Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Financial Reporting Standards (PFRS) 8, Operating Segments, to provide preparers and users of financial statements and those charged with governance of reporting entities some key implementation issues and interpretational guidance in certain problematic areas of PFRS 8.

Overview

Management needs to monitor how they are performing, how they need to allocate their resources and how they can create successful strategies in their markets, so high-quality management accounts are key to helping them achieve this. PFRS 8, Operating Segments, aligns external reporting with what is reported internally by management by identifying and reporting operating segments.

Aggregation of Operating Segments Prior to Identifying Reportable Segments

Aggregation often improves the usefulness of the disclosures by avoiding excessive detail and focusing more readily on the overall trends and key information

Criteria for Aggregation

PFRS 8 explains the first stage of aggregating operating segments as follows:

Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of this PFRS, the segments have similar economic characteristics, and the segments are similar in each of the following respects:

• the nature of the products and services,
• the nature of the production processes,
• the type or class of customer for their products and services,
• the methods used to distribute their products or provide their services, and,
• if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

The Standard also notes operating segments often exhibit similar long-term financial performance if they have similar economic characteristics.

Impact of Aggregating Segments Prior to Consideration of Quantitative Thresholds for Reportable Segments

PFRS 8 provides the order in which the steps for identifying reportable segments are performed.

1. Identify operating segments
2. Aggregate identified operating segments with similar economic characteristics
3. Measure identified operating segments (or groups of aggregated segments, if applicable) against the PFRS 8 quantitative thresholds for reportable segments
4. Consider further aggregation of identified segments or groups of segments

If one or more of the aggregated segments has reported a profit but another has reported a loss, the net profit or loss is considered for the purpose of determining the reportable threshold for segment results. In some cases, this can change the number of reportable segments identified. However, the fact one segment did not meet the quantitative thresholds prior to the aggregation of other segments does not preclude it from being considered a reportable segment subsequent to that aggregation.

Aggregation of Operating Segments after Identifying Reportable Segments

Once the reportable segments have been identified (including segments that are reported to meet the 75% revenue test), information about all remaining non-reportable operating segments is combined and disclosed in an ‘all other segments’ category. The sources of revenue included in this ‘all other segments’ category is disclosed.

The totals for all segments are then used as the basis for the reconciliations required by PFRS 8.

Combining Operating Segments that Individually do not Meet the Quantitative Thresholds

Once the first stage aggregation permitted by PFRS 8 has been considered and the reportable segments or groups identified, an entity has a limited further opportunity to aggregate some segments that are not individually reportable.  An entity may combine information about operating segments that do not meet the quantitative thresholds for reportable segments with information about other operating segments of the same status if and only if the operating segments concerned have similar economic characteristics and share majority of the aggregation criteria listed in PFRS 8.  This new aggregation may be used to identify additional reportable segments.

As noted, for the purpose of combining segments in these circumstances only majority of the aggregation criteria in PFRS 8 need to be met.  This is slightly less restrictive than the first stage aggregation described above, for which all the criteria must be met.

Combining a Reportable Segment with a Segment that does not Meet the Quantitative Thresholds

In some cases, the external revenue of reportable segments is below the 75% of total revenue threshold required and so additional segments need to be identified as reportable.  An entity may wish to aggregate another operating segment with an existing reportable segment to satisfy the 75% test rather than report another segment separately.

This is not permissible unless aggregation is consistent with the core principle, the segments are economically similar, and meet all the aggregation criteria in PFRS 8.

See attached Accounting Alert for further details.