AYB340 Company Accounting Lecture 9 Translation of a Foreign Subsidiary’s Financial Statements and Segment Reporting 1

Segment reporting: Learning objectives To understand why the provision of segment information is potentially useful to financial report users To appreciate the nature of the process used in the identification of operating segments To understand and be able to explain the nature of segment revenue, segment expense, segment profit or loss, segment assets and segment liabilities To be able to allocate revenues, expenses, assets and liabilities to operating segments and determine the amount of segment profit or loss To understand and apply the basis on which reportable segments is determined To be able to prepare tabulated segment data

Introduction AASB 8 Operating Segments Replaced AASB 114 Reporting Financial Information by Segment from 1 January 2009

Definition of operating segments … a component of an entity: that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), 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, and (c) for which discrete financial information is available. (AASB 8, Appendix A)

Scope of operating segments Segment need not: currently generate revenues cover 100% of entity No guidance on factors considered in identifying segments but factors considered when combining segments presumably relevant (see AASB 8.12)

Allocating revenues, expenses, assets and liabilities to segments Allocations are determined solely by managerial discretion depends on rules used for internal reporting measures can be inconsistent with those used in financial statements If assets and liabilities allocated must do so on a reasonable basis

What segments do we report on? Need not report on all segments Need only report on reportable segments How do we determine which segments are reportable? those that exceed the quantitative threshold in AASB 8.13 (AASB 8.11(b)) if number of reportable segments >10 need to consider combining some segments

When can segments be combined? Must be consistent with ‘core principles’ of AASB_8 Segments must have similar economic characteristics Must be similar in all following respects: nature of product or service nature of production process type or class of customer for product or service methods used to distribute product or service nature of regulatory environment

Rules for reportable segments A segment must be classified as a reportable segment if any of the following conditions is satisfied: its reported revenue – including both sales to external customers and inter-segment sales or transfers – is 10% or more of the combined revenue (internal and external) for all operating segments; or the absolute amount of its reported profit or loss is 10% or more of the greater of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported losses of all operating segments reporting a loss; or its assets are 10% or more of total assets for all operating segments (AASB 8.13)

Rules for reportable segments (cont.) If ‘total external revenues reported by the operating segments’ constitutes less than 75% of the ‘entity’s revenue’, additional reportable segments must be identified, even though they do not meet the test in 1 above, until at least 75% of the entity’s revenue is included in the reportable segments (AASB 8.15) Internally reported segments that are ‘substantially similar’, that is they meet the requirements of AASB 8.12 discussed above, may be combined (AASB 8.14)

Rules for reportable segments (cont.) An internally reported segment that is not classified as reportable is treated in one of three ways: it is designated as reportable despite its size because management believes information about the segment will be useful to users (AASB 8.13); or it is combined, in accordance with 3, into a separately reportable segment with one or more ‘substantially similar’ segments that do not satisfy 1; or information about other non-reportable segments and that relating to other business activities are combined and reported as ‘all other segments’ and is distinguished from the items in the reconciliation required by AASB 8.28 (AASB 8.16)

Rules for reportable segments (cont.) If ‘the management judges’ that an operating segment that was a reportable segment in the prior reporting period ‘is of continuing significance’, information about that segment must be reported separately in the current period. Despite test 1 not being satisfied it must be classified as a reportable segment for current reporting period (AASB 8.17)

Rules for presentation and disclosure in segment reports Two broad types of disclosures: Those about segment revenues, expenses, profit or loss, assets and liabilities Supplemental information assist in understanding each reportable operating segment reconciliation with information in financial statements Summarised in Table 27.1

TABLE 27.1 Information in segment report General information ● factors used to identity reportable segments including the basis of organisation (AASB 8.22(a)) ● for each reportable segment, the types of revenue producing products and services (AASB 8.22(b)) General information on profit or loss, assets and liabilities (AASB 8.23) ● for each reportable segment: ● a measure of (i) profit or loss and (ii) total assets; and ● if reported internally, a measure of liabilities

TABLE 27.1 Information in segment report (cont.) For each reportable segment detailed information on profit or loss (AASB 8.23(a)–(i)) – need not be included in internally reported segment profit or loss ● revenues from external customers ● revenues from transactions with other operating segments of the entity ● interest revenue ● interest expense ● depreciation and amortisation expenses ● material items of revenue and expense disclosed under AASB 101.97 ● the entity’s interest in profit or loss of associates and joint ventures accounted for by the equity method ● income tax expense or revenue ● material non-cash items other than depreciation and amortisation

TABLE 27.1 Information in segment report (cont.) Detailed information on segment assets internally reported (even if not included in internally reported total segment assets) (AASB 8.24) ● carrying amount of investments in associates and joint venture accounted for by the equity method ● amounts of additions to non-current assets (excluding financial assets, deferred tax assets, post-employment benefits and rights under insurance contracts)

Measure of profit or loss Based on amounts of revenues and expenses reported internally Not necessarily same as any profit or loss reported internally Consequence of including revenues and expenses reported other than as components of segment profit or loss

Supplementary disclosures: measurement related Include the following Basis of accounting for inter-segment transactions Any differences in measurement of segment and entity profit or loss Any differences in measurement of segment assets and liabilities and those for the entity Nature and effect of asymmetrical allocations of assets, liabilities, revenues and expenses

Supplementary disclosures: reconciliations total amount of revenues for reportable segments and entity’s revenue; total amount of profit or loss for reportable segments and entity’s profit or loss before income tax and discontinued operations; total assets of reportable segments and the entity’s assets; total liabilities of reportable segments and entity’s liabilities, if liabilities are allocated to reportable segments total amounts of every other material item reported for reportable segments and corresponding amount for the entity

Entity-wide disclosures Cash flow disclosures For each reportable segment the amount of cash flow from: Operating activities Investing activities Financing activities (AASB 107.50(d)) Entity-wide disclosures About: (i) products and services (ii) geographical areas; and (iii) major customers (AASB 8.33)

Entity-wide disclosures (cont.) For geographical areas revenues from external customers (i) attributable to entity’s country of domicile and (ii) attributable to all foreign countries (and if material, to individual foreign countries); and non-current assets located in (i) entity’s country of domicile and (ii) in all foreign countries (and, if material, to individual foreign countries) (AASB 8.33) Disadvantages to entities reporting segment information include: revealing more than often wished time-consuming

Example 27.1: Segment reporting

Example 27.1: Segment reporting (cont.)

DIVERSE LTD and its subsidiaries Segment data analysis Segments Reported but not for a segment $ Total $ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7 $ Test 1(a): Sales revenue analysis [AASB 8.13(a)] Total segment revenue (including intersegment sales) 898 750 585 000 225 000 305 000 410 000 255 000 280 000 55 000 3 013 750 (Segment external revenue + inter-segment revenue) ÷ (Total revenue for all segments) 29.8% 19.4% 7.5% 10.1% 13.6% 8.5% 9.% Passes test? Yes No Test 1(b): Segment profit analysis [AASB 8.13(b)] Profit 219 250 196 950 180 250 200 500 73 200 70 250 940 400 Loss (30 000) (90 000) (120 000) Percentage calculation (segment profit ÷ total profit of profitable segments) 23.3% 20.9% 3.2 19.2% 21.3% 7.8% Test 1(c): Asset analysis [AASB 8.13(c)] Segment assets 750 000 450 000 175 000 110 000 100 000 75 000 1 885 000 Segment assets ÷ Total segment assets for all segments 39.8% 23.9% 9.3% 11.9% 5.8% 5.3% 4.0% Segment is reportable? Passes tests in AASB 8.13? Test 2: Total external revenues for reportable segments ÷ entity's revenue [AASB 8.15] Total revenue for reportable segments (including other revenue) 2 198 750 less Inter-segment revenues for reportable segments 180 000 65 000 310 000 Total external revenues of reportable segments [including other segment revenue] 1 888 750 (1) Total entity revenue Total segment revenue less inter-segment revenue (see data) 2 628 750 Unallocated revenues 2 7803 750 (2) Ratio 67.4% (1)/(2)% 940 400 >120 000 so use 940 000

DIVERSE LTD and its subsidiaries Segment data analysis Segments Reported but not for a segment $ Total $ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7 $ Test 1(a): Sales revenue analysis [AASB 8.13(a)] Total segment revenue (including intersegment sales) 898 750 585 000 225 000 305 000 410 000 255 000 280 000 55 000 3 013 750 (Segment external revenue + inter-segment revenue) ÷ (Total revenue for all segments) 29.8% 19.4% 7.5% 10.1% 13.6% 8.5% 9.3% Passes test? Yes No Test 1(b): Segment profit analysis [AASB 8.13(b)] Profit 219 250 196 950 180 250 200 500 73 200 70 250 940 400 Loss (30 000) (90 000) (120 000) Percentage calculation (segment profit ÷ total profit of profitable segments) 23.3% 20.9% 3.2% 19.2% 21.3% 7.8% Test 1(c): Asset analysis [AASB 8.13(c)] Segment assets 750 000 450 000 175 000 110 000 100 000 75 000 1 885 000 Segment assets ÷ Total segment assets for all segments 39.788% 23.873% 9.284% 11.936% 5.836% 5.305% 3.979% Segment is reportable? Passes tests in AASB 8.13? TRUE FALSE Test 2: Total external revenues for reportable segments ÷ entity's revenue [AASB 8.15] Total revenue for reportable segments (including other revenue) 2 198 750 less Inter-segment revenues for reportable segments 180 000 65 000 310 000 Total external revenues of reportable segments [including other segment revenue] 1 888 750 (1) Total entity revenue Total segment revenue less inter-segment revenue (see data) 2 628 750 Unallocated revenues 2 7803 750 (2) Ratio 67.4% (1)/(2)% Total entity revenue = total segment revenue for all segments less inter-segment revenues plus unallocated revenues

DIVERSE LTD and its subsidiaries Segment data analysis Segments Reported but not for a segment $ Total $ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7 $ Test 1(a): Sales revenue analysis [AASB 8.13(a)] Total segment revenue (including intersegment sales) 898 750 585 000 225 000 305 000 410 000 255 000 280 000 55 000 3 013 750 (Segment external revenue + inter-segment revenue) ÷ (Total revenue for all segments) 29.8% 19.4% 7.5% 10.1% 13.6% 8.5% 9.3% Passes test? Yes No Test 1(b): Segment profit analysis [AASB 8.13(b)] Profit 219 250 196 950 180 250 200 500 73 200 70 250 940 400 Loss (30 000) (90 000) (120 000) Percentage calculation (segment profit ÷ total profit of profitable segments) 23.3% 20.9% 3.2% 19.2% 21.3% 7.8% Test 1(c): Asset analysis [AASB 8.13(c)] Segment assets 750 000 450 000 175 000 110 000 100 000 75 000 1 885 000 Segment assets ÷ Total segment assets for all segments 39.8% 23.9% 11.9% 5.8% 5.3% 4.0% Segment is reportable? Passes tests in AASB 8.13? TRUE FALSE Test 2: Total external revenues for reportable segments ÷ entity's revenue [AASB 8.15] Total revenue for reportable segments (including other revenue) 2 198 750 less Inter-segment revenues for reportable segments 180 000 65 000 310 000 Total external revenues of reportable segments [including other segment revenue] 1 888 750 (1) Total entity revenue Total segment revenue less inter-segment revenue (see data) 2 628 750 Unallocated revenues 2 7803 750 (2) Ratio 67.4% (1)/(2)% Ratio less than 75% – must reclassify one or more segments as reportable

Example 27.1: Segment reporting (cont.) Requirement 2 (AASB 8.15) Of the three segments that are not reportable under requirement 1, the measures for the three tests are: Segment 3 Segment 6 Segment 7 Test 1(a): Sales revenue analysis [AASB 8.13(a)] (Segment external revenue + inter-segment revenue) ÷ (Total revenue for all segments) 7.5% 8.5% 9.3% Test 1(b): Segment profit analysis [AASB 8.13(b)] Profit (loss) $(30 000) $73 200 $70 250 Percentage calculation 3.2% 7.8% Test 1(c): Asset analysis [AASB 8.13(c)] Segment assets ÷ Total segment assets for all segments 5.3% 4.0% ● No segment has more than one score over 9%. ● Segment 3: The score for 1(c) is over 9%, but it is significantly below segment 7’s 1(a) score. The scores for the two other tests are well below 9%. ● Segment 6 has no measure over 9%, and is a poor candidate. ● Segment 7 is close to meeting test 1(a) and it has the second highest score for text 1(b), but the lowest score for test 1(c). The ultimate selection is likely to depend on qualitative rather than quantitative factors. Here we have decided to reclassify segment 7 as reportable, but we could have decided on segment 3. The total revenue for reportable segments is then increased to $2 143 750 ($1 888 750 + $255 000) which is 76.460% of entity revenues ($2 803 750), so requirement 2 is now satisfied.

Example 27.1: Segment reporting (cont.) Requirement 3 (AASB 8.14) There are insufficient data to apply the ‘substantially similar’ test to segments 3, 6 and 7. Requirements 4 and 5 There are insufficient data to apply those requirements; it is assumed that they do not result in additional reportable segments. Preparation of the segment report The next step is to prepare the segment information as required by AASB 8. Extracts from the ‘Notes to the financial statements’ of Diverse Ltd are presented after the analysis. Segments 1, 2, 4, 5 and 7 are included as reportable segments. The column headed ‘all other segments’ contains the data for segments 3 and 6 and the amounts in the ‘reported but not for a segment column. A reconciliation has been presented for the revenues and expenses but is not needed for assets and liabilities as the unallocated amounts are already reported.

READING: REVIEW QUESTION: Picker et al., Australian Accounting Standards, Chapter 21 (pp. 864 – 881) and Jubb et al., Company Accounting Chapter 27 (pp. 944-958). See CMD. REVIEW QUESTION: Picker, et al., Problem 21.1