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

Segment reporting is intended to give information to investors and stakeholders regarding the financial results and financial position of the entity that are used by the entity’s chief operating decision maker (CODM).

PFRS 8’s ‘management approach’ has the effect that reportable segments and segment information will vary according to the information used by the CODM. As a result, disclosures will not be consistent between entities, even those operating in similar industries. It is therefore important that users are provided with an explanation of how management have identified both the entity’s CODM and its operating segments and how the information reported to the CODM reconciles to the primary financial statements. Furthermore, the disclosures required in PFRS 8 include both narrative and quantitative information

Disclosure of the factors used to identify segments

PFRS 8 requires an entity to disclose the following general information:

• factors used to identify the entity’s reportable segments, including the basis of organization; and,
• types of products and services from which each reportable segment derives its revenues.

Quantitative information about profit or loss, assets and liabilities

The amounts disclosed for each segment item reflects what has been reported to the CODM.

There are limited circumstances in which entities may need to obtain additional information to meet the requirements of PFRS 8 and they are set out as follows:

Measure of segment profit or loss

PFRS 8 requires an entity reports a measure of segment profit or loss in all cases.

Measure of segment assets

Where a measure of segment assets is reported to the CODM, that measure is required to be disclosed. In accordance with PFRS 8, the disclosure is based on what is reported to the CODM. If the internal reporting includes, say, cash, inventory and accounts receivable, the sum of those three items is what needs to be disclosed.

Measure of segment liabilities

PFRS 8 requires an entity reports a measure of liabilities for each reportable segment if, and only if, such an amount is regularly provided to the CODM.

Other specified segment measures

PFRS 8 requires disclosure of items when they are either included in the measure of segment profit or loss reviewed by the CODM or they are otherwise regularly provided.

The specified amounts to be disclosed in these circumstances are:

• revenues from external customers;
• revenues from transactions with other operating segments of the same entity;
• interest revenue;
• interest expense;
• depreciation and amortization;
• material items of income and expense disclosed in accordance with PAS 1, Presentation of Financial Statements;
• the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;
• income tax expense or income; and,
• material non-cash items other than depreciation and amortization.

Disclosures for non-reportable segments

Information about other business activities and operating segments that are not separately reportable (after all preceding stages of aggregation and identification of reporting segments have been performed) is then combined and disclosed in an ‘all other segments’ category. A description of the sources of revenue included in this category is required by PFRS 8.

Disclosure of measurement policies

PFRS 8 requires an entity to disclose an explanation that enables users to understand the basis on which segmental information is measured.

The explanation should cover as a minimum:

• The basis of accounting for transactions between reportable segments, including transfer pricing policies (e.g., market prices, cost, or cost-plus).
• The nature of the description of the measurement basis for each reported measure of segment profit or loss, segment assets and segment liabilities, in particular the nature of any differences between these measurements and those used for the entity’s reported profit or loss before income tax expense or income and discontinued operations, or assets and liabilities in the entity’s statement of financial position. 
• The nature of any changes from prior periods in the measurement methods used and the effect of the changes. 
• The nature and effect of any asymmetrical allocations to reportable segments, for example an entity might allocate depreciation expense to a segment without allocating the related depreciable assets to the segment.

Reconciliation to PFRS primary financial statements

PFRS 8 requires disclosures to reconcile the segment items with the equivalent entity amounts.

Segment measures to be reconciled

PFRS 8 requires reconciliations of:

• the total of the reportable segments’ revenues to the entity’s revenue;
• the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items;
• the total of the reportable segments’ assets to the entity’s assets;
• the total of the reportable segments’ liabilities to the entity’s liabilities (if segment liabilities are reported); and,
• the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.

Amounts relating to the ‘all other segments’ category are disclosed separately from other reconciling items.

See attached Accounting Alert for further details and illustrative examples.