pwc practical guide to segment reporting
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A practical guide to
segment reportingSeptember 2008
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IFRS technical publications
Adopting IFRS A step-by-step illustration ofthe transition to IFRS
Illustrates the steps involved in preparing the firstIFRS financial statements. It takes into account theeffect on IFRS 1 of the standards issued up to andincluding March 2004.
Financial instruments under IFRSHigh-level summary of the revised financialinstruments standards issued in December 2003,updated to reflect IFRS 7 in September 2006. Forexisting IFRS preparers and first-time adopters.
Financial Reporting in HyperinflationaryEconomies Understanding IAS 292006 update (reflecting impact of IFRIC 7) of aguide for entities applying IAS 29. Provides an
overview of the standards concepts, descriptionsof the procedures and an illustrative example of itsapplication.
IFRS 3R: Impact on earnings the crucial Q&A for decision-makersGuide aimed at finance directors, financialcontrollers and deal-makers, providing backgroundto the standard, impact on the financial statementsand controls, and summary differences withUS GAAP.
Illustrative Consolidated Financial Statements
Banking, 2006 Corporate, 2008
Insurance, 2006
Investment funds, 2006 Investment property, 2006
Realistic sets of financial statements for existingIFRS preparers in the above sectors illustrating therequired disclosure and presentation.
Share-based Payment a practical guide to applying IFRS 2Assesses the impact of the new standard, looking atthe requirements and providing a step-by-stepillustration of how to account for share-basedpayment transactions.
Similarities and Differences a comparison of IFRS and US GAAPPresents the key similarities and differencesbetween IFRS and US GAAP, focusing on thedifferences commonly found in practice. It takes intoaccount all standards published up to August 2007.
SIC-12 and FIN 46R The Substance of Control
Helps those working with special purpose entities toidentify the differences between US GAAP and IFRSin this area, including examples of transactions andstructures that may be impacted by the guidance.
IFRS Pocket Guide 2008Provides a summary of the IFRS recognition andmeasurement requirements. Including currencies,assets, liabilities, equity, income, expenses,business combinations and interim financialstatements.
IAS 39 Achieving hedge accounting in practiceCovers in detail the practical issues in achievinghedge accounting under IAS 39. It provides answersto frequently asked questions and step-by-stepillustrations of how to apply common hedgingstrategies.
Illustrative interim financial informationfor existing preparersIllustrative information, prepared in accordance withIAS 34, for a fictional existing IFRS preparer.Includes a disclosure checklist and IAS 34application guidance. Reflects standards issued upto 31 March 2008.
IFRS NewsMonthly newsletter focusing on the businessimplications of the IASBs proposals and newstandards.
IFRS for SMEs (proposals) Pocket Guide 2007Provides a summary of the recognition andmeasurement requirements in the proposed IFRSfor Small and Medium-Sized Entities published bythe International Accounting Standards Board inFebruary 2007.
PricewaterhouseCoopers IFRS and corporate governance publications and tools 2008
IFRS Manual of Accounting 2008Provides expert practical guidance on howgroups should prepare their consolidatedfinancial statements in accordance with IFRS.Comprehensive publication including hundredsof worked examples, extracts from companyreports and model financial statements.
Understanding financial instruments A guide to IAS 32, IAS 39 and IFRS 7Comprehensive guidance on all aspects of therequirements for financial instruments accounting.Detailed explanations illustrated through workedexamples and extracts from company reports.
Disclosure Checklist 2007Outlines the disclosures required by all IFRSspublished up to September 2006.
A practical guide to segment reportingProvides an overview of the key requirements ofIFRS 8, Operating Segments and some points toconsider as entities prepare for the application ofthis standard for the first time. Includes a questionand answer section.
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Page
Introduction 4
Key implementation issues 5
Key dierences between IFRS 8 and IAS 14 6
What to do on rst-time adoption o IFRS 8 7
IFRS 8 at a glance 8
Questions and answers 12
1. Identiying operating segments 14
2. Aggregating and reporting segments 19
3. Segment disclosures 27
4. Other matters or consideration 33
Contents
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IFRS 8 (the standard) aligns the identication and reporting o operating segments withinternal management reporting. Segment reporting under IFRS 8 should highlight the
inormation and measures that management believes are important and are used to make
key decisions. It should also provide a better link between the nancial statements and the
inormation reported in management commentaries such as the Operating and Financial
Review or Management Discussion and Analysis. The standard converges IFRS with US
Accounting Standard SFAS 131 Disclosure about Segments o an Enterprise and Related
Inormation.
This publication explains the key requirements o the standard and some practical issues or
entities to consider when it is applied or the rst time.
Introduction
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Key implementation issues
The International Accounting Standards Board issued IFRS 8, Operating segments inNovember 2006. The standard replaces IAS 14, Segment reporting. It applies to annual
reporting periods beginning on or ater 1 January 2009. Early adoption is permitted.
The key implementation issues are as ollows:
n The IASB did not intend to change the range o entities required to present segment
inormation, but we believe IFRS 8 has a wider scope than IAS 14. It applies to
entities whose equity or debt securities are publicly traded or that issue, or
are in the process o issuing, any class o instrument in a public market. The
scope also includes entities that le nancial statements with a regulatory
organisation or purpose o issuing any instruments in a public market. We believe
this means that some entities whose equity and debt securities are not traded
publicly and were not within the scope o IAS 14 will have to provide segmentdisclosures.
n The standard introduces a management approach to identiying and measuring
the nancial perormance o an entitys operating segments. Reported segment
inormation will be based on the inormation used internally by management. This
means that:
n the way entities identiy segments and measure and present segment inormation
could change;
n there will be more diversity in reported segment inormation;
n segment inormation may not be measured in accordance with IFRS entities are
required to reconcile segment nancial inormation to the consolidated nancial
statements; and
n entities will no longer need to prepare two sets o inormation or internal andexternal reporting.
n Reportable segments are no longer limited to those that earn a majority o revenue
rom sales to external parties, so entities may now be required to report the dierent
stages o vertically integrated operations as separate segments.
Practical experience
IFRS 8 aligns segment reporting under IFRS with the requirements o the equivalent US
standard SFAS 131. IFRS 8 adopts the requirements o the US standard almost in its entirety.
Insight
Experience rom PwC in the US shows that:
Identiying the chie operating decision maker (CODM) can be dicult. Judgements
about the components o an entity that are regularly reviewed by the CODM have
been challenging and subject to regulatory scrutiny.
The regulator has challenged companies about the identication o operating
segments and the appropriateness o aggregating operating segments.
Companies subject to Sarbanes-Oxley Section 404 requirements may incur
additional costs in ensuring that internal processes and systems are sucientlyrobust in capturing internal segment inormation.
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What to do on rst-time adoption
o IFRS 8
n Identiy the CODM (see p9). Identiying the correct person(s) is undamental tocorrectly identiying the reportable segments.
n Be aware that more operating (and thereore reportable) segments may be identied
or example, where vertically-integrated operations are identied or where more
components o the business are regularly reviewed by the CODM. Management
should consider the implications o presenting this inormation in the nancial
statements.
n Consider the impact o the inormation that will be disclosed. IFRS 8 does not
contain a competitive harm exemption and requires entities to disclose the nancial
inormation that is provided by the CODM. The management accounts reviewed
by the CODM may contain commercially sensitive inormation, and IFRS 8 might
require that inormation to be disclosed externally. This was a key issue or many US
companies on initial adoption o SFAS 131.
n Review internal control processes or management accounts, which might not be
subject to the same processes and systems as the consolidated nancial statements.
Entities might need to spend time and money ensuring that their management
accounts are suciently robust to support external disclosures and audit. IFRS 8
also requires a reconciliation between total reportable segment revenues, total prot
or loss, total assets and any other amounts disclosed or reportable segments to
corresponding amounts in the nancial statements. There should be an audit trail
between the management accounts and the consolidated nancial inormation.
n Revisit goodwill impairment. Goodwill cannot be allocated to a group o cash-
generating units larger than an operating segment. Management should consider
careully the impact o changes in the identication o operating segments ongoodwill impairment.
n Restate the comparatives. Management should consider the impact o IFRS 8,
resolve any issues and begin capturing the relevant data well beore the initial
application o the standard in annual or interim nancial statements.
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IFRS 8 at a glance
What is the scope o IFRS 8?
IFRS 8 applies to entities that prepare nancial statements, and:
n whose equity or debt securities are traded in a public market, or
n that le, or are in the process o ling, nancial statements with a securities
commission or other regulatory organisation or the purposes o issuing any class o
instruments in a public market.
Insight
We expect IFRS 8 to apply to entities that issue instruments on the public market wherethose instruments can only be redeemed by putting them back to the issuer. For
example, XYZ Equity Investment Fund issues units to the public that can be redeemed
only by selling them back to the und. IFRS 8 would apply to XYZ Equity Investment
Fund i it was required to le nancial statements with a regulator or the purposes o
issuing those units.
When does it apply?
IFRS 8 applies to annual reporting periods beginning on or ater 1 January 2009. It may be
early adopted, as long as that act is disclosed in the notes to the nancial statements.
What is the key principle?
IFRS 8 requires disclosures that enable users to evaluate the nature and nancial eects o the
business activities in which it engages and the economic environment in which it operates.
Insight
IFRS 8 requires judgement in its application. Management should consider the key
principle as it determines its segment disclosures rather then relying on a set o rules.
The key concept is that the entity should provide inormation used by management
that will allow users to understand the entitys main activities, where those activities are
located and how well those activities are perorming.
What is an operating segment?
An operating segment is a component o an entity:
n that engages in business activities rom which it may earn revenues and incur
expenses;
n whose operating results are regularly reviewed by the entitys CODM to makedecisions about resources to be allocated to the segment and assess its
perormance; and
n or which discrete nancial inormation is available.
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How are operating segments identied?
There are our key steps. Entities will need to:
1 Identiy the CODM.
2 Identiy their business activities (which may not necessarily earn revenue or incur
expenses).
3 Determine whether discrete nancial inormation is available or the business activities.
4 Determine whether that inormation is regularly reviewed by the CODM.
Insight
Identiying the CODM and the components that are regularly reviewed by the CODM
to make decisions can be dicult. It is also important to reassess regularly the
identication o the CODM, particularly ollowing a business reorganisation, acquisition
or disposal.
What or who is a chie operating decision maker?
The CODM is a unction and not necessarily a person. That unction is to allocate resources to,
and assess the perormance o, the operating segments. It is likely to vary rom entity to entity
it may be the CEO, the chie operating ocer, the senior management team or the board o
directors. The title or titles o the person(s) identied as CODM is not relevant, as long as it is
the person(s) responsible or making strategic decisions about the entitys segments.
See the Questions and answers section or some o the practical implications identiying an
entitys operating segments.
How do I determine an entitys reportable segments?
Not all operating segments need to be separately reported. Operating segments are only
required to be reportable i they exceed quantitative thresholds.
Quantitative thresholds (IFRS 8 para 13)
Inormation on an operating segment should be separately reported i:
n reported revenue (external and inter-segment) is 10% or more o the combined
revenue o all operating segments;
n the absolute amount o the segments reported prot or loss is 10% or more o the
greater o:
n the combined reported prot o all operating segments that did not report a
loss, and
n the combined loss o all operating segments that reported a loss;
n the segments assets are 10% or more o the combined assets o all operating
segments.
Two or more operating segments may be combined (aggregated) and reported as one i certain
conditions are satised.
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Aggregation o operating segments (IFRS 8 para 12)
Two or more operating segments may be combined as a single reportable segment i:
n aggregation provides nancial statement users with inormation that allows them to
evaluate the business and the environment in which it operates;
n they have similar economic characteristics; and
n they are similar in each o the ollowing respects:
n the nature o the products and services,
n the nature o the production processes,
n the type or class o customer or their products and services,
n the methods used to distribute their products or provide their services, and
n the nature o the regulatory environment (ie, banking, insurance or public
utilities), i applicable.
Minimum number o reportable segments
Ater determining the reportable segments, the entity should ensure that the total external
revenue attributable to those reportable segments is at least 75% o the entitys total revenue.
When the 75% threshold is not met, additional reportable segments should be identied (even
i they do not meet the 10% thresholds), until at least 75% o the entitys total external revenue
is included in its reportable segments.
The sections Aggregating and reporting segments on p19 and Segment disclosures on p27
address some o the practical implications o determining reportable segments.
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Questions and answers
1. Identiying operating segments
1.1 Can the CODM be a group o individuals?
1.2 Is the CODM always viewed as the highest level o management at which decisions are
made?
1.3 Can a head oce unction be an operating segment?
1.4 Does a component meet the denition o a segment i the CODM reviews revenue-only
inormation?
1.5 Is a segment balance sheet necessary to conclude that discrete nancial inormation is
available?
1.6 Can vertically integrated operations and cost centres that do not earn revenues beclassied as an operating segment?
1.7 Can a research and development unction be an operating segment?
1.8 Can a discontinued operation be an operating segment?
1.9 Are activities conducted through proportionally consolidated joint ventures or associates
considered under the denition o operating segment?
1.10 A CODM may receive multiple levels o inormation. How are operating segments
determined?
1.11 An entity is structured in a matrix style, where the CODM reviews two overlapping sets o
nancial inormation. How are the operating segments determined?
2. Aggregating and reporting segments
2.1 I operating segments are based on geography rather than products or services, can
they still be aggregated?
2.2 Can a company aggregate start-up businesses with mature businesses?
2.3 Can two similar operating segments be combined despite having dierent long-term
average gross margins?
2.4 How should an entity perorm the 10% test when each o its operating segments reports
dierent measures o segment protability and segment assets?
2.5 How should an entity identiy its operating segments under IFRS 8 para 13 (b) when ithas both prot- and loss-making segments?
2.6 Can inormation about non-reportable operating segments be combined and disclosed
in an all other category, together with items that reconcile the segment inormation to
the statutory inormation?
2.7 Can a company aggregate an immaterial non-reportable segment with a reportable
segment, even though the aggregation criteria under IFRS 8 para 12 have not been met?
2.8 When applying the 75% test under IFRS 8 para 15, should the next largest operating
segment always be selected?
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3. Segment disclosures
3.1 Where the CODM is provided with more than one measure o segment protability, what
measure o segment protability should be reported?
3.2 What measure should be reported when the asset inormation reported to the CODM is
limited or not reviewed at all?
3.3 Should the measures o prot or loss and assets and liabilities presented or each
operating segment comply with the IFRS accounting policies used in the consolidated
nancial statements?
3.4 Where the CODM only receives inormation with respect to the entitys cash fows (that
is, the CODM receives no prot or asset inormation), what should that entity disclose in
its segmental disclosure?
3.5 When should an entity consider and review its segment reporting?
3.6 Is restatement o segment inormation required when a reorganisation causes the
composition o reportable segments to change?
3.7 Is restatement o segment inormation required when there is change in the measure o
segment prot or loss?
3.8 What is the denition o material where an entity is required to disclose separately
material revenues and material non-current assets rom an individual oreign country?
4. Other matters or consideration
4.1 The impact o IFRS 8 on accounting or impairment o assets
4.2 Segment reporting in the separate company statements o subsidiaries
4.3 Convergence with US standard SFAS 131
4.4 Whats in the pipeline?
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Identiying operating segments
1.1 Can the chie operating decision maker be a group o individuals?
Yes. The CODM may be an individual or a group o individuals.
Insight
A business activity usually has a unit manager who is directly accountable to, and
maintains regular contact with, an individual or group o individuals to discuss
operating activities, nancial results, orecasts, or plans or the business activity.
The CODM is that individual or group o individuals that is responsible or the
allocation o resources and assessing the perormance o the entitys business
units.
1.2 Is the CODM always viewed as the highest level o management at whichdecisions are made?
Typically, yes. In almost every organisation, decisions about the entitys resource
allocation and the assessment o the perormance o the entitys businesses are made at
the highest level o management.
Insight
Judgement is required. The CODM will vary rom entity to entity and it may be the
chie executive ocer, chie operating ocer, senior management team or in some
jurisdictions, the board o directors. We believe that a supervisory board unction
that simply approves managements decisions would not be the CODM, as it doesnot allocate resources.
1.3 Can a head oce unction be an operating segment?
Yes. A head oce unction that undertakes business activities (or example, a treasury
operation that earns interest income and incurs expenses) may be an operating segment
as long as its revenues earned are more than incidental to the activities o the entity, and
discrete nancial inormation is reviewed by the CODM.
A head oce unction (such as accounting, inormation technology, human resources
and internal audit) that earns revenue that is purely incidental to the entitys activities
is not an operating segment and not part o one o the reportable segments. Such
unctions should be reported in the reconciliation o the segment totals as other
reconciling items.
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1.8 Can a discontinued operation be an operating segment?
Yes. A discontinued operation can meet the denition o an operating segment i:
n it continues to engage in business activities;
n the operating results are regularly reviewed by the CODM; and
n discrete nancial inormation is available to acilitate the review.
1.7 Can a research and development unction be an operating segment?
Yes, as long as discrete inormation is reviewed by the CODM. Typically, an entitys
research and development (R&D) unction is a vertically integrated operation (see
question 1.6), in which the R&D activities serve as an integral component o the entitys
business. The denition o operating segment envisages that part o an entity that earns
revenue and incurs expenses relating to transactions with other components o the same
entity may still qualiy as an operating segment even i all o its revenue and expensesderive rom intra-group transactions.
Insight
Where entities allocate entity-wide R&D costs into the business activities or
which the R&D is specically being perormed, the R&D unction will be a separate
operating segment as long as the CODM separately reviews discrete R&D activity
and data. It will not be separate segment i the CODM does not review discrete
nancial data or the criteria.
Example Insurance company disposing o its workers
compensation businessAn insurance company discontinues its workers compensation line o business.
The discontinuation meets the criteria or discontinued operations under
IFRS 5, Non-current assets held or sale and discontinued operations. For
internal purposes, separate nancial results are maintained or this business,
and they are reviewed by the CODM until the discontinuance is complete. The
operation is still being managed by the CODM and would continue to meet the
denition o an operating segment.
Conversely, i the CODM no longer reviews discrete nancial inormation on the
discontinuing operation, it would no longer all within the denition o an operating
segment. For example, a urniture manuacturing plant shuts down its operations
in Asia. The plant is no longer producing inventory and it has been reclassied
under IFRS 5 as assets held or sale. Discrete nancial inormation is no longer
reported. As a result, it would not be considered an operating segment.
Note. Disclosures would still be presented in accordance with IFRS 5.
1.9 Are activities conducted through proportionally consolidated joint ventures or
associates considered under the denition o operating segment?
We believe that where (1) a company manages its joint-venture operations or associates
separately and (2) the criteria or identiying operating segments in (a)-(c) o IFRS 8 para5 are met, the joint-venture operations qualiy as an operating segment. The asset and
prot/loss inormation (reported to the CODM) regarding the joint-venture or
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1.11 An entity is structured in a matrix style, where the CODM reviews two
overlapping sets o nancial inormation. How are the operating segments
determined?
IFRS 8 para 10 addresses the issue o matrix structures. It uses the example o an entity
where some managers are responsible or product and service lines worldwide, whereas
other managers are responsible or specic geographical areas.
The CODM reviews the operating results o both sets o components, and discrete
nancial inormation is available or both. In this situation, the entity should determine
which set o components constitutes the operating segments, taking account o what
users o the nancial statements would need to know in order to evaluate the entitys
business activities and the environment it operates in.
Insight
Matrix-structured entities use judgement to determine their operating segments.
Such entities should consider the importance o the actors that have led to
the matrix structure. For example, i an entitys priority is to increase total
sales, market share and geographic spread, the most relevant inormationor shareholders would be based on geographic markets. An entity that aims
to improve the sales o individual products, with a CODM that believes that
improving and maintaining product quality is the key to achieving this, might
conclude that the most relevant inormation or shareholders would be based on
products.
This approach would be acceptable under IFRS 8 i:
theentitycansufcientlysupportthebasisforhowitdetermineditssegments;
and
theentitysbasisfordeterminingsegmentsenablesusersofitsnancial
statements to evaluate its activities and nancial perormance, and thebusiness environment it operates in.
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Aggregating and reporting segments
2.1 I operating segments are based on geography rather than products or
services, can they still be aggregated?
Yes, as long as the individual country segments have similar economic characteristics
and are similar in each o the other areas set out in IFRS 8 para 12.
Insight
The requirement or segments to have similar economic characteristics may
be dicult to overcome when combining individual countries. This is because
the individual countries need to have similar economic conditions, exchange
control regulations and underlying currency or them to have similar economic
characteristics.
Even when aggregation o geographic segments is permitted, IFRS 8 para 33
requires the separate disclosure o revenues and assets or each material oreign
country. This disclosure allows users o the nancial statements to assess thedependence o the entity on customers based in one particular country.
Example A retail chain opens new stores
A retail chain has mature businesses (store locations) in ve major cities in a given
country. In the current year, the retail chain opens additional stores in those cities.
Each store constitutes a separate operating segment, as the CODM o the retail
chain reviews nancial results and makes decisions on a store-by-store basis.
These start-up stores may meet the economic characteristics requirement or
aggregation with mature stores i management determines that the uture long-
term nancial perormance o the stores is expected to be similar.
2.2 Can a company aggregate start-up businesses with mature businesses?
Yes. One o the objectives o requiring disclosures about segments is to help users
assess the uture prospects o an entitys business. Segments with similar economic
characteristics oten exhibit similar long-term nancial perormance. To the extent that
the uture nancial perormance (including the competitive and operating risks) o the
start-up businesses is expected to be similar to that o a companys mature businesses,
the economic characteristics requirement or aggregation might be satised.
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2.3 Can two similar operating segments be combined despite having dierent
long-term average gross margins?
Yes. Management should consider all relevant actors to determine whether the
economic characteristics o its segments are similar.
IFRS 8 states that similar long-term average gross margins or two operating segments
are expected i their economic characteristics are similar. However, other perormance
actors such as trends in sales growth, returns on assets employed and operating
cash fow may also be considered by management to assess whether segments have
substantially similar economic characteristics.
Insight
When management reviews nancial perormance measures and compares
segments, it should consider not only the quantitative results, but also the
reasons why the results are similar or dissimilar beore reaching a conclusion
about whether the economic characteristics are similar/dissimilar. The basis
or conclusions states that, separate reporting o segment inormation will not
add signicantly to an investors understanding o an enterprise i its operatingsegments have characteristics so similar that they can be expected to have
essentially the same uture prospects. We consider these comments regarding
aggregation to be consistent with the core principle o IFRS 8. Entities should
ensure their acts and circumstances support aggregation.
Management should be aware that:
n An entity that cannot demonstrate similar economic characteristics cannot rely on
the other criteria in IFRS 8 para 12 to aggregate operating segments. This is a high
hurdle.
n It is important to consider a variety o actors, such as trends in growth o theproducts, gross margins and managements long-term expectations or the product
lines.
n Several years o both historical and uture nancial perormance should be
considered.
n Segment reporting should be consistent with other public inormation and
disclosures, such as websites and other nancial inormation presented outside o
the nancial statements.
n Management should document their conclusion that segments are
economically similar.
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Example A retailer o womens coats
A retailer o womens coats has the ollowing operating segments: store label
wool coats; other designer brands wool coats; and ur coats. The ollowing
table shows limited nancial inormation or each segment:
Store labelwool coats
Other designerbrands wool coats
Fur coats
Averagegross-marginpercentage
25% 30% 33%
Sales volume 500,000 units 375,000 units 20,000 units
Average sales price 175 per unit 265 per unit 4,200 per unit
Growth rate per year 3% (steady) 2% (steady) -5% (declining)
The companys ur coats line o business has experienced sales decline in recent
years and the rate o decline is expected to continue. Management believes thatthe sales decrease is principally in response to the growing consumer ocus on
animal rights. Management expects that it can maintain the prot margin at 33%
or at least the next three years. While management views the ur coats line as
still avourably contributing to its operations, it has indicated that ater a ve-year
period it will deliberate whether to maintain the line.
The wool or the store label and other designer brands segments is purchased
rom the same manuacturer. Average margins and gross sales o the two
segments dier but there are lines in the other designer brands segment with
margins and sales prices very similar to the store label segment. The growth
rates o the two segments have moved in tandem over the past 10 years, and
management expects this to continue in the uture.
The store label and other designer brands segments possess similar economic
characteristics, despite the dierence in average gross margins. The ur
coats segment has dierent economic characteristics because o the ongoing
dierences in growth and the operating risks, despite the similarity o its average
gross margins to that o the other designer brands segment.
Management should be aware that certain regulators may challenge the
conclusion above due to the dierences in gross margins between store
label and other designer brands. Management should exercise caution when
aggregating operating segments with disparate gross margins to ensure that they
are economically similar despite the dierences in margins. As long-term grossmargins o operating segments become more divergent, we would expect it to
become more dicult to support the assertion that the operating segments are
economically similar.
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2.4 How should an entity perorm the 10% test when each o its operating
segments reports dierent measures o segment protability and segment
assets?
Where segments report dierent measures o segment protability, assets and liabilities,
a consistent measure should be developed or the purposes o assessing the 10% test.
This measure should be used regardless o whether the CODM uses that measure when
evaluating the segments perormance.
Example Segments use dierent measures o protability
An entity has three operating segments, none o which can be combined under
the aggregation criteria.
The ollowing is reported to the CODM:
n Segment 1 measures protability based on operating income, with pension
amounts reported on a cash basis. Segment 1 is the only segment or which
pension expense is reported; pension expense is not allocated to the other two
segments. Asset inormation is limited to the presentation o accountsreceivable.
n Segment 2 measures protability based on pre-tax income, which includes
an internal cost-o-capital amount, charged by corporate that is assessed to
segment 2 only. Asset inormation includes only accounts receivable and xed
assets.
n Segment 3 measures protability based on post-tax income. Asset inormation
is limited to accounts receivable.
Operating income is the lowest measure o protability that is available and that
is provided to the CODM or all three segments. This should be the measure used
in the 10% test. The same approach would apply or assets. Accounts receivablewould thereore be the most consistent measure o assets to perorm the 10%
test.
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2.5 How should an entity identiy its reportable segments under IFRS 8
para 13(b) when it has both prot- and loss-making segments?
Where an entity is applying the 10% test to segment results, the entity is required to
ascertain whether the absolute amount o its reported prot or loss is 10% or more o
the greater, in absolute amount, o:
(i) the combined reported prot o all operating segments that did not report a loss;and
(ii) the combined reported loss o all operating segments that reported a loss.
Example Determining reportable segments
Entity A has operating segments A-F (below). The revenues (internal and external),
prots and assets are set out below. Entity A needs to determine how many
reportable segments it has. The gures are in the same proportions as in the
previous year.
Segment Total revenue Proft/loss Total assetsA 11,000 2,000 25,000
B 7,500 1,000 15,500
C 3,000 (1,000) 10,500
D 3,500 (500) 7,000
E 4,000 600 7,000
F 1,500 400 3,500
30,500 2,500 68,500
Segments A, B, D and E clearly satisy the revenue and assets tests under IFRS 8
paras 13(a) and (c), and they are separate reportable segments. There is no need
to consider the prots test.
Segment C does not satisy the revenue test, but it does satisy the assets test
and it is a reportable segment. Thereore, there is no need to consider the prots
test.
Segment F does not satisy the revenue or the assets tests, but it does satisy the
prots test because its prot o 400 is 10% o the greater o the absolute amount
o losses o those segments in loss (1,500) and those that either break even or
make a prot (4,000 including segment F). Thereore segment F is a reportable
segment.
2.6 Can inormation about non-reportable operating segments be combined and
disclosed in an all other category, together with items that reconcile the
segment inormation to the statutory inormation?
No. IFRS 8 para 16 requires that, all non-reportable operating segments and other
business activities should be combined and disclosed in an all other category on a
stand-alone basis. The disclosure o other reconciling items should be presented
separately in the reconciliation o segment totals to the consolidated nancial statement
totals.
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2.7 Can a company aggregate an immaterial non-reportable segment
with a reportable segment, even though the aggregation criteria under
IFRS 8 para 12 have not been met?
No. Two or more operating segments may only be combined i all o the aggregation
criteria are met. An exception to this is IFRS 8 para 14, which allows the aggregation
o two or more immaterial non-reportable segments (ie, operating segments that do
not meet the 10% quantitative threshold) where the operating segments have similareconomic characteristics and share a majority o the ve aggregation criteria.
Insight
An entity has identied two operating segments one is a reportable segment
and the other is a non-reportable segment. In such situations, an entity may treat
the immaterial non-reportable segment in one o the ollowing ways (assuming the
75% test in IFRS 8 para 15 is met):
includethesegmentinanallothercategory;
voluntarilyreportthesegmentseparately;or
ifapplicable,aggregatethesegmentwithothernon-reportablesegmentsin
accordance with IFRS 8 para 14.
2.8 When applying the 75% test under IFRS 8 para 15, should the next largest
operating segment always be selected?
No. The entity should select the next most meaningul operating segment.
Insight
The next most meaningul operating segment may be the next largest in terms
o revenue, but it need not be. Entities should consider both quantitative and
qualitative actors when determining which segment would be most useul to
users o nancial statements. For example, an entity may select a small segment
in terms o revenue contribution because it is a potential growth segment, which is
expected to contribute materially to group revenue in the uture.
Immaterial segments can only be aggregated with material segments i
aggregation is consistent with the core principle, are economically similar, and
meet all o the aggregation criteria in IFRS 8 para 12.
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Example Selecting the meaningul operating segment
Entity A has identied the ollowing operating segments.
SegmentTotal
revenue$000
% osegmentrevenue
EBITDA
$000
% o
EBITDA
Totalassets
$000
% osegment
assets
Australia urnituremanuacturing:
Domestic Commercial ofce
9,0006,100
15,100
25 2,0201,3703,390
24 7,0004,730
11,730
23
UK urnituremanuacturing:
Domestic Commercial ofce
3,0002,1005,100
9 820580
1,400
10 3,3002,2005,500
11
Furniture retail 11,600 20 1,900 14 11,600 23
IT consulting (Australia) 13,300 22 4,000 28 9.640 19
IT consulting (Asia) 4,100 7 700 5 3,500 7
Electronic equipment 3,850 6 900 6 2,590 5
Land development 5,500 9 1,000 7 4,500 9
Machinery hire 1,100 2 897 6 1,718 3
Total o all segments 59,650 14,187 50,778
Consolidated revenueper fnancial statements
53,900*
The ollowing fow chart demonstrates the steps required when determining which
segments should be presented separately as reportable segments and which segments
constitute immaterial non-reportable segments and should be disclosed under the allother segments category.
* The dierence between the segments revenue and the consolidated reported revenue is due to internal sales
between the urniture businesses.
The domestic and the commercial manuacturing segments in Australia and the UK have
similar economic characteristics and are similar in all ve o the areas listed in IFRS 8
para 12.
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Do any operating segmentsmeet all of the aggregationcriteria?
Aggregation into asingle reportablesegment is permitted(but not required)
Aggregation intoa separatereportable segmentis permitted(but not required)
Present as separatereported segmentsin the financialstatements
furniture (Australia)
These reportable segments
cannot be aggregated becausethey have dissimilar economiccharacteristics
Material reportable segments
segments constituted 73%.
$53.9k consolidated revenue
even though it is not required underthe standard. Management felt thatthis segment should be reported due
Present land development andmachine hire as all other segments
Are there any operatingsegments (or aggregatedoperating segments) that
Are there any immaterialnon-reporting segments thathave similar economiccharacteristics and share amajority of the aggregationcriteria?
Do the reportable segments
identified constitute at least75% of consolidatedrevenue?
(aggregated if permitted) until75% if consolidated revenue
Aggregate the remainingimmaterial non-reportablesegments and other activitiesinto an all other segmentscategory
No
Yes
Yes
Yes
Yes
No
No
No
Reporting segments
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Segment disclosures
3.1 Where the CODM is provided with more than one measure o segment
protability, what measure o segment protability should be reported?
When more than one measure o protability is provided to the CODM, the measure
most relied upon by the CODM or assessing perormance and deciding on theallocation o resources should be disclosed. When two or more measures are equally
relied upon by the CODM, the measure most consistent with those used in measuring
the corresponding amounts in the entitys nancial statements should be used.
Additional disclosure may need to be made in some circumstances. An example o this
is shown below.
Example Company A uses two measures o prot
Company A provides the CODM with two measures o protability by operating
segment, which is operating prot and prot beore income tax expense. Segment
operating prot is determined based on the same measurement principles thatare used in the preparation o consolidated operating prot. However, segment
prot beore income tax expense includes certain internal cost-o-capital charges
that are eliminated in determining consolidated prot beore income tax expense.
Segment operating prot would be the measure reported externally because
this measure is the most consistent with its corresponding amount in the entitys
nancial statements.
Additional disclosure would be made or interest income and expense because
that inormation is included in the prot beore income tax expense measure
provided to the CODM.
The measure o segment protability may dier or each operating segment, as
dierent operating segments may report dierent measures o protability to theCODM. IFRS 8 para 27 requires companies to explain the measurement basis o
segment protability or each reportable segment.
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3.2 What measure should be reported when the asset inormation reported to the
CODM is limited or not reviewed at all?
IFRS 8 para 25 states that only those assets that are included in the measure o the
segments assets that are used by the CODM should be reported.
Scenario Basis o asset measurement
Asset inormation, although available,is not reported or used by the CODM.
No measure o segment asset is disclosed*.Disclose in the notes that asset inormation isnot reported.
Asset inormation is reported but isnot used by the CODM.
Asset inormation is included in other reportsprovided to the CODM is disclosed even i theinormation is not used by the CODM.
Asset inormation reported is limitedto cash, inventory and accountsreceivables.
The sum o the total o those asset items isdisclosed as segment assets. The total o thereported segment assets is then reconciled tothe total consolidated assets. An explanation othe basis o measurement is disclosed.
The CODM is provided with, andreviews ratios derived rom, currentasset balances (ie, working capital).The components that orm the ratiosare not separately provided.
The specic asset inormation or workingcapital amount is not required to be disclosed.Although it has an asset component, the currentasset component is not what is relevant to theCODMs decision-making. However, an entitymay elect to voluntarily report total workingcapital, and then reconcile that gure to totalconsolidated working capital.
Non-current assets by geographical area are also required to be disclosed
(IFRS 8 para 33(b)) even i such inormation is not reviewed by the CODM.
* The Basis o Conclusions to IFRS 8 para BC35 states that a measure o total segment assets should be
disclosed or all segments regardless o whether those measures are reviewed by the CODM. In December2007, the IASB concluded that BC35 should be changed to state that a measure o segment assets should
only be disclosed when such inormation is provided to the CODM. This change will become eective as part
o the IASBs 2009 Annual Improvements project. Until this change becomes eective, we think it is best or
companies to disclose segment assets as required by BC35.
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3.3 Should the measures o prot or loss and assets and liabilities presented or
each operating segment comply with the IFRS accounting policies used in the
consolidated nancial statements?
No. IFRS 8 para 25 requires the inormation presented to be the same basis as it is
reported internally, even i the segment inormation does not comply with IFRS or the
accounting policies used in the consolidated nancial statements.
Insight
Examples o such situations include segment inormation reported on a cash
basis (as opposed to an accruals basis), and reporting on a local GAAP basis or
segments that are comprised o oreign subsidiaries.
Although the basis o measurement is fexible, IFRS 8 para 27 requires entities to
provide an explanation o:
thebasisofaccountingfortransactionsbetweenreportablesegments;
thenatureofanydifferencesbetweenthesegmentsreportedamountsand
the consolidated totals. For example, those resulting rom dierences in
accounting policies and policies or the allocation o centrally incurred costs
that are necessary or an understanding o the reported segment inormation.
The nature o any changes rom prior periods in the measurement methods
and the eect o those changes should also be disclosed; and
thenatureandeffectofanyasymmetricalallocationstoreportablesegments.
For example, an entity might allocate depreciation expense to a segment
without allocating the related depreciable assets to that segment.
In addition, IFRS 8 para 28 requires reconciliations between the segments
reported amounts and the consolidated nancial statements.
3.4 Where the CODM only receives inormation with respect to the entitys cash
fows (that is, the CODM receives no prot or asset inormation), what should
that entity disclose in its segmental disclosure?
The entity should only disclose inormation that is used by the CODM to evaluate
segment results and allocate resources; thereore the entity should disclose the cash-
fow inormation and then reconcile these cash fows to the entitys total revenues, prot
or loss beore tax and total assets.
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Insight
Determining operating segments is an area o signicant judgement and scrutiny,
so it is important that entities consider how internal organisational change will
impact the identication and measurement o their operating segments.
Management should consider the ollowing when determining its operating
segments:
WhoistheCODMandwhatisreviewedbytheCODM?
HastheCODMchanged(ie,havereportinglineschanged)?
HowhastheCODMreportingpackagechanged?
Hastheorganisationalchartchanged(ie,acquisition/disposalofbusiness
activities)?
HasthepersontheCODMmeetswithchanged?
Havetherebeenanychangesinthebudgetingprocess,orlevelatwhich
budgets are set?
Whatisthecompanycommunicatingtoexternalpartiessuchasinvestors,
creditors and customers?
Situations that may impact identied operating segments:
Enteringanewlineofbusiness.
Lineofserviceversusgeography(ie,acompanyhashiredanewCEOandthe
internal reporting structure is changing rom a model o geographical reporting
to that o product line reporting).
Newsystemandreportingtools(ie,implementationofanewsystemthat
includes various reporting tools has enabled the entity to report on and
manage its business activities dierently).
3.5 When should an entity consider and review its segment reporting?
There is no specic guidance in IFRS 8 on what changes trigger a change in an entitys
reportable operating segments. Change in the CODM and/or the inormation provided to
and reviewed by the CODM or the purposes o evaluating perormance and allocating
resources would impact the identied operating segments. Thereore, at each reporting
date management should consider whether the current operating segment disclosure
continues to be appropriate.
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3.6 Is restatement o segment inormation required when a reorganisation causes
the composition o reportable segments to change?
Yes. An entity that changes the structure o its internal organisation in a manner that
causes the composition o its reportable segments to change, should restate the
corresponding inormation or earlier periods (including interim periods), unless the
inormation is not available and the cost to develop it would be excessive.
Management should determine, or each disclosure item, whether the inormation is
available and i not, whether the cost to develop it would be excessive. This means that
an entitys disclosures may consist o some comparatives that have been restated and
some that have not; disclosures to this eect should be made.
Other examples where restatement is required are shown below.
Scenario Restatement required? Insight
A previously immaterialnon-reportable segmentbecomes material in the
current year
Yes. Restate prior yearto refect new reportablesegments
Restatement is required eveni it is anticipated that thesegment would not meet the
10% threshold in the uture(ie, non-recurring event)
A previously reportablesegment becomes anon-reportable segment inthe current year
No. I management views thesegment to be o continuingsignicance, it shouldcontinue to report it as aseparate reportable segment
Inormation to the eectthat it does not meet thequantitative thresholdsbut is considered to beo signicance should bedisclosed
Yes. I it is not considered tobe o continuing signicance,it should not be separatelydisclosed and the prior
year should be restated toconorm to the current yearspresentation
Disclosure should be madedescribing the restatement
Initial year o application Yes N/A
3.7 Is restatement o segment inormation required when there is a change in the
measure o segment prot or loss?
No. IFRS 8 only requires restatement (i practicable) when there has been a change in
the composition o the segments resulting rom changes in the structure o an entitys
internal organisation. Although restatement is not required, we believe it might beappropriate to show all segment inormation on a comparable basis to the extent it
is practicable to do so. I prior years inormation is not restated, IFRS 8 para 27(e)
nonetheless requires disclosure o the nature o any changes rom prior periods in the
measurement methods used to determine reported segment prot or loss and the eect,
i any, o those changes on the measure o segment prot or loss.
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3.8 What is the denition o material where an entity is required to disclose
separately material revenues and material non-current assets rom an
individual oreign country?
IFRS 8 does not dene the term material or the purpose o determining whether an
individual countrys revenue or non-current assets should be separately disclosed.
The entity should consider materiality rom both quantitative and qualitativeperspectives. When considering materiality quantitatively, the standard uses the
threshold o 10% or more in determining whether an operating segment is a reportable
segment. Thereore, it may be appropriate to apply the same test to determine whether
an individual countrys revenue or assets are material or the purpose o separate
disclosure.
Insight
PwC believes the materiality test should be applied by comparing the countrys
revenue or assets to total entity external revenue or assets (including the country
o domicile) rather than comparing those gures to the relevant totals o oreign
countries revenues and assets (excluding the country o domicile).
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Other matters or consideration
4.1 The impact o IFRS 8 on accounting or impairment o assets
The release o IFRS 8 has required a consequential amendment to IAS 36, Impairment
o assets. IAS 36 required goodwill acquired in a business combination to be allocated
to existing cash-generating units o the acquiring entity. The amendment to IAS 36 statesthat each cash-generating unit or group o cash-generating units to which the goodwill is
allocated should not be larger than an operating segment determined in accordance with
IFRS 8.
Consequently, all entities should consider whether their cash-generating units are in line
with this amendment ahead o impairment reviews.
4.2 Segment reporting in the separate company statements o listed subsidiaries
Listedsubsidiariesarerequiredtopresentsegmentinformation.Thelistedsubsidiary
would need to analyse its segments in the same manner as the parent company. Thiswould include identiying its CODM, determining its operating segments based on its
CODMs review and disclosure o its reportable segments in accordance with IFRS 8.
We expect the separate subsidiarys reportable segments will not be consistent with the
parent companys disclosures o the activities o the listed subsidiary in many cases.
It would not be uncommon or the listed subsidiarys reportable segments to be more
detailed than the corresponding segment disclosures in the parent company nancial
statements.
4.3 Convergence with US standard SFAS 131
IFRS 8 is almost identical to SFAS 131. There are still some minor dierences between
the standards, which are outlined in the basis or conclusion within IFRS 8.
IFRS 8 SFAS 131 Impact
Uses the term non-currentassets.
Uses the term long livedassets.
Longlivedassetsislimitedto physical assets, whereasnon-current assets includeintangible assets.
Includes the disclosure osegment liabilities wheninormation is regularlyprovided to the CODM.
Does not require thisdisclosure.
Disclosure impact or somecompanies.
Allows matrix structures todetermine their segments oneither product/services orgeography.
Requires matrix structuresto determine their segmentsbased on products orservices.
Under IFRS 8 entities mustuse judgement to determinewhich basis provides themost useul inormation.
4.4 Whats in the pipeline?
The International Accounting Standards Board has indicated that the scope paragraph
o IFRS 8 is likely to be amended upon nalisation o the IFRS standard or small and
medium-sized entities (IFRS or private entities). The intention is that IFRS 8 will apply
to all entities that have public accountability. This means that IFRS 8 would have to be
applied whenever an entity has to apply ull IFRS and is not able to use the IFRS orprivate entities.
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