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 interpretational guidance in certain problematic areas of PFRS 8.

Overview

For entities that operate in a variety of classes of business, geographical locations, regulatory or economic environments or markets, high quality management accounts are essential. They enable management to monitor performance, allocate resources and devise business and market strategies.  PFRS 8 requires much of this management information for publicly listed entities to be published externally so that investors, analysts, and other users of entities’ financial statements can review an entity’s operations from the same perspective as management.

Objective

The objective of PFRS 8 is set out in a core principle. This principle requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

Operating segments are determined based on the structure of the organization and how information is reported to management.  PFRS 8 does not prescribe the measurement policies for the information to be disclosed. Instead, the amounts disclosed are mainly based on the information presented to management. This is generally known as ‘the management approach’ or ‘through the eyes of management.’

The Management Approach

The IASB decided to implement a management approach in the Standard because:

• it gives consistency between what is reported to users and what is reported internally to management, enabling users to see how the entity is structured to reflect the risks and opportunities that management believes are important;
• the ability to see segment information ‘through the eyes of management’ enhances users’ ability to predict actions or reactions of management that can significantly affect the entity’s prospects for future cash flows; 
• segment information is more consistent with information reported elsewhere in the annual report, for example in a management commentary; and,
• the incremental cost of producing segment information is lower because it is based on the information already presented to management.

Scope

The disclosure requirements of PFRS 8 are limited to entities within its scope. However, other entities may, in certain circumstances, need to identify operating segments in accordance with PFRS 8 in order to comply with the requirements of other standards.

PFRS 8 applies to entities that prepare financial statements, and:

• whose equity or debt securities are traded in a public market; or,
• that file, or are in the process of filing, financial statements with a securities commission or other regulatory organization for the purposes of issuing any class of instruments in a public market.

This applies to both consolidated financial statements of a group with a parent and the separate or individual financial statements of an entity.

PFRS 8 clarifies what is meant by a ‘public’ market and makes it clear this includes ‘over-the-counter’ markets.  It also states a parent entity that does not have publicly traded securities is not within the scope of PFRS 8, even if it has a subsidiary or investment in another entity that has issued listed securities.

If a financial report in the scope of PFRS 8 contains both consolidated financial statements as well as the parent’s separate financial statements, segment information is required only in the consolidated financial statements

Some entities outside the mandatory scope of PFRS 8 may decide to disclose segment information regardless. If this happens but the entity chooses to disclose information about segments that does not comply fully with PFRS 8, it must not describe the information as segment information.  An alternative heading should be given to the disclosures.

The accounting alert also discusses summary of requirements of PFRS 8 and steps to determine reportable segments.

See attached Accounting Alert for further details.