Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Financial Reporting Standards (PFRS) 8, Operating Segments, to assist preparers of financial statements and those charged with the governance of reporting entities understand the requirements set out in PFRS 8 and revisit some areas where confusion has been seen in practice.

Overview

PFRS 8 requires entities within its scope (including those entities with only one reportable segment) to make certain product and service and geographical disclosures for the entity as a whole rather than by reportable segment.

Entity-wide disclosures

Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. PFRS 8, Operating Segments, sets out these requirements and asks for reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.

Entity-wide disclosures are particularly useful when the segment disclosures do not otherwise include total revenues by product, service or revenue stream. This will be the case when different reportable segments sell the same product or service, and when reportable segments are not organized by geographic area.

Exemptions from entity-wide disclosures

Separate disclosure is not required if the information is otherwise provided as part of the reportable segment information. The entity-wide disclosures are not required where the necessary information is not available and the cost to develop it would be excessive. However, because the information is on an entity basis, it is not expected this exemption will be invoked often. Most entities are likely to collect and retain information about their geographical operations and products and services. If the exemption is taken, that fact must be disclosed.

Information about products and services

PFRS 8 requires entities to disclose the revenues from external customers for each product and service or each group of similar products and services. Revenues disclosed should be based on the financial information used to produce the entity’s financial statements.

Information about geographical areas

Entities must disclose the following geographical information, based on financial information used to produce the entity’s financial statements:

• Revenues from external customers attributed to:
• the entity’s country of domicile, and
• all foreign countries in total from which the entity derives revenues.
• The basis for attributing revenue from external customers to individual countries
• Non-current assets, other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts located in:
• the entity’s country of domicile; and, 
• all other foreign countries in total in which the entity holds assets.
• If revenues attributable to and/or assets located in an individual foreign country are material, those revenues and/or assets should be separately disclosed.

Information about major customers

PFRS 8 requires disclosure of an entity’s reliance on its major customers. If revenues from transactions with a single external customer amount to 10% or more of an entity’s revenues, the entity should disclose:

• that fact;
• the total amount of revenues from each such customer; and,
• the identity of the segment or segments that report the revenues.
  

There is no need to disclose the amount of revenues that each segment reports from that customer or customers or the identity of the customer(s).

See attached Accounting Alert for further details and illustrative examples.