Segment Reporting

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What is the objective of segment reporting?

Back 1

The objective of segment reporting is to provide information on the business activities & the economic environment of a company to help users of the FSs:
1- Better understand the enterprise's performance,
2- Better assess its prospects for future net cash flows,
3- Make more informed judgments about the enterprise as a whole.

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In general, an enterprise is required to disclose segment profit or loss, segment assets, & certain related items, but is not required to report segment cash flow.

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IFRS requires the disclosure of segment liabilities if such a measure is regularly provided to the chief operating decision maker, But US GAAP does NOT.

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In order to conform with US GAAP & IFRS, FSs for public business enterprises must report information about a company's:
1- Operating segments (annual & interim).
2- Products & services.
3- Geographic areas.
4- Major customers.

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The accounting principles used in preparing the FSs should be used for the segment information.

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Transactions between the segments of an enterprise are not eliminated in a consolidation between the parent company & subsidiaries.

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Segment reporting applies to public companies only.

Front 8

What is the definition of "Operating Segment"?

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An operating segment is a component of an enterprise:
1- That engages in business activities from which it may earn revenues & incur expenses
2- Whose operating results are regularly reviewed by the enterprise's "Chief Operating Decision Maker" to make decisions about resources to be allocated to the segment & assess its performance,
3- For which discrete financial information is available.

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The definition of a segment depends on how management uses information, which is called the management approach method. For example, management may report results both by product & service lines & by geographical lines.

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Not every part of an enterprise is necessarily an operating segment or part of an operating segment.

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A corporate headquarters or certain functional departments that may not earn revenues or may earn revenues that are only incidental to the activities of the enterprise, would NOT be operating segments.

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An enterprise's pension & other post-retirement benefit plans are NOT considered to be operating segments.

Front 13

What is the definition of "Reportable Segment"?

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Reportable segments are operating segments of an enterprise that meet the criteria for separate reporting.

Front 14

When operating segments that exhibit similar long-term financial performance may be aggregated into a single operating segment?

Back 14

If:
1- Aggregation is consistent with the objective & principles of segment reporting,
2- The segments have similar economic characteristics,
3- The segments are similar other issues.

Front 15

What are other issues that operating segments should be similar in for aggregation into a single operating segment?

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1- The nature of the products & services,
2- The nature of the production processes,
3- The type or class of customer for their products & services,
4- The methods used to distribute their products or provide their services,
5- If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

Front 16

What are the quantitative thresholds for reportable segments?

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1- 10% of external consolidated “Size” test whether from Revenues, Reported profit/loss, or Assets (Must only meet one)
2- 75% "Reporting Sufficiency" Test

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A segment meets the size test if its reported revenue, including both sales to external customers & intersegment sales or transfers (but excluding interest income on advances & loans to other segments), is 10% or more of the combined revenue, internal & external, of all operating segments.

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A segment meets the size test if the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of
1- The combined reported profit of all operating segments that did not report a loss.
2- The combined reported loss of all operating segments that did report a loss.

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A segment meets the size test if its assets are 10% or more of the combined assets of all operating segments.

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The assets of a segment are those assets included in the measure of the segment's assets that are reviewed by the chief operating decision maker.

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If the total of external (consolidated) revenue reported by operating segments constitutes less than 75% of external (consolidated) revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three tests, until at least 75% of external (consolidated) revenue is included in reportable segments.

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The practical limit to the number of reportable segments is 10, which is not a precise limit.

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Information about other business activities & operating segments that are not reportable based on the above criteria should be combined & disclosed in an "all other segments" category.

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An operating segment that was deemed to be reportable in the immediately preceding period but that does not meet the criteria for reportability in the current period may continue to be reported separately if management judges the segment to have continuing significance.

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If an operating segment that was not deemed to be reportable in the prior period meets the criteria for reportability in the current period, segment data for prior periods presented should be restated to reflect the newly reportable segment as a separate segment.

Front 26

How can the segment profit/loss be calculated?

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Front 27

What are the items that are normally excluded from segment profit/loss?

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1- General corporate revenues
2- General corporate expenses
3- Interest expense (except for financial institutions)
4- Income taxes
5- Equity in earnings & losses of an unconsolidated subsidiary (i.e. , under the equity method)
6- Gains or losses from DCOs
7- Extraordinary items
8- Minority interest

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Income & expenses are not allocated to a segment unless they are included in the determination of segment profit or loss reported to the "Chief Operating Decision Maker." (CODM)

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What are the items that should be disclosed in the reportable segment?

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1- Identifying Factors
2- Products and Services
3- Profit or Loss
4- Assets
5- Liabilities
6- Measurement Criteria
7- Reconciliations

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Factors used to identify the enterprise's reportable segments, including the basis of organization (e.g. , products & services, geographic areas, regulatory environments) should be disclosed.

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Disclose whether any operation segments have been aggregated .

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The types of products & services from which the reportable segment derives its revenues must be disclosed.

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What are the items that must be individually disclosed if the amounts are included in the calculation of segment profit/loss reviewed by the chief operating decision maker?

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1- Revenues from external customers.
2- Revenues from transactions with other internal operating segments.
3- Interest revenue.
4- Interest expense.
5- Depreciation, depletion, & amortization.
6- Unusual items, including unusual events & transactions.
7- Equity in NI of investees accounted for by the equity method.
8- Income tax expense or benefit.
9- Extraordinary items (US GAAP only).
10- Significant noncash items other than depreciation, depletion, & amortization expense.

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What are the segment assets that should be disclosed?

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1- The amount of investment in equity method investees.
2- Total expenditures for:
a. Additions to long-lived assets other than financial instruments.
b. Long-term customer relationships of a financial institution.
c. Mortgage & other servicing rights.
d. Deferred policy acquisition costs.
e. Deferred tax assets.

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Under IFRS , an entity discloses a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker.

Front 36

What are the measurement criteria that should be disclosed for the reportable segment?

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1- Basis of accounting for any internal transactions.
2- Nature of any differences between measurements of the reportable segments' profits or losses & the enterprise's consolidated income.
3- Nature of any differences between measurements of the reportable segments' assets & the enterprise's consolidated assets, if not apparent from the reconciliation provided.
4- Nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss.
5- The nature & effect of any asymmetrical allocations to segments.

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What are the reconciliations that should be disclosed for the reportable segment?

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1- The total of the reportable segments' revenues to the enterprise's consolidated revenues.
2- The total of the reportable segments' measures of profit or loss to the enterprise's consolidated income before income taxes, extraordinary items, DCOs, & the cumulative effects of changes in accounting principles.
3- The total of the reportable segments' assets to the enterprise's consolidated assets.
4- The total of the reportable segments' liabilities to the enterprise's consolidated liabilities (IFRS only).
5- The total of the reportable segments' amounts for every other significant item of information disclosed to the corresponding consolidated amount.

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The following disclosures apply to enterprises regardless of the number of reportable segments. They are required disclosures for all public enterprises.
A. Products and Services
B. Graphic Areas
1. Revenues
2. Long Lived Assets
C. Major Customers

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Revenues from external customers for each product or service or each group of similar products and services must be disclosed unless it is impracticable to do so, and that fact must be disclosed.

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Disclose the revenues from external customers that are:
1- Attributable to the enterprise's domicile country.
2- Attributed to all foreign countries if the amount is material.
3- Attributed to individual foreign countries if the amount is material.
4- The basis for attributing revenues from external customers to individual countries.

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Disclose the long-lived assets that are:
1- Located in the enterprise's domicile country.
2- Located in all foreign countries in total in which the enterprise holds assets.
3- Located in individual foreign countries if the amount is material.

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What is the criterion that determine who are the Major customers?

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Any customer that consists 10% or more of the enterprise revenues is considered a Major Customer

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What are the enterprise disclosures related to "Major Customers"?

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1- The total amount of revenues from them
2- The identity of the segment or segments reporting these revenues.
3- The identity of the major customer