation expense	1 170	120	175	50	175	225	70	(950)	1 035	
Non-cash expenses other than depreciation and amortisation	1150	10	25	85	20	130	38	(160)	1 298	
Other expenses	1 763	300	268	115	100	200	80	(1 000)	1 826	
	4326	478	536	265	345	595	208	(2110)	4 643	
Segment profit (loss)	884	2	(36)	15	25	365	52	(15)	1 292	
Unallocated revenue									125	
Unallocated expenses										
(other than tax)									(625)	
Unallocated income tax expense									(143)	
Period profit or loss									649	
Segment assets	4 250	850	1 100	400	625	875	350		8450	
Unallocated assets									1 250	
Total assets									9 700	
Segment liabilities	3 150	600	680	160	510	395	180		5 675	
Unallocated liabilities									1 250	
Total liabilities									6 925	
Investments in associates and joint ventures accounted for using the equity method	80			30					110	
Cost to acquire property, plant and equipment, and intangibles	725	90	185	75	95	85	40		1 295	

Page 964

Mather LTD and subsidiaries

Operating segment data

					Segments							
	1	2	3	4	5	6	7	8	9	Intra-group	Group	
	$000	$000	$000	$000	$000	$000	$000	$000	$000	$000	$000	
Segment revenues:												
Revenue from external customers	345	500	950	885	765	920	475	675	550	—	6 065	
Revenue from transactions with other segments	255	100	—	185	85	—	50	180	90	(945)		
Total segment sales revenue	600	600	950	1 070	850	920	525	855	640	(945)	6 065	
Other segment revenues:												
Interest in profit or loss of associates and joint ventures accounted for by the equity method	100	(5)	—	—	(15)	20	—	10	—	—	110	
Interest revenues	25	30	—	50	—	20	—	15	—		140	
Total segment revenue	725	625	950	1 120	835	960	525	880	640	(945)	6 315	
Segment expenses:												
Interest expense	58	120	85	135	50	115	105	230	93		991	
Depreciation and amortisation expense	125	130	175	250	180	195	105	205	140	(410)	1 095	
Non-cash expenses other than												
depreciation and amortisation	15	10	25	20	18	30	23	12	8	(80)	81	
Other expenses	300	375	435	500	285	225	185	365	210	(430)	2 450	
	498	635	720	905	533	565	418	812	451	(920)	4 617	
Segment profit (loss)	227	(10)	230	215	302	395	107	68	189	(25)	1 698	
Unallocated revenue											850	
Unallocated expenses (other than tax)											(610)	
Unallocated income tax expense											(625)	
Period profit or loss											1 314	
Segment assets	1 250	1 500	1 875	1 750	1 600	1 500	1 300	2 800	1 320		14 895	
Unallocated assets											575	
Total assets											15 470	

Page 965

					Segments							
	1	2	3	4	5	6	7	8	9	Intra-group	Group	
	$000	$000	$000	$000	$000	$000	$000	$000	$000	$000	$000	
Segment liabilities	575	1 200	850	1 350	500	1 150	1 050	2 300	925		9 900	
Unallocated liabilities											3 950	
Total liabilities											13 850	
Investments in associates and joint ventures accounted for using the equity method	250	50			150	100		135			685	
Cost to acquire property, plant and equipment, and intangibles	250	300	350	115	200	275	115	400	100		2 105