2. Segment reporting gives information about the:
Different types of products and services an entity produces, and
The different types of geographical areas in which it operates.
Objective:
The objective of IAS 14 is to establish the principles of reporting financial information by
segments, to help the users of financial statements:
Better understand entity’s past performance
Better assess the entity’s risks and returns, and
Make more informed judgement about entity as a whole
Scope:
IAS 14 must be applied by entities:
Whose equity or debt securities are publicly traded, or
Who are in the process of issuing such securities
Other entities are encouraged to disclose segment information voluntarily.
Segment information is only required on consolidated basis if a financial report contains
both the consolidated and parent’s own financial statement. When a subsidiary, associate
or joint venture of group issues publically traded securities, they must give segment
information in their own financial statements.
Types of Segment:
1. Business Segment
It is a distinguishable component of the entity that is:
Engaged in providing an individual product or service or group of related
products or services, and
Subject to risk and returns that are different from those of other business
segments
For example for a publishing entity business segments may include consumer
books, consumer magazines and business magazines.
2. Geographical Segments
A geographical segment is a distinguishable component of an entity that is engaged
in providing products or services within a particular economic environment and
subject to risks and returns that are different from those of components operating in
other economic environment.
Two or more internally reported business segments or geographical segments that are
substantially similar may be combined as a single segment. Two or more segments are
substantially similar only if:
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3. They exhibit similar long term financial performance, and
They are similar in all the factors in the relevant definition of that type of segment (i.e.
Business or Geographical)
IAS 14 requires entities to report data for both business segments and geographical
segments.
Based on the structure of its internal financial reporting system, management identifies:
One of those bases of segmentation as primary, and
The other as Secondary
The dominant source and nature of an entity’s risks and returns should govern whether it’s
primary segment reporting will be business segments or geographical segments.
If the entity’s risks and rates of return are strongly affected by both by differences in
products and by differences in geographical area then the entity should use:
Business segments as its primary segment reporting format, and
Geographical segments as its secondary reporting format
However IAS 14 neither requires nor prohibits an entity from presenting the secondary
reporting format in the same detailed form as primary reporting format, this is called as
Matrix Presentation.
Determining Reportable Segments:
A business segment or a geographical segment should be identified as a reportable
segment if a majority of its revenue is earned from sales to external customer and
its revenue from sales to external customers and from transactions with other
segments is 10% or more of total revenue, external or internal, of all segments or
its segment results, whether profit or loss, is 10% or more of the combined results of
all segments in profit or the combined results of all segments in loss, whichever is
greater in absolute amount, or
Its assets are 10% or more of total assets of all segments.
If an internally reported segment doesn’t meet any of the 10% thresholds as mentioned
above then there are three options available. The segment may be
Designated as a reportable segment despite its size
Combined into separately reportable segment with other similar internally reported
segment(s) that are also below the 10% thresholds, or
Included as an unallocated reconciling item
An entity may choose to select a segment that doesn’t meet any of the thresholds as a
reportable segment if expectations are that this segment will soon exceed the criteria or the
segment is very volatile.
75% Threshold
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4. If the total external revenue attributable to reportable segments is less than 75% of the total
consolidated (in consolidation internal revenue is eliminated) or entity revenue then
additional segments must be identified as reportable segments, even if they do not meet the
10% threshold. IAS 14 does not specify how to select the additional segments. They do not
need to be next largest by any measure. Judgement should be based on individual
circumstances.
General requirements of allocation
When allocating amounts to segments following should be considered
Segment revenue, expense, assets and liabilities are determined before eliminating
intra group transactions. This is done because it gives information how segments
are linked.
Segment information should be prepared in conformity with the accounting policies
adopted for preparing the consolidated financial statements and not internal
accounting procedures.
The amounts must be allocated to segments on consistent and reasonable basis.
Related revenues and assets should be allocated in a consistent way e.g. if the
depreciation is reported in a specific segment then the related asset should also be
reported the same segment.
Related expenses and liabilities should be allocated in a consistent way e.g. if the
interest expense is reported in a specific segment, related interest bearing liability
should also be reported in same segment.
Definitions
1. Segment Revenue
Segment revenue is the revenue
Reported in entity’s statement of comprehensive income
Directly attributable to segment, and
That is the relevant portion of entity revenue that can be allocated on
a reasonable basis to a segment, whether from external sales or
from transactions with other segments
Segment revenue also includes
An entity’s share of profits or losses of associates of associates, joint
ventures or other investment accounted for under the equity method
only if those items are included in the consolidated or total entity
revenue and
A joint venturer’s share of revenue of jointly controlled entity
accounted for by proportionate consolidation
2. Segment Expense
Segment expenses is the expense
From the segment’s operating activities
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5. Directly attributable to segments, and
The relevant part of an expense allocable on a reasonable basis to the
segments
It also includes the joint venturer’s share of the expenses of a jointly
controlled entity accounted for by proportionate consolidation.
3. Segment Result is segment revenue less segment expense. Segment result is
determined before any adjustments for minority interest.
Segment revenue and expense do not include:
Interest/dividend including interest on advances or loans to/from other
segments, unless the segment’s operations are primarily financial in nature
Gains/losses on disposal/sale of investments or gains/losses on extinguishment
of debt unless the segment’s operations are primarily financial in nature
Income tax expense
General administrative expenses, head office expenses and other expenses
relating to the entity as a whole.
4. Segment Assets are those operating assets that are employed by a segment in its
operating activities and are directly attributable to the segment, or can be allocated
to it on a reasonable basis. They include:
Investments accounted for under equity method if the profit or loss from such
investments is included in segment revenue
A joint venturer’s share of operating assets of a jointly controlled entity
accounted for by proportionate consolidation
Assets held under finance lease are included in segment assets, if they are
attributable.
5. Segment Liabilities are those operating liabilities resulting from the operating
activities of a segment and those are directly attributable, or can be allocated on a
reasonable basis to the segment. Segment liabilities include a joint venturer’s share
of liabilities of a jointly controlled entity accounted for by proportionate consolidation.
Liabilities related to finance lease are not included in segment liabilities unless the
segments operation are primarily of financial nature. This is because liability is
incurred for financing rather than operating purposes. How the asset is used is not
affected by how it is financed.
Segment assets and liabilities do not include:
Income tax assets and liabilities
Interest-bearing liabilities, loans, investments or other income producing assets
unless a segment’s revenue or result includes the related interest income or
expense, or dividend income
Assets employed for general entity or head office purposes
When a company produces its products in many countries and the products are sold on
international markets and global commodity exchange it is likely that the risks and returns
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6. will be impacted more strongly by its products, as sale prices are determined on a global, not
an individual country, basis.
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