Annual Report: Additional Financial Statements 4.1 Chapter 4 Annual Report: Additional Financial Statements

Objectives By the end of this chapter, you should be able to: discuss the value segmental information adds to published financial statements; understand and evaluate the structure and content of Segmental Reports and discuss the major provisions of IFRS 8 Operating Segments; explain the criteria laid out in IFRS 5 Non-current assets held for sale and discontinued operations that need to be satisfied before an asset (or disposal group) is classified as ‘held for sale’;

Objectives (Continued) explain the accounting significance of classifying an asset or disposal group as ‘held for sale’; explain the meaning of the term ‘discontinued operations’ and discuss the impact of such operations on the statement of comprehensive income; identify Related Parties in accordance with IAS 24.

Segment reporting - IFRS 8 IFRS8 requires a management approach to segment reporting – i.e the identification of operating segments is based on the internal reports regularly reviewed by the entity’s chief operating decision maker (CODM) in order to allocate resources to the segment and assess its performance. This attempts to provide investors with the information provided to management It is specific to the organisation It is more difficult to make inter-company comparisons because of differences in the ways in which companies compile/use these reports.

Criteria for identifying a segment An operating segment is a part of an entity: That engages in business activities from which it may earn revenues and incur expenses Whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) and c) Discrete financial information has to be available.

A reportable segment is one that meets any of the following criteria (a) Its reported revenue, from internal and external customers, is 10% or more of the combined revenue (internal and external) of all operating segments or (b) Its reported profit or loss is 10% or more of the greater of (i) The combined profit of all operating segments that did not report a loss and (ii) The combined reported loss of all operating segments that reported a loss or (c) Its assets are 10% or more of the combined assets of all operating segments.

4.1 The 75% test If the total external revenue of the reportable operating segments is less than 75% of the entity’s revenue, additional operating segments have to be identified as reportable segments, (even if they don’t meet the criteria in (a) to (c) above) until 75% of the entity’s revenue is included.

Which divisions are reportable segments? Divisions Revenue Profit Assets £000 Exam-based Training 360 21 176 E-Learning 60 3 13 Corporate Training 125 5 84 Print Media 232 27 102 Online Publishing 124 2 31 Cable TV 73 5 39 974 63 445

Which divisions are reportable segments? Divisions Revenue Profit Assets £000 Exam-based Training 360* 21* 176* E-Learning 60 3 13 Corporate Training 125* 5 84* Print Media 232* 27* 102* Online Publishing 124* 2 31 Cable TV 73 5 39 974 63 445 * = meets 10% requirement. Therefore, E-Learning and Cable TV are not segments.

Which divisions are reportable segments? Final check: Does the total revenue from these reporting segments equal at least 75% ot the company’s total revenues? Revenue Profit Assets Exam-based Training 360* 21* 176* Corporate Training 125* 5 84* Print Media 232* 27* 102* Online Publishing 124* 841 841/974 = 86% Therefore, the 75% test is met, so no other segments need to be identified or added

IFRS 8 – Operating Segments disclosures IFRS 8 requires detailed disclosure of “information to enable users to evaluate the nature and financial effect of the business activities in which it engages and the economic environment in which it operates” See pp.79-81(pp51-53) for details.

Continuing concerns about directors’ discretion Discretion as to the definition of each segment Discretion as to the allocation of common costs to segments Discretion as to the definition of some of the items to be disclosed e.g. net assets.

Discontinued operations Discontinued is defined in IFRS 5: A discontinued operation is one that has either been disposed of, or is classified as held for sale Represents a separate major line of business or geographical area of operations as reported in accordance with IFRS 5 Is part of a single coordinated plan to dispose of a separate major line of business, or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

Discontinued operations (Continued) Definition of ‘held for sale’ IFRS 5 defines ‘held for sale’ as: If the carrying amount will be recovered principally through a sale transaction rather than through continuing use and It must be available for immediate sale in its present condition and its sale must be highly probable. Held for sale assets should not be depreciated from the classification date be classified on the Balance sheet as a “held for sale” item – usually as part of current assets

Discontinued operations (Continued) Highly probable – criteria Management must be committed to a plan to sell An active programme started to locate a buyer Actively marketed for sale at a price that is reasonable in relation to current fair value Sale should be expected to be completed within a year It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Discontinued operations presentation The results of continuing and discontinued operations should be disclosed separately It is necessary to identify the revenue, cost of sales and expenses that relate to the discontinued operation in arriving at the operating profit.

Related party transactions Arm’s length transactions Related party relationships may mean transactions have not been entered into on an arm’s length basis The objective of IAS 24 Related Party disclosures To draw attention to the fact results may have been affected by transactions with related parties.

Related party transactions (Continued) Related parties as defined by IAS 24 Where one party has direct or indirect control of the other party or The parties are subject to common control or One party has such influence over the financial and operating policies of the other party that the other party might be inhibited from pursuing its own separate interests or The parties entering into a transaction are subject to such influence from the same source that one party has subordinated its own separate interests. See pp.89-90 (pp.60-61) for examples

Related party transactions (Continued) Disclosures required of: The person controlling the reporting entity and Related party transactions such as Purchase or sale of goods, property or other assets Giving or receiving services Agency arrangements, leasing arrangements Transfer of research and development, licence agreements Provision of finance and management contracts.

Related party disclosures Disclose relationships – even if no transactions Disclose if there have been transactions Nature of relationship Types of transactions Commercial detail – volumes, pricing policy.

IAS 24 – not deemed to be related parties Two companies with a director in common However consider extent of his interest Providers of finance, unions and government when in course of normal dealings with the entity Single customer, supplier simply based on volume of business.

Review questions Explain the criteria that has to be satisfied when identifying an operating segment Explain the criteria that has to be satisfied to identify a reportable segment Explain why it is necessary to identify a chief operating decision maker and describe the key identifying factors. 5. Explain the conditions that must be satisfied if a non-current asset is to be reported on the Balance sheet as “held for sale.” 8. Explain how to identify key personnel for the purposes of IAS 24 and why this is considered to be important.