International Accounting Standards IAS 14 Segment Reporting 1

International Accounting Standards IAS 14 Segment Reporting 1

Preview This module looks at the reporting of financial information by segment. • IAS 14 requires: o an enterprise to identify its geographical segments and its business segments, o the enterprise to disclose information about segment revenue, segment assets and liabilities, and certain other segment expenses and costs. o comparative information to be restated unless impracticable. 2

Objective To explain how an enterprise identifies its segments and the type of segment information it should include in its financial report. 3

Scope IAS 14 applies to: • enterprise whose equity or debt securities are publicly traded; • enterprises that are in the process of issuing equity or debt securities in public securities markets; and • enterprises voluntarily disclosing segment information. If an enterprise whose securities are not publicly traded chooses to disclose segment information voluntarily, that enterprise should comply fully with the requirements of IAS. 4

Key Principles Business Segment A business segment is: • a distinguishable component of an enterprise that is • engaged in providing an individual product or service, or group of related products or services, and • that is subject to different risks and returns that are different from those of other business segments. 5

Continued-Business Segments Factors for determining business segments: • the nature of the products or services; • the nature of the production processes; • the type or class of customer for the products or services; • the methods used to distribute the products or services; and • the nature of the regulatory environment (for example, banking, insurance or public utilities). 6

Continued-Business Segments Examples of “real” business segments: • Renault, France: Automobile, Commercial vehicles and Finance. • Nokia, Finland: Networks, Mobile phones and Other operations. • Commerzbank, Germany: Domestic branch banking, International finance, Investment banking, Mortgage business and Group management/others. 7

Geographical Segment A geographical segment is: • a distinguishable component of an enterprise that is • engaged in providing goods or services in a particular economic environment, and • that is subject to risks and returns that are different from those of components operating in other economic environments. 8

Factors for Determining Geographical Segments • The similarity of economic and political conditions; • Relationships between operations in different geographical areas; • Proximity of operations; • Special risks associated with operations in a particular area; • Exchange control regulations; and • Underlying currency risks. 9

Continued-Factors… A geographical segment • may be a country, a group of countries or a region within a country. • does not include operations facing significantly different risks and returns. • can be based on either o location of operations or o location of markets) depending on the internal reporting structure. 10

Continued-Factors… Risks and returns are influenced by both • the location of its operations, and • the location of its markets and customers. ØExamples of “real-life” geographical segments: v. Renault, France: France, Other EU-countries, Other European countries and Other countries. v. Nokia, Finland: Europe, America and Asia-Pacific. v. Commerzbank, Germany: Germany, Europe (excluding Germany), America, Asia and Africa. 11

Reportable Segment is a business segment or a geographical segment identified based on the foregoing definitions. 12

Segment revenue, expenses, assets and liabilities are either: 1) Directly attributable to a segment, or 2) Allocated to it on a reasonable basis. 13

Continued-Segments revenue Definitions of segment elements employ the following notions: • Directly attributable or able to be allocated on a reasonable basis • Specific exclusions (e. g. , segment revenue excludes interest or dividend income for non-financial operations) • Specific inclusions (e. g. , segment liabilities include a joint venture’s share of liabilities of a jointly controlled entity accounted for by proportionate consolidation under IAS 31). 14

Continued-Segments revenue… If a revenue or expense is included in segment result, any related asset or liability should be included among the segment assets or liabilities. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and transactions are eliminated in the consolidation process, i. e. , includes transactions with both external parties and with other segments. 15

Segment Revenue Segment revenue is: • revenue reported in the enterprise’s income statement that is • directly attributable to a segment and • the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment. • It includes revenue arising from transactions with parties external to the enterprise and with other segments of the same enterprise. 16

Continued-Segment revenue does not include : extraordinary items; • Interest or dividend income, including interest earned on advances or loans to other segments, unless the segment’s operations are primarily of a financial nature, or • Gains on sales of investments or extinguishment of debt unless the segment’s operations are primarily of a financial nature. 17

Segment Expense Segment expense is: • Expense resulting from the operating activities of a segment that are • Directly attributable to the segment and • The relevant portion of an expense that can be allocated on a reasonable basis to the segment. • They include expenses relating to transactions with parties external to the enterprise and with other segments of the same enterprise. 18

Continued-Segment Expense Segment expenses do not include: • Extraordinary items; • Interest, including interest incurred on advances or loans from other segments, unless the segment’s operations are primarily of a financial nature; • Losses on sales of investments or losses on extinguishments of debt unless the segment’s operations are primarily of a financial nature. 19

Continued-Segment Expense • An enterprise’s share of losses of associates, joint ventures, or other investments accounted for under the equity method; • Income tax expense; or • General administrative expenses, head-office expenses, and other expenses that arise at the enterprise level and relate to the enterprise as a whole. 20

Segment Result Segment result is segment revenue less segment expenses, and is determined before any adjustments for minority interests. 21

Segment assets are operating assets employed by a segment in its operating activities. • Segment assets include: o if a segment’s result includes interest or dividend income, its segment assets include the related receivables, loans, investments, or other income producing assets o investments accounted for under the equity method only if the profit or loss from such investments is included in segment revenue (very unlikely to happen) 22

Continued-Segments Assets o a joint venturer’s share of the operating assets of a jointly controlled entity that is accounted for by proportionate consolidation in accordance with IAS 31 o if a segment’s result include a particular item of amortization or depreciation, the related asset should be included among the segment assets o assets shared by two or more segments if they can get reasonably allocated. Only jointly controlled assets are allocated to segments if their related revenue and expenses also are allocated o goodwill, if directly attributable or if allocated on a reasonable basis o other “usual” assets such as intangibles, property, plant and equipment, assets which are the subject of finance lease, inventories, receivables etc. 23

Continued-Segments Assets Segment assets do not include: – income tax assets – asset used for the general enterprise or head office purposes (unless expenses allocated on a reasonable basis) Ø Segment assets are measured on a net book value basis, i. e, determined after deducting depreciation, amortization, impairment losses, provisions for bad debts etc. 24

Segment Liabilities Segment liabilities are liabilities that result from the operating activities of a segment. Ø Segment liabilities include: • if a segment’s segment result includes interest expense, its segment liabilities include the related interest-bearing liabilities • a joint venturer’s share of the liabilities of a jointly controlled entity that is accounted for by proportionate consolidation in accordance with IAS 31 • trade and other payables, accrued liabilities, customer advances, provisions etc 25

Continued-Segment Liabilities ØSegment liabilities do not include: • income tax liabilities • borrowings, liabilities related to assets that are the subject of finance leases and other liabilities incurred for financing rather than operating purposes 26

Identifying Primary and Secondary Reporting Formats An enterprise must nominate either • business segmentation or • geographical segmentation as its primary segment reporting format, based on the dominant source of the enterprise’s risks and returns. 27

Continued-Identifying Primary… If the enterprise’s risks and rates of return are affected predominantly by differences in the products and services it produces, – its primary format for reporting segment information should be business segments, – with secondary information reported geographically 28

Continued-Identifying Primary… The enterprise’s internal organization and management structure and its system of internal financial reporting to the board of directors and the chief executive office should be used as the basis for identifying the dominant source and nature of the enterprise’s risks. 29

Identifying Reportable Segments A segment is reportable if : – the majority of its revenue is earned from external customers (test 1) AND – segment revenue (from external customers and from transactions with other segments) > 10% of total revenue ( external and internal) of all segments (test 2), OR 30

Continued-Identifying… – segment result, whether profit or loss > 10% of the combined result of all segments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount, (test 3) OR, – segment assets > 10% of total assets of all segment assets (test 4). Ø The 10 per cent thresholds in the standard are not intended to be a guide for determining materiality for any aspect of financial reporting other than identifying reportable business and geographical segments. 31

Continued-Identifying… Segments that are too small and therefore do not fulfill the reporting criteria above may be treated as follows: • it can be regarded as a reportable segment despite its size, • it can be combined with similar internally reported segments that also are too small to be reported separately, or • it can be included as an unallocated reconciling item 32

Number of reportable segments The total external revenue attributable to reportable segments: • must exceed 75 per cent of the total consolidated or enterprise revenue. ØIf not, additional segments must be identified until the 75 per cent limit is reached (test 5). ØEven segments that do not fulfill the 10 per cent threshold should be identified as reportable segments in this case. 33

Segment Accounting Policies The same accounting policies should be used for preparing segment information and for preparing the financial statements of the group or enterprise. 34

Disclosure – Primary Segments For each reportable segment for the nominated primary segmentation basis, the enterprise must disclose: • • • Segment revenue Segment result Carrying amount of segment assets Segment liabilities Total cost incurred to acquire long term segment assets 35

Continued-Disclosure • Any items of revenue or expense of such size and nature or incidence that their disclosure relevant to explain the performance of the segment • Total amount of depreciation and amortization of segment assets: Total significant non-cash expenses other than depreciation and amortization. 36

Continued-Disclosure • Aggregate share of net result of associates, joint ventures or equity accounted investments if substantially all of those associate’s operations are within one segment • Reconciliation between segment information and information in the consolidated or single financial statement. 37

Disclosure – Secondary Segments If an enterprise adopts business segmentation as its primary segment reporting format, it should also disclose the following information: • Segment revenue from external customers by geographical area (or market) based on the geographical location of customers for all segments with a revenue > 10% of total external enterprise revenue 38

Continued-Disclosure… • Carrying amount of segment assets by geographical location of assets for all geographical segments with assets > 10% of total assets of all geographical segments. • Total cost incurred to acquire long-term segment assets by geographical location of assets for all segments with assets (capital expenditure) > 10% of total assets of all geographical segments. 39

Disclosure Issues If an enterprise adopts geographical segmentation as its primary segment reporting format, it should disclose the following information for each business segment with: • segment revenue (external customers) > 10% of total external enterprise revenue, or 40

Continued-Disclosure Issues • segment assets > 10% of total segment assets, report: o Segment revenue from external customers o Carrying amount of segment assets o Total cost incurred to acquire long-term segment assets 41

Continued-Disclosure Issues If the primary segment reporting base is geographical, and based on location of assets, and location of customers different from location of assets, disclosure must be given about: • segment revenue from external customers for each customer based geographical segment > 10% of total external enterprise revenue. 42

Continued-Disclosure Issues If the primary segment reporting base is geographical, and based on location of customers, and the location of assets is different from location of customers, disclosure must be given about: • segment assets per location of assets for each asset based geographical segment, and • cost incurred to acquire long-term segment assets (capital expenditure) by location of assets Ø where segment revenue from external customers for each asset based segment > 10% of total external enterprise revenue. 43

Other disclosure issues: • If there are non reportable segments that have external sales > 10% of their total external sales, the following disclosure must be given: o revenue from sales from external customers o internal sales to other segments • Basis of inter-segment transfer pricing and any changes therein should be disclosed. • Changes in segment accounting policies, if material, should be disclosed. • Type of products or services in each business segment and composition of each geographical segment. • Description of the types of products and services included in each reportable business segment. 44

Summary of Disclosures Summary of disclosures: Primary Secondary Sales or operating revenues Sales to external customers x Sales to other segment x Share of net result of associates, joint ventures, etc x Segment result x Depreciation and amortization expense x Other non-cash expenses x x 45

Continued-Summary of… Summary of disclosures: Primary Secondary Segment assets x x Segment liabilities x Capital expenditure x Reconciliation to F/S x Activities of business segments x x Composition of geographical segments x x Basis of pricing inter-segment transfers x x x 46