OPERATING

SEGMENT
PFRS 8
Objectives:

1. To understand the need for segment reporting

2. To know the core principle of segment reporting
3. To understand the concept of an operating segment
4. To identify the criteria for the recognition of a reportable segment
5. To identify the information required to be disclosed for a reportable segment
Before
Technological
Industry

COMPAN Food Industry

Apparel
Industry
Governing standard of Segment
Reporting
■ Philippine Financial Reporting Standard 8 (PFRS 8)
■ PFRS 8, supersedes PAS 14.
The core principle of segment reporting

An entity shall disclose information to enable users of financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic
environment in which it operates.

It’s purpose is for understanding of the performance of the entity as a

whole.
Who?

It 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 a public market.
b) That files or is in the process of filing the consolidated financial statements with the
SEC or other regulatory organization for the purpose of issuing any class of
instruments in a public market.

However, if the entity reports both separate and consolidate FS, segment information is
required only in the consolidated financial statements.
 What is an operating segment?
Engages in a
business
Includes
Note: activity which intersegment
earns revenue
Not every part of an entity is an and incurs sales/expenses
expenses
operating segment. (e.g head
quarters)

A
component
Which discrete
of an entity It is regularly
reviewed by
financial
the chief
information is
operating
available
decision maker
Who is the chief operating decision
maker?

Exec.
CEO? COO?
Directors
ANYONE

Depends who within the organization is responsible for the allocation of resources and
assessing the performance of operating segments.
Management Approach

In identifying operating segments

Management Approach shall be used

Risk and
It means that the operating segments are identified based on the components of the entity
that are considered to be important for internal management reporting purposes Reward
Approach
Reportable Segments

Any operating segments who comply with any of the following quantitative thresholds:
1. Segment revenue (both internal and external) 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% of more of the greater in
absolute amount of
a) Combined profit of all operating segments that reports profit
b) Combined loss of all operating segments that reports loss
3. The assets of the segment are 10% or more of the combined assets of all operating
segments.
Can the management still report an operating
segment which does not qualify to any thresholds?

Yes, if the management believes that information about the segment would be useful to the
users of the financial statement
Overall size test 75%

The total external revenue of reportable operating segments must constitute 75% or more of
the entity external revenue.

Otherwise,
The entity must add some operating segments even if they do not meet the thresholds stated.
Two or more operating segments may be aggregated into one reportable segment to achieve
75% test
Aggregation of segments

Two or more segments may be aggregated into a “single operating segment” if

1. The segments have similar economic characteristics

AND
2. And the segments share majority of the following:
a) Nature of product/services
b) Nature of process
c) Type of customers
d) Marketing method
e) Nature of regulatory environment
Is there a limit to the number of
reportable segments?
PFRS 8 does not specify a defined limit but suggests that there is a practical limit.
As the number increases above 10, the entity shall consider whether a practical limit has
been reached or not.

The guiding light for segment reporting is usefulness, thus if it becomes too detailed it
might lose its usefulness.
Segment no longer reportable

A segment which does not meet the thresholds given will not be separately reported.

However, if the management judges that an operating segment identified as a reportable

segment in immediately preceding period is of continuing significance, information shall
be continue to be reported even if it no longer meets the thresholds.
Segment becoming reportable

If an entity becomes reportable for the current period, the segment data for a prior period
presented for comparative purposes shall be restated even if it did not qualify the previous
year.
 INFORMATION TO BE
DISCLOSED FOR EACH
SEGMENT
An entity shall disclose the following:

1. General Information
2. Information about profit and loss
3. Information about segment assets and liabilities
4. Reconciliations of the total segment revenue, profit or loss, assets, liabilities and other
material segment items.
1. General Information

a) Factor used to identify the reportable segments

Ex. Products/ services, geographical area, regulatory environment, etc.
b) Type of products and services from which each reportable segment derives revenue
Ex. Car parts segment, motor vessels segment, software segments
2. Profit or loss

■ An entity shall disclose a measure of profit and lost under all circumstances

■ Segment Revenue and segment expense are not defined by PFRS 8.

■ According to the old standard

– 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
– Segment expense is expense that is directly attributable to a segment and the relevant
portion of entity expense that can be allocated on a reasonable basis to the segment
3. Assets and Liabilities

■ An entity shall disclose a measure of total assets and total liabilities if such an amount is regularly
provided to the chief operating decision maker

■ Segment assets and segment liabilities are not defined by PFRS 8.

■ According to the old standard

– Segment assets are those operating assets that are employed by a segment in its operating activities that
are either directly attributable to the segment or can be allocated to the segment on a reasonable basis
– Segment liabilities are those operating liabilities that are employed by a segment in its operating
activities that are either directly attributable to the segment or can be allocated to the segment on a
reasonable basis
4. Reconciliation

■ An entity shall provide reconciliations of segment amounts and amounts shown in the
entity’s financial statement related to all of the following:
a) Total revenue of all reportable segments to the entity revenue
b) The total profit or loss of all reportable segments to the entity profit or loss before
income tax expense and discontinued operations
c) The total assets of all reportable segments to the entity total assets
d) The total liabilities of all reportable segments to the entity total liabilities
e) The total for every other material item of information disclosed by the reportable
segments to the corresponding amount for the entity.
Example

■ Refer to the book, kapoy type

Entity-wide disclosures

■ Additional information that is required to be disclosed by all entities if such information

is not provided as part of the reportable segment information
– Information about products and services
– Information about geographical areas
– Information about major customers
Revenue from products and services

■ An entity shall disclose the revenue from external customers for each product and
services, unless the necessary information is not available and the cost to develop it
would be excessive.
Revenue and assets from geographical
areas
a) Revenue from external customers in the entity’s country of domicile and in all foreign
operations in total
b) Separate disclosure of material revenue from external customers in an individual
foreign country.
c) The basis for attributing revenue from external customers to individual customers
d) Non current assets, other than financial instruments, deferred taxes, post employment
benefit assets and rights under insurance contracts, located in the entity’s country of
domicile and in all foreign countries in total.
Major Customer
■ It is defined as a single external customer providing revenue which amounts to 10% or
more of an entity’s external revenue.
■ The following shall be considered single customer
– A group of entities under a common control
– A government and entities under the control of such government
■ Disclosures
– Such reliance on major customers
– An entity shall provide information about the extent of reliance on major customers
– Thus, the entity shall report the total amount of revenue from a major customers and
the identity of the segment or segments reporting the revenue
■ NOTE: The entity is NOT required to disclose the “identity/name” of the major customer or
the amount of revenue that each segment reports from that customer