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
​High quality management accounts enable management to monitor performance, allocate resources and devise business and market strategies. Therefore, they are particularly important for entities that operate in a variety of classes of business, geographical locations, regulatory or economic environments or markets.
This article sets out further applications, issues and information regarding other standards involving operating segments.
Further application issues
Management reports include more than one measure of segment results, assets or liabilities
The chief operating decision maker (CODM) sometimes uses more than one measure of profit, assets or liabilities. In these circumstances, the segment measures to be reported should be those that are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity’s financial statements.
PFRS 8 sets out the minimum disclosure requirements and the basis of measurement for those disclosures. An entity may wish to disclose both measures, but it must be clear which is most consistent with the figures used in the primary financial statements. Each amount disclosed must be reconciled to the entity-wide figures.
Ratios are reported to the CODM but not the underlying asset or liability amounts
In some entities, the CODM uses ratios derived from asset and liability balances (such as liquidity and working capital ratios) rather than the asset and liability amounts directly.
Allocations of central costs and assets/liabilities
Centrally managed borrowings and interest costs may or may not be allocated to individual segments for the purpose of reporting to the CODM. Practices on allocation or non-allocation of other central costs, assets and liabilities also vary. PFRS 8 makes clear these types of items are allocated in the segment disclosures only if they are included in the measures reported to the CODM. However, there is an additional requirement that any such allocations to reported segment amounts should be made on a reasonable basis.
Adjustments to segment measures
Typically, adjustments are made to segment figures in preparing the entity’s annual (and any interim) consolidated financial statements. These adjustments typically include the elimination of intra-segment transactions, the recognition of fair value changes and the correction of any errors in the segment amounts previously reported to the CODM. These items would normally not be adjusted for at the segment level but instead an adjustment would be made in total in order to reconcile the segment information with that reported for the consolidated entity as a whole.
Other standards involving operating segments
Several other standards refer to segment information or the identification of segments in accordance with PFRS 8. In some circumstances, additional disclosures relating to segments are only required for entities within the scope of PFRS 8. However, in some situations, the requirements of other standards relating to segments apply to all entities, including those outside the scope of PFRS 8.
PAS 36, Impairment of assets
This requires goodwill acquired in a business combination to be allocated to the cash-generating units (CGUs) or groups of CGUs of the acquiring entity expected to benefit from the synergies of the combination. Each CGU (or group of CGUs) should not be larger than an operating segment determined in accordance with PFRS 8. Operating segments identified for the purpose of goodwill allocation are those defined by PFRS 8 before any aggregation is permitted. Consequently, all entities that have goodwill should consider whether their allocation to CGUs (or groups of CGUs) is consistent with this requirement.
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations
When the entity reports segmental information in accordance with PFRS 8, the entity shall disclose the reportable segment in which the non-current asset (or disposal group) classified as held for sale or sold is presented.
PFRS 6, Exploration for and Evaluation of Mineral Resources
Consistent with the requirements of PAS 36 discussed above, the CGU or group of units to which an exploration and evaluation asset is allocated is not larger than an operating segment determined in accordance with PFRS 8.
PAS 34, Interim Financial Reporting
PAS 34 also requires segment disclosures in interim financial statements.
If an entity publishes an interim financial report in accordance with PAS 34, it may choose to present either a complete set or a condensed set of financial statements. Furthermore, if an entity presents a complete set of financial statements as interim financial statements, the full requirements of PFRS 8 described in our article ‘Insights into PFRS 8 – Segment Information to be disclosed’ should be observed. Alternatively, an entity may elect to present condensed financial statements and selected notes in its interim report.
PAS 34 sets out the minimum contents of such condensed financial statements but does not prohibit or discourage entities from disclosing more than the minimum required.
Minimum content of segment information in condensed interim financial statements
Entities should disclose the information listed below, as a minimum, in the notes to their condensed interim financial statements, if material and if not disclosed elsewhere in the interim financial report.
- segment external revenues, if included in the measure of segment profit or loss reviewed by the chief operating decision maker (CODM) or otherwise regularly provided to the CODM;
- inter-segment revenues if included in the measure of profit or loss reviewed by the CODM or otherwise provided to the CODM;
- a measure of segment profit or loss;
- total assets for which there has been a material change from the amount disclosed in the last annual financial statements;
- a description of any differences from the last annual financial statements in the basis of segmentation or in the basis of measurement of segment profit or loss; and,
- a reconciliation of the total reportable segments’ measure of profit or loss to the entity’s profit or loss before tax and discontinued operations unless the entity allocates tax or discontinued operations to segments, in which case the reconciliation is to the entity’s profit after such items. The reconciliation should identify and describe separately each material reconciling item.
PAS 7, Statement of Cash Flows
PAS 7 encourages, but does not mandate, disclosure of additional cash flow information for entities reporting in accordance with PFRS 8.
See attached Accounting Alert for further details and illustrative examples.
