Republic of the Philippines

CENTRAL LUZON STATE UNIVERSITY

Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3
CHAPTER 7: NOTES – PART 2 (Related Party Disclosures and Operating Segments)
Related standards: PAS 24 – Related Party Disclosures; PFRS 8 – Operating Segments

Learning Objectives:
 Enumerate examples of related parties.
 Describe the disclosure requirements for related parties.
 Define an operating segment.
 Describe the “management approach” to identifying reportable segments.
 State the quantitative thresholds in identifying reportable segments.

RELATED PARTY
- If one party has the ability to affect the financial and operating decisions of the other party through
control, significant influence or joint control, the parties involved are considered related.
- Control, significant influence or joint control – degree of one party’s ability to affect the relevant
decisions of another.
- Examples:
 Parent and its subsidiary
 Fellow subsidiaries with a common parent
 Investor and its associate; and the associate’s subsidiary
 Venturer and the joint venture; and the joint venture’s subsidiary
 A joint venture and an associate of a common interest
 Key management personnel of the reporting entity or of the reporting entity’s parent
*Key management personnel – (PAS 24.9) persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly including any
director (whether executive or otherwise) of that entity.
 A person who has control, significant influence or joint control over the reporting entity
 Close family member of the person referred to in (6) and (7)
*Close family member – one who may be expected to influence or be influenced by the person in
his/her dealings with the reporting entity. It includes the person’s spouse, their children and their
dependents.
 Post-employment benefit plan of the employees of either the reporting entity or an entity related
to the reporting entity
- Not considered as related parties:
 Two entities simply because they have one director or key management personnel in common.
 Two joint venturers simply because they are co-venturers in a joint venture.
 Financers, trade unions, public utilities and government agencies that do not control, jointly
control or significantly influence the reporting entity, simply by virtue of their normal dealings
with the entity, even though they may place some restrictions on the entity or participate in its
decision-making.
 A customer, supplier or other business that the entity does significant transactions with, simply
because of economic dependence.

DISCLOSURE
1. Relationships between parents and subsidiaries
*Note: The relationship is being disclosed even if there are no transactions between the parties.
Subsidiary (discloses):
 Name of parent
 If different, name of ultimate parent
Note: If neither of the two prepares consolidated financial statements for public use, the subsidiary discloses
the name of the next most senior parent that does so.

2. Key management personnel compensation

Inclusive of the following:
a. Short-term employee benefits
b. Post-employment benefits

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3
c. Other long-term benefits
d. Termination benefits; and
e. Share-based payment

3. Related party transactions – a “transfer of resources, services or obligations between a reporting entity and a
related party regardless of whether a price is charged” (PAS 24.9).
Examples:
a. Purchases or sales of goods, services or other assets
b. Leases
c. Transfers of research and development
d. Transfers under license agreements
e. Loans and other financing arrangements, including equity contributions
f. Provision of guarantees or collateral
g. Commitments
h. Settlement of liabilities by or on behalf of either party
i. Participation by a parent or subsidiary in a defined benefit plan wherein risks are shared

The following are disclosed when there are related party transactions during the periods covered by the
financial statements:
a. Nature of the related party relationship
b. Nature, terms and amount of the transaction and outstanding balances
c. Doubtful debts recognized on the outstanding balances

Note: Related party transactions and their outstanding balances are disclosed in an entity’s separate or individual
financial statements. These, however, are eliminated in the group’s consolidated financial statements.

Disclosures that related party transactions were on arm’s length basis are not made unless this can be substantiated.

OPERATING SEGMENTS
- Must be a profit center (i.e. it earns its own revenues and incurs its own expenses), used internally by
management for decision-making, and on which separate financial information is available.
- A component of an entity (PFRS 8.5):
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 assesses its performance, and
c. For which discrete financial information is available

Component of an entity – comprises “operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity” (PFRS 8.5 Appendix A).

Reportable Segments
An operating segment is reportable if it:
a. It is used by management in internal reporting or results from aggregating two or more segments; and
b. Qualifies under the quantitative thresholds

Management Approach (PFRS 8) – an approach of identifying reportable segments where operating segments are
identified 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.
*Chief Operating Decision-maker – a function rather than a manager with a specific title. That function includes
allocating resources and assessing the performance of operating segments; may be the entity’s chief executive officer,
chief operating officer, a group of executive directors or others.

Note: The decision on whether an operating segment is reportable or not is based on management’s judgment.
Operating segments used by management for internal reporting are also operating segments used for external
reporting.
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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3

Aggregation Criteria
PFRS 8:
 Similar economic characteristics
 Similar in each of the following respects:
a. Nature of the products and services
b. Nature of production processes
c. Type or class of customer for their products and services
d. The methods used to distribute their products or provide their services; and
e. Nature of the regulatory environment, if applicable, i.e. banking, insurance or public utilities

Quantitative Thresholds
An operating segment is reportable if it meets any of the following:
a. Its revenue, including both external and intersegment sales, is 10% or more of the total revenue, external and
internal of all operating segments.
b. Its profit or loss is 10% or more of the greater, in absolute amount, of the:
1. Total profit of all operating segments that reported a profit; and
2. Total loss of all operating segments that reported a loss
c. Its assets are 10% or more of the total assets of all operating segments

Operating segments not meeting any of the quantitative thresholds

a. 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.
b. 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.

Limit on External Revenue

If the total revenues of the identified reportable segments are less than 75% of the entity’s total external revenue,
additional operating segments are included as reportable, even if they do not meet the quantitative threshold, until at
least 75% of the entity’s external revenue is included in reportable segments.

Additional reportable segments are identified based on management’s judgment.

Reporting of Non-reportable Segments

Operating segments that are not reportable are combined and disclosed in an “all other segments” category. The
sources of the revenue included in the “all other segments” category are described in the notes.

Segments Ceasing to be Reportable

If management judges that an operating segment identified as a reportable segment in the immediately preceding
period is of continuing significance, information about the segment shall continue to be reported in the current period
even if it no longer meets the quantitative threshold criteria.

Segment Becoming Reportable

If an operating segment is identified as a reportable segment in the current period in accordance with the quantitative
thresholds, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly
reportable segment as a separate segment, even if that segment did not satisfy the quantitative threshold criteria in the
prior period, unless the necessary information is not available and the cost to develop it would be excessive.

Limit on the Number of Reportable Segments

There may be a practical limit to the number segments that an entity separately discloses beyond which segment
information may become too detailed. Although no precise limit has been determined, as the number of segments that

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3
are reportable in accordance with the quantitative threshold increases above ten (10), the entity should consider
whether a practical limit has been reached.

Summary of Procedures in Determining Reportable Segments

a. Operating segments are identified based on management’s internal reporting system.
b. Segments that have similar economic characteristics and are similar in all of the respects enumerated in
PFRS 8 are aggregated.
c. The segments are tested under the quantitative threshold.
d. Segments not qualifying under any of the quantitative thresholds but have similar economic characteristics
and are similar in majority of the respects enumerated in PFRS 8 are aggregated and their combined
revenues, profit or loss and assets are tested under the quantitative thresholds.
e. The total revenue of the identified reportable segments is tested under the 75% limit on external revenues.
Additional operating segments shall be identified as reportable segments (even if they do not meet the
quantitative threshold) until at least 75% of the entity’s external revenue is included in reportable segments.
f. Non-reportable segments are combined and disclosed in an “all other segments” category.

DISCLOSURES
a. General information including:
i. Factors used to identify the entity’s reportable segments, including the basis of organization
(i.e. whether management has chosen to organize the entity around differences in products
and services, geographical areas, regulatory environments, or a combination of factors and
whether operating segments have been aggregated);
ii. Judgments made by management in applying the aggregation criteria including a brief
description of the operating segments that have been aggregated and the economic indicators
that have been assessed in determining that the aggregated operating segments share similar
economic characteristics and
iii. Types of products and services from which each reportable segment derives its revenues.
b. Information about reported segment profit or loss, including specified revenues and expenses included in
reported segment profit or loss, segment assets, segment liabilities and the basis of measurement; and

c. Reconciliation of the totals of segment revenues, reported segment profit or loss, segment assets, segment
liabilities and other material segment items to corresponding entity amounts.

Information about profit or loss, assets and liabilities

 PFRS 8 requires an entity to report a measure of profit or loss for each reportable segment.
 PFRS 8 requires an entity to report a measure of total assets and liabilities for each reportable segment if such
amounts are regularly provided to the chief operating decision-maker.
 The following are required to be disclosed if the specified amounts are included in the measure of segment
profile 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:
- Revenues from external customers
- Revenues from transactions with other operating segments of the same entity
- Interest revenue
- Interest expense
- Depreciation and amortization
- Material items of income and expense disclosed in accordance with PAS 1
- The entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity
method
- Income tax expense or income; and
- Material non-cash items other than depreciation and amortization

Reporting of Interest Revenue and Interest Expense

Interest revenue and interest expense are reported separately for each reportable segment unless the segment’s revenue
is primarily from interest (i.e. the segment is a financial institution) and internal decision-making is based on net

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3
interest revenue. In such case, the entity may report the segment’s interest revenue net of interest expense and disclose
the fact.

Information on Segment Assets

An entity shall disclose the following about each reportable segment if the specified amounts are included in the
measure of segment assets reviewed by the chief operating decision-maker or are otherwise regularly provided to the
chief operating decision-maker, even if not in the measure of segment assets:
a. The amount of investment in associates and joint ventures accounted for by the equity method
b. The amounts of additions to non-current assets other than financial instruments, deferred tax assets, post-
employment benefit assets, and rights arising under insurance contracts.

Reconciliations
An entity shall provide reconciliations of all of the following:
a. The total of the reportable segments’ revenues to the entity’s revenue.
b. The total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense
(tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as
tax expense (tax income), the entity may reconcile the total of segments’ measures of profit or loss to the
entity’s profit or loss after those items.
c. The total of the reportable segments’ assets to the entity’s assets as if such amounts are regularly provided to
the chief operating decision maker.
d. The total of the reportable segments’ liabilities to the entity’s liabilities.
e. The total of the reportable segments’ amounts for every other material item of information disclosed to the
corresponding amount for the entity.

Changes in Internal Organization

If an entity changes the structure of its internal organization in a manner that causes the composition of its reportable
segments to change, the corresponding information for earlier periods, including interim periods, shall be restated
unless the information is not available and the cost to develop it would be excessive.

Information about Products and Services

An entity shall report the revenues from external customers for each product and service, or each group of similar
products and services, unless the necessary information is not available and the cost to develop it would be excessive,
in which case that fact shall be disclosed. The amounts of revenues reported shall be based on the financial
information used to produce the entity’s financial statements.

Information about Geographical Areas

An entity shall report the following geographical information, unless the necessary information is not available and
the cost to develop it would be excessive:
a. Revenues from external customers
o Attributed to the entity’s country of domicile and
o Attributed to all foreign countries in total from which the entity derives revenues
 Note: If revenues from external customers attributed to an individual foreign country are material, those
revenues shall be disclosed separately. An entity shall disclose the basis for attributing revenues from external
customers to individual countries.
b. Non-current Assets (other than financial instruments, deferred tax assets, post-employment benefit assets and
rights arising under insurance contracts
o Located in the entity’s country of domicile and
o Located in all foreign countries in which the entity hold assets
 Note: If assets in an individual foreign country are material, those assets shall be disclosed separately.

Information about Major Customers

An entity discloses the extent of its reliance on its major customers. A major customer is a single external customer
who has provided 10% or more of the entity’s revenues.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 3100 – Intermediate Accounting 3
If an entity has major customers, it discloses that fact along with the total amount of revenues from each major
customer and the identity of the segment or segments reporting the revenues.

The entity need not disclose the identity of a major customer or the amount of revenues that each segment reports
from that customer.

For the purpose of this disclosure, a group of customers under common control, such as subsidiaries of a common
parent, or various government agencies are considered as a single customer.

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