SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS

College of Business Administration and Hospitality Management

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OPERATING SEGMENT

OBJECTIVE/S:
At the end of the lecture/discussion/week, the student should be able to:
 Identify core principle of segment reporting
 Define operating segment
 Discuss reportable operating segment
 Measure profit or loss
 Understand entity-wide disclosures
 Know geographical areas
 Understand information about major customers
PART 1. LECTURE/DISCUSSION
 SEGMENT REPORTING
PFRS 8, now sets out the requirements for disclosure information about operating segments.
The core principle of segment reporting is as follows:
“An entity shall disclose information to enable users of its financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic
environments in which it operates”. Segment reporting is the disclosure of certain financial
information about the products and services and entity produces and the geographical areas in
which an entity operates.
 SCOPE OF PFRS 8
Shall apply to the separate or individual financial statements of an entity, and to the
consolidated financial statements of a group with a parent:
a. Whose debt or equity instruments are traded in public market.
b. That files or is in the process of filing the consolidated financial statements with a
securities commission or other regulatory organization for the purpose of issuing any
class of instruments in a public market.
 OPERATING SEGMENTS -an operating segment is a component of an entity:
a. That engages in business activities from which it may earn revenue and incur
expenses, including revenue 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.
c. And for which discrete financial information is available.
 IDENTIFYING OPERATING SEGMENTS
The “management approach is used in identifying operating segments. It means that the
operating segments are identified on the basis of internal reports about components of
an entity that are regularly reviewed by the chief operating decision maker in order to
allocate resources to the segment and to assess its performance.
 REPORTABLE SEGMENTS
An entity shall report information about an operating segment that meets any of the
following quantitative thresholds:
1. The segment revenue, including both sales to external customers and intersegment
sales or transfers, is 10% or more of the combined revenue, internal and external of
all operating segments.
2. The absolute amount of profit or loss of the segment is 10% or more of the greater in
absolute amount of:
a. Combined profit of all operating segments that reported a profit.
b. Combined loss of all operating segments that reported a loss.

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 SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS
College of Business Administration and Hospitality Management
City of Tacurong, Sultan Kudarat

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3. The assets of the segment are 10% or more of the combined assets of all operating
segments.
Note: Operating segments that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed on a voluntary basis if management
believes that information about the segment would be useful to the users of the financial
statements.
 OVERALL SIZE TEST -75% THRESHOLD
If the total external revenue of reportable operating segments constitutes less than 75%
of the entity external revenue, additional operating segments shall be identified as
reportable segments even if they do not meet the 10% quantitative thresholds until at
least 75% of the entity external revenue is included in reportable segments.
 AGGREGATION OF SEGMENTS
Two or more operating segments may be aggregated into a “single operating segment”
if the segments have similar economic characteristics and the segments share a
majority of the following five aggregation criteria:
a. Nature of product or service
b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking, insurance or public
utility
 INFORMATION TO BE DISCLOSED FOR EACH SEGMENT
An entity shall disclose the following for each reportable operating segment:
1. General information about the operating segment.
2. Information about profit or loss, including specified revenue and expenses included
in the measure of profit or loss, segment assets, segment liabilities and the basis of
measurement.
3. Reconciliation of the totals of segment revenue, profit or loss, segment assets,
segment liabilities and other material segment items to corresponding items in the
entity’s financial statements.
 SEGMENT REVENUE AND SEGMENT EXPENSE
PFRS 8 does not define any more segment revenue and segment expense. As a
consequence, entities shall have a wide discretion in determining the measurement of
these items. PFRS 8 simply states that the amount of segment revenue and segment
expense shall be measure reported to the chief operating decision maker.
o Segment revenue -is revenue that is directly attributable to a segment and the
relevant portion of entity revenue that can be allocated on a reasonable basis to
the segment.
o Segment expense -is expense resulting from the operating activities of the
segment that is directly attributable to the segment and the portion of an expense
that can be allocated on a reasonable basis to the segment.
 DISCLOSURE ABOUT MAJOR CUSTOMER
The major customer disclosure means that “an entity shall provide information about the
extent of its reliance on tis major customers”. The entity shall disclose such fact of
reliance on major customers, the total amount of revenue from major customers and the
identity of the segment or segments reporting the revenue. The entity is not required to
disclose the identity of the major customer or the amount of revenue that each segment
reports from the that customer.

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 SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS
College of Business Administration and Hospitality Management
City of Tacurong, Sultan Kudarat

__________________________________________________________________________________________________
PART II. ASSESSMENT
QUESTIONS:
1. What is the core principle of segment reporting?
2. Explain briefly segment reporting.
3. Why is segment reporting required?
4. What is the scope of PFRS 8?
5. Define operating segment.

PART III. SOURCES/REFERENCES

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