IFRS 9 Financial Instruments by iSz7XL

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									                                                            for Accounting Professionals




                                                           IFRS 8 Operating segments
                                                                                           2011

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                                                                                                                             IFRS 8 Operating segments


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Visiting Professor of the Siberian Academy of Finance and Banking                                  Moscow, Russia         2011 Updated




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CONTENTS                                                                  Multiple choice questions                                             20
                                                                          Answers to multiple choice questions ...................... 26
Background                                                           3
Definitions                                                          4    Background
Main features of IFRS 8                                              5    Standards of financial statements are published to specify
                                                                          disclosure and/or to move profit from one period to another. IFRS 8
IFRS 8 - Core principle                                              6    is exclusively about disclosure.
Scope                                                                6
                                                                          As undertakings become larger, understanding how they operate:
Operating segments                                                   7
                                                                          - in different markets,
Reportable segments                                                  8
                                                                          - with different products and services and
Quantitative thresholds                                              9
Disclosure - General information ............................... 13       - providing to a growing range of clients

Disclosure - Specific information............................... 13       becomes more difficult, unless additional detail is provided.
Disclosure - Information about profit or loss, assets                     Information about components of an undertaking, the products and
                            and liabilities ............... 14            services that it offers, its foreign operations, and its major clients is
                                                                          useful for understanding and making decisions about the
Measurement                                                          16   undertaking as a whole. Users observe that the evaluation of the
Reconciliations                                                      17   prospects for future cash flows is the central element of investment
                                                                          and lending decisions.
Information about products and services – total
                            undertaking ................. 18              The evaluation of prospects requires assessment of the uncertainty
                                                                          that surrounds both the timing and the amount of the expected cash
Information about geographical areas – total                              flows to the undertaking, which in turn affect potential cash flows to
                           undertaking ................. 19               the investor or creditor. Users also observe that uncertainty results
                                                                          in part from factors related to the products and services an
Information about major clients areas – total                             undertaking offers and the geographic areas in which it operates.
                            undertaking ................. 19
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                                                                                                           IFRS 8 Operating Segments

Different segments will generate dissimilar streams of cash flows, to     Segments based on the structure of an undertaking’s internal
which are attached disparate risks and which bring about unique           organisation have at least three other significant advantages:
values. Thus, without disaggregation, there is no sensible way to
predict the overall amounts, timing, or risks of a complete                  1. An ability to see an undertaking “through the eyes of
undertaking’s future cash flows.                                                management” enhances a user’s ability to predict actions or
                                                                                reactions of management that can significantly affect the
EXAMPLE – risk assessment                                                       undertaking’s prospects for future cash flows.

Your group has invested in a country that has become politically             2. As information about those segments is generated for
unstable. Segment reporting explains how much (or little)                       management’s use, the incremental cost of providing
performance depends on that country, and helps measure the risk                 information for external reporting should be relatively low.
that any loss of business could have on the group.
                                                                             3. Practice has demonstrated that the term ‘industry’ is
The additional detail should:                                                   subjective. Segments based on an existing internal structure
                                                                                should be less subjective.
(1) increase the number of reported segments and provide more
information;                                                              IFRS 8 arises from the IASB’s consideration of (US) FASB
                                                                          Statement No.131 Disclosures about Segments of an Undertaking
(2) enable users to see an undertaking through the eyes of                and Related Information (SFAS 131), compared with (the now-
management;                                                               superseded) IAS 14 Segment Reporting.

(3) enable an undertaking to provide timely segment information for       IFRS 8 achieves convergence with the requirements of SFAS 131,
external interim reporting with relatively low incremental cost;          except for minor differences.

(4) enhance consistency with the management discussion and                Definitions
analysis or other annual report disclosures; and
                                                                          An operating segment is a component of an undertaking:
(5) provide various measures of segment performance.
                                                                          (1) that engages in business activities from which it may earn
Knowledge of the structure of an undertaking’s internal organisation      revenues and incur expenses (including revenues and expenses
is valuable in itself because it highlights the risks and opportunities   relating to transactions with other components of the same
that management believes are important.                                   undertaking),

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                                                                                                        IFRS 8 Operating Segments

(2) whose operating results are regularly reviewed by the
undertaking’s chief operating decision maker to make decisions         Operating segments are components of an undertaking about
about resources to be allocated to the segment and assess its          which separate financial information is available that is evaluated
performance, and                                                       regularly by the chief operating decision maker in deciding how to
                                                                       allocate resources and in assessing performance.
(3) for which discrete financial information is available.
                                                                       Generally, financial information is required to be reported on the
The term ‘chief operating decision maker’ identifies a function, not   same basis as is used internally for evaluating operating segment
necessarily a manager with a specific title. That function is to       performance and deciding how to allocate resources to operating
allocate resources to and assess the performance of the operating      segments.
segments of an undertaking. Often the chief operating decision
maker of an undertaking is its chief executive officer or chief        IFRS 8 requires an undertaking to report a measure of operating
operating officer but, for example, it may be a group of executive     segment profit or loss and of segment assets. It also requires an
directors or others.                                                   undertaking to report a measure of segment liabilities and particular
                                                                       income and expense items if such measures are regularly provided
IFRS 8 Operating Segments sets out requirements for disclosure of      to the chief operating decision maker.
information about an undertaking’s operating segments and also
about the undertaking’s products and services, the geographical        It requires reconciliations of total reportable segment revenues,
areas in which it operates, and its major clients.                     total profit or loss, total assets, liabilities and other amounts
                                                                       disclosed for reportable segments to corresponding amounts in the
Main features of IFRS 8                                                undertaking’s financial statements.

IFRS 8 specifies how an undertaking should report information          IFRS 8 requires an undertaking to report information about the
about its operating segments in annual financial statements and in     revenues derived from its products or services (or groups of similar
interim financial reports. It also sets out requirements for related   products and services), about the countries in which it earns
disclosures about products and services, geographical areas and        revenues and holds assets, and about major clients, regardless of
major clients.                                                         whether that information is used by management in making
                                                                       operating decisions.
IFRS 8 requires an undertaking to report financial and descriptive     However, IFRS 8 does not require an undertaking to report
information about its reportable segments.                             information that is not prepared for internal use if the necessary
                                                                       information is not available and the cost to develop it would be
Reportable segments are operating segments or aggregations of          excessive.
operating segments that meet specified criteria.
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                                                                                                                IFRS 8 Operating Segments

IFRS 8 also requires an undertaking to give descriptive information
about the way the operating segments were determined, the                   (2) the consolidated financial statements of a group with a parent:
products and services provided by the segments, differences
between the measurements used in reporting segment information              (i) whose debt or equity instruments are traded in a public market (a
and those used in the undertaking’s financial statements, and               domestic or foreign stock exchange, or an over-the-counter market,
changes in the measurement of segment amounts from period to                including local and regional markets), or
period.
                                                                            (ii) that files, or is in the process of filing, the consolidated financial
IFRS 8 - Core principle                                                     statements with a securities commission, or other regulatory
                                                                            organisation for the purpose of issuing any class of instruments in a
An undertaking shall disclose information to enable users of its            public market.
financial statements to evaluate the nature and financial effects of
the business activities in which it engages and the economic                If an undertaking that is not required to apply IFRS 8 chooses to
environments in which it operates.                                          disclose information about segments that does not comply with
                                                                            IFRS 8, it shall not describe the information as segment
IAS 34 Interim Financial Reporting, requires an undertaking to              information.
report selected information about its operating segments in interim
financial reports.                                                          If a financial report contains both the consolidated financial
                                                                            statements of a parent that is within the scope of IFRS 8 as well as
Scope                                                                       the parent’s separate financial statements, segment information is
                                                                            required only in the consolidated financial statements.
IFRS 8 shall apply to:

(1) the separate or individual financial statements of an
undertaking:

(i) whose debt or equity instruments are traded in a public market (a       EXAMPLES-group accounts
domestic or foreign stock exchange, or an over-the-counter market,          1. You produce consolidated accounts for your listed group. You
including local and regional markets), or                                   include the parent company’s full financial statements, and those of
                                                                            the subsidiaries located in your country.
(ii) that files, or is in the process of filing, its financial statements
with a securities commission or other regulatory organisation for the       Only the consolidated accounts need provide segment information.
purpose of issuing any class of instruments in a public market; and
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                                                                                                          IFRS 8 Operating Segments

2. You produce consolidated accounts for the group. The parent          the E plc group has listed debt in issue. The question is, then,
company is a privately-owned company, that is not listed on any         whether the definition of the entity in the context of consolidated
stock exchange. The shares of your largest subsidiary is traded on      financial statements is the parent company or the consolidated
your national stock exchange. Only the largest subsidiary’s             group.
accounts need provide segment information.
                                                                        IFRS 10 defines consolidated financial statements as the financial
EXAMPLE-associates                                                      statements of a group presented as those of a single economic
1. You produce consolidated accounts for your listed group. You         entity.
include the associate company accounts. The associate is a listed
company.                                                                Applying this definition leads us to conclude that the entity for IFRS
You need provide segment information for group companies, other         8 purposes is the consolidated group and not the solus parent
than the listed associate. The associate will produce segment           entity.
information in its own accounts.
                                                                        Thus, the entity (the E plc group) does have listed securities and
                                                                        should make the disclosures required by IFRS 8. In addition, the
                                                                        financial statements of F plc fall within the scope of IFRS 8 and
EXAMPLE - listed securities
                                                                        disclosures are also required in that company’s separate financial
                                                                        statements.
Does segment reporting apply when an unlisted company has a
subsidiary with listed securities?                                      Operating segments
E plc is a large unlisted company that is required to prepare
consolidated accounts.                                                  An operating segment may engage in business activities for which it
                                                                        has yet to earn revenues, for example, start-up operations may be
E plc has a subsidiary, F plc,that has debt listed on the London        operating segments before earning revenues.
Stock Exchange.
Do the accounts of E plc fall within the scope of IFRS 8?               Not every part of an undertaking is necessarily an operating
                                                                        segment or part of an operating segment. For example, a corporate
IFRS 8 applies to entities whose equity or debt securities are          headquarters or some functional departments may not earn
publicly traded (and by entities that are in the process of issuing     revenues or may earn revenues that are only incidental to the
equity or debt securities in public securities markets).                activities of the undertaking and would not be operating segments.

Although E plc (entity) does not have any publicly-traded securities,   An undertaking’s pension plans are not operating segments.

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                                                                                                         IFRS 8 Operating Segments

An undertaking may produce reports in which its business activities     The characteristics may apply to two or more overlapping sets of
are presented in a variety of ways. If the chief operating decision     components for which managers are held responsible. That
maker uses more than one set of segment information, other              structure is sometimes referred to as a matrix form of organisation.
factors may identify a single set of components as constituting an      In that situation, the undertaking shall determine which set of
undertaking’s operating segments, including the nature of the           components constitutes the operating segments by reference to the
business activities of each component, the existence of managers        core principle.
responsible for them, and information presented to the board of
directors.                                                              EXAMPLE-matrix form of organisation
                                                                        In some undertakings, some managers are responsible for different
EXAMPLE- next lower level of internal segmentation                      product and service lines worldwide, whereas other managers are
Your management wants to use segment reporting, but only                responsible for specific geographical areas. The chief operating
receives one set of figures for the group as a whole, with no further   decision maker regularly reviews the operating results of both sets
analysis. You will need to look at how the figures are assembled to     of components, and financial information is available for both.
identify the next lower level of internal segmentation. It may be
found in the reports to divisional managers.
                                                                        Reportable segments
Generally, an operating segment has a segment manager who is
directly accountable to and maintains regular contact with the chief    An undertaking shall report separately information about each
operating decision maker to discuss operating activities, financial     operating segment that:
results, forecasts, or plans for the segment.
                                                                        (1) has been identified, or results from aggregating two or more of
                                                                        those segments, and
The term ‘segment manager’ identifies a function, not necessarily a
manager with a specific title.                                          (2) exceeds the quantitative thresholds (see below).
                                                                        Aggregation criteria
The chief operating decision maker also may be the segment
manager for some operating segments. A single manager may be            Operating segments often exhibit similar long-term financial
the segment manager for more than one operating segment. If the         performance if they have similar economic characteristics. For
characteristics apply to more than one set of components of an          example, similar long-term average gross margins for two operating
organisation but there is only one set for which segment managers       segments would be expected if their economic characteristics were
are held responsible, that set of components constitutes the            similar.
operating segments.

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                                                                                                           IFRS 8 Operating Segments

Two or more operating segments may be aggregated into a single          Your production facilities are all in the southern hemisphere. Your
operating segment if aggregation is consistent with the core            clients are all in the northern hemisphere. Your segments can either
principle of IFRS 8, the segments have similar economic                 be based on your production facilities, or the locations of your
characteristics, and the segments are similar in each of the            clients. Your group’s reporting structure will indicate which choice to
following respects:                                                     take.

(1) the nature of the products and services;                            (4) the methods used to distribute their products or provide their
                                                                        services; and
EXAMPLE-dissimilar services
Your group includes cobblers’ shops and banks. These would not
                                                                        EXAMPLE-dissimilar distribution
be included in the same segment.
                                                                        You have a food business. Part of the business is wholesale: low
                                                                        profit margins, and high volume. The other part is restaurants:
(2) the nature of the production processes;                             higher margins, but lower volumes. Both should be separate
                                                                        segments.
EXAMPLE-vertical integration-oil companies
Many international oil companies report their upstream activities       (5) if applicable, the nature of the regulatory environment, for
(exploration and production) and their downstream activities            example, banking, insurance or public utilities.
(refining and marketing) as separate business segments, even if
most of the upstream product (crude petroleum) is transferred
                                                                        EXAMPLES-regulatory environment
internally to the undertaking’s refining operation.
                                                                        Among your major investments are a bank and a company that
                                                                        provides electricity to domestic users. Both have to report to
(3) the type or class of client for their products and services;        different state bodies, who can control their profitability. Both should
                                                                        be separate segments.
EXAMPLE-dissimilar locations                                            Quantitative thresholds
Your group provides pharmaceuticals to all areas of the world.
Countries where tropical diseases will have different characteristics
                                                                        An undertaking shall report separately information about an
from those where colds and influenza dominate. The two groups
                                                                        operating segment that meets any of the following quantitative
would not be included in the same segment.
                                                                        thresholds:
EXAMPLE-geographical segments


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                                                                                                           IFRS 8 Operating Segments

(1) Its reported revenue, including both sales to external clients and   cent of the undertaking’s revenue is included in reportable
intersegment sales or transfers, is 10 per cent or more of the           segments.
combined revenue, internal and external, of all operating segments.
                                                                         Information about other business activities and operating segments
(2) The absolute amount of its reported profit or loss is 10 per cent    that are not reportable shall be combined and disclosed in an ‘all
or more of the greater, in absolute amount, of                           other segments’ category separately from other reconciling items in
                                                                         the reconciliations (see below). The sources of the revenue
(i) the combined reported profit of all operating segments that did      included in the ‘all other segments’ category shall be described.
not report a loss and
                                                                         EXAMPLE - Voluntary disclosure of additional segment
(ii) the combined reported loss of all operating segments that
reported a loss.                                                         Entity B currently prepares segment disclosures in accordance with
                                                                         IFRS 8
(3) Its assets are 10 per cent or more of the combined assets of all
operating segments.                                                      The segment information includes three business segments and the
                                                                         results of unallocated parts of the business that do not meet the
Operating segments that do not meet any of the quantitative              10% thresholds for assets, segment result or revenue.
thresholds may be considered reportable, and separately disclosed,
if management believes that information about the segment would          B’s management is considering presenting a fourth segment to
be useful to users.                                                      reflect a component of the business that is currently included within
                                                                         the unallocated results.
An undertaking may combine information about operating segments
that do not meet the quantitative thresholds with information about      This fourth component, which generates all of its revenues from
other operating segments that do not meet the quantitative               third parties, falls below the 10% thresholds for mandatory
thresholds to produce a reportable segment only if the operating         reporting; however, it is a part of the business that is growing
segments have similar economic characteristics and share a               rapidly and is expected to reach the 10% thresholds in the next few
majority of the aggregation criteria.                                    years.

If the total external revenue reported by operating segments             Management therefore believes it would be helpful for readers of
constitutes less than 75 per cent of the undertaking’s revenue,          the financial
additional operating segments shall be identified as reportable          statements if the results were presented as a separate segment.
segments (even if they do not meet the criteria) until at least 75 per
                                                                         Can B’s management present a fourth segment under IFRS 8?
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                                                                      IFRS 8 Operating Segments


Yes. B’s management may present a fourth segment if it believes
that this information will be useful to the users of the financial
statements. This is permitted by IFRS 8.

If the fourth segment is presented, then the comparatives should be
restated to provide the same presentation.




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                                                                                             IFRS 8 Operating Segments


  Diagram for identifying reportable segments
                                      Identify operating segments
                                      based on management
                                      reporting system.

                                                                         YES
                                                                               Aggregate
                                      Do some operating segments               segments if
                                      meet all aggregation criteria?           desired
                                 NO
                                      Do some operating segments
                                      meet the quantitative
                                      thresholds?
                             YES
                                                                        NO
                             YES
                                      Do some of the remaining
              Aggregate               operating segments meet a
              segments if             majority of the aggregation
              desired                 criteria?
                                                                        NO
                                      Do identified reportable
                                      segments account for 75% of
                                      the total revenue?
                                                                         YES
                                 NO
                                      Report additional segment if
                                      external revenue of all
                                      segments is less than 75% of
                                      total revenue,


  These are                              Aggregate remaining segments
  reportable                             into 'all other segments'
  segments.                              category.
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If management judges that an operating segment identified as a
reportable segment in the immediately preceding period is of                 Yes. The foreign exchange gains and losses arise directly from the
continuing significance, information about that segment shall                revaluation of the foreign currency receivables from each segment
continue to be reported separately in the current period even if it no       and should be included in segment result which is the difference
longer meets the criteria.                                                   between segment revenue and expense.

If an operating segment is identified as a reportable segment in the         Segment expense is the directly attributable costs of each segment.
current period, segment data for a prior period presented for                The foreign exchange gains and losses are directly attributable to
comparative purposes shall be restated to reflect the newly                  the segments from which they arise.
reportable segment as a separate segment, even if that segment
did not satisfy the criteria for reportability in the prior period, unless   Disclosure - General information
the necessary information is not available and the cost to develop it
would be excessive.                                                          An undertaking shall disclose the following general information:

There may be a practical limit to the number of reportable segments          (1) factors used to identify the undertaking’s reportable segments,
that an undertaking separately discloses beyond which segment                including the basis of organisation (for example, whether
information may become too detailed. Although no precise limit has           management has chosen to organise the undertaking around
been determined, if the number of segments that are reportable in            differences in products and services, geographical areas, regulatory
increases above ten, the undertaking should consider whether a               environments, or a combination of factors and whether operating
practical limit has been reached.                                            segments have been aggregated), and

EXAMPLE - Exchange gains and losses segments                                 (2) types of products and services from which each reportable
                                                                             segment derives its revenues.
Entity D has operations in four business segments. The foreign
exchange gains and losses arising from the revaluation of foreign            Disclosure - Specific information
currency receivable balances are recorded within administrative
expenses and therefore within operating profit.                              An undertaking shall disclose information to enable users to
                                                                             evaluate the nature and financial effects of the business activities in
D presents segment information in accordance with IFRS 8,                    which it engages and the economic environments in which it
including segment result.                                                    operates.

Should segment result include the foreign exchange gains and                 An undertaking shall disclose the following for each period for which
losses arising from the revaluation of foreign currency receivables          an income statement is presented:
from that segment?

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                                                                                                            IFRS 8 Operating Segments

(1) general information as described above;                            - the basis of measurement,; and

(2) information about reported segment profit or loss, including:      (3) reconciliations of the totals:

- specified revenues and expenses included in reported segment         - of segment revenues,
profit or loss,
                                                                       - reported segment profit or loss,
EXAMPLE-intersegment pricing
Your policy is that sales between segments should be at list price     - segment assets,
minus 15%.
This should be stated as a segment accounting policy.                  - segment liabilities and

- segment assets,                                                      - other material segment items
                                                                       to total undertaking amounts.
EXAMPLE-doubtful debt provision
Your accounts receivable are collected centrally. Your segment         Reconciliations of statement of financial position (balance sheet)
assets will include its share of accounts receivable, and also the     amounts for reportable segments to the undertaking’s balance
portion of doubtful debt provision relating to those receivables.      sheet amounts are required for each date at which a balance sheet
                                                                       is presented. Information for prior periods shall be restated.
- segment liabilities and
                                                                       Disclosure - Information about profit or loss, assets and
EXAMPLE-interest-bearing liabilities                                   liabilities
You show your segment result after accounting for interest
expense. The segment liabilities should show the liabilities (loans)
                                                                       An undertaking shall report a measure of profit or loss and total
that have incurred the interest expense.
                                                                       assets for each reportable segment.
EXAMPLE- product warranty provisions                                   An undertaking shall report a measure of liabilities for each
Your segment provides televisions and video equipment. The group       reportable segment if such an amount is regularly provided to the
makes a central warranty provision to cover after-sale repairs. Your   chief operating decision maker.
segment liabilities should include your share of this product
warranty provision.                                                    An undertaking shall also disclose the following about each
                                                                       reportable segment if the specified amounts are included in the
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                                                                                                          IFRS 8 Operating Segments

measure of segment profit or loss reviewed by the chief operating
decision maker, or are otherwise regularly provided to the chief         (9) material non-cash items other than depreciation and
operating decision maker, even if not included in that measure of        amortisation.
segment profit or loss:
                                                                         An undertaking shall report interest revenue separately from
(1) revenues from external clients;                                      interest expense for each reportable segment, unless a majority of
                                                                         the segment’s revenues are from interest and the chief operating
(2) revenues from transactions with other operating segments of the      decision maker relies primarily on net interest revenue to assess
same undertaking;                                                        the performance of the segment and make decisions about
                                                                         resources to be allocated to the segment.
EXAMPLE-internal sales and balances
In preparing your segment reports, you eliminate transactions within     In that situation, an undertaking may report that segment’s interest
the segment, such as sales from one unit to another within the           revenue net of its interest expense and disclose that it has done so.
segment, and also the balances between one unit and another
within the segment.                                                      An undertaking shall disclose the following about each reportable
Transactions with other units of the group, that are outside the         segment if the specified amounts are included in the measure of
segment, and balances with those units, should not be eliminated         segment assets reviewed by the chief operating decision maker or
for segment reporting. They will be eliminated in the consolidated       are otherwise regularly provided to the chief operating decision
financial statements. These differences will be reconciled within the    maker, even if not included in the measure of segment assets:
segment reporting.
                                                                         (1) the amount of investment in associates and joint ventures
(3) interest revenue;                                                    accounted for by the equity method, and

(4) interest expense;                                                    EXAMPLE-associated company
                                                                         Your segment assets include your share of profit from an associate,
(5) depreciation and amortisation;                                       which acts as a sales agent. You should include the investment in
                                                                         the associate with in the segment assets.
(6) material items of income and expense (see IAS 1);
                                                                         (2) the amounts of additions to non-current assets (assets that
(7) the undertaking’s interest in the profit or loss of associates and   include amounts expected to be recovered more than twelve
joint ventures accounted for by the equity method;                       months after the balance sheet date) other than financial
                                                                         instruments, deferred tax assets, pension assets and rights arising
(8) income tax expense or income; and                                    under insurance contracts.
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                                                                                                              IFRS 8 Operating Segments

                                                                            recognised?
EXAMPLE-goodwill
Your segment has benefited from an acquisition of another                   The requirement for C plc to look at operating rather than reporting
company. The segment has been allocated 60% of the goodwill,                segments was a consequential amendment to IAS 36 when IFRS 8
related to that acquisition. Later, the goodwill is tested for              was issued.
impairment, and your segment finds that its share of goodwill is
impaired. Your segment expenses its impairment charge.                      So, in accordance with IAS 8, Accounting Policies, Changes in
                                                                            Accounting Estimates and Errors, the first-time adoption of IFRS 8
                                                                            should be accounted for retrospectively.
EXAMPLE - IFRS 8 and goodwill impairment
                                                                            Hence, any goodwill impairment arising on the reallocation of
C plc is applying IFRS 8 for the first time in its consolidated financial   goodwill between CGUs should also be treated retrospectively.
statements.
                                                                            Measurement
C plc has goodwill acquired in business combinations that has been
allocated to each of its cash generating units (CGUs) for the               The amount of each segment item reported shall be the measure
purposes of impairment testing under IAS 36, Impairment of Assets.          reported to the chief operating decision maker for the purposes of
                                                                            making decisions about allocating resources to the segment and
The identification of operating segments in accordance with IFRS 8          assessing its performance.
has resulted in a change from the segments that were historically
reported under IAS 14.                                                      Adjustments and eliminations shall be included in segment profit or
                                                                            loss only if they are included in the segment’s profit or loss that is
In accordance with IAS 36, the CGU to which the goodwill is                 used by the chief operating decision maker.
allocated for the purpose of impairment testing should not be larger
than an operating segment determined in accordance with IFRS 8.             Similarly, only those assets and liabilities that are included in the
                                                                            segment’s assets and segment’s liabilities that are used by the
As a result of the limit imposed by IAS 36 on the size of the CGUs          chief operating decision maker shall be reported for that segment. If
to which goodwill is allocated for the purposes of impairment               amounts are allocated to reported segment profit or loss, assets or
testing, C plc has had to reallocate goodwill between CGUs on the           liabilities, those amounts shall be allocated on a reasonable basis.
adoption of IFRS 8.
                                                                            EXAMPLE-pension allocation
C plc has identified that an impairment charge will arise solely as a       Group pension calculations may be allocated to segments based on
result of this reallocation. How should this impairment be                  salary, and demographic, data for the segments.
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                                                                                                           IFRS 8 Operating Segments

                                                                        usage of central facilities, such as central research. These
If the chief operating decision maker uses more than one measure        allocations should be included in segment expense.
of an operating segment’s profit or loss, the segment’s assets or the
segment’s liabilities, the reported measures shall be those that
                                                                        (3) the nature of any changes from prior periods in the
management believes are most consistent with those used in the
                                                                        measurement methods used to determine reported segment profit
financial statements.
                                                                        or loss and the impact, if any, of those changes on the measure of
                                                                        segment profit or loss.
An undertaking shall provide an explanation of the measurements
of segment profit or loss, segment assets and segment liabilities for
                                                                        (4) the nature and effect of any asymmetrical allocations to
each reportable segment. At a minimum, an undertaking shall
                                                                        reportable segments.
disclose the following:
                                                                        For example, an undertaking might allocate depreciation expense
(1) the basis of accounting for any transactions between reportable
                                                                        to a segment without allocating the related assets to that segment.
segments.

(2) the nature of any differences between:                              EXAMPLE-shared assets
                                                                        Your segment uses another’s machine, for which you are charged
-the measurements of the reportable segments’ profits or losses,        40% of the depreciation charge. Either your segment assets should
assets and liabilities and                                              include 40% of the value of asset, and 40% of its accumulated
                                                                        depreciation to match the charge, or an explanation will be needed
-the undertaking’s profit or loss before income tax expense or          as a “nature and effect of a asymmetrical allocation”.
income and discontinued operations, assets and liabilities (if not
apparent from the reconciliations).                                     Reconciliations

Such differences could include accounting policies and policies for     An undertaking shall provide reconciliations of all of the following:
allocation of centrally incurred costs and jointly-used assets and
liabilities that are necessary for an understanding of the reported     (1) the total of the reportable segments’ revenues to the
segment information.                                                    undertaking’s revenue.

EXAMPLE-head office expenses                                            (2) the total of the reportable segments’ measures of profit or loss
                                                                        to the undertaking’s profit or loss before tax expense (tax income)
You allocate a portion of head office expenses to your operating        and discontinued operations.
divisions (which comprise your segments). All allocations reflect

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                                                                                                          IFRS 8 Operating Segments

However, if an undertaking allocates to reportable segments items       periods, shall be restated unless the information is not available
such as tax expense (tax income), the undertaking may reconcile         and the cost to develop it would be excessive.
the total of the segments’ measures of profit or loss to the
undertaking’s profit or loss after those items.                         EXAMPLES- changes in policies relate specifically to segment
                                                                        reporting
(3) the total of the reportable segments’ assets to the undertaking’s
assets.                                                                 Changes in identification of segments, and changes in the basis for
                                                                        allocating revenues, and expenses, to segments. Such changes
(4) the total of the reportable segments’ liabilities to the            will not change aggregate financial information reported for the
undertaking’s liabilities if segment liabilities are reported.          undertaking.

(5) the total of the reportable segments’ amounts for all other         The determination of whether the information is not available and
material items disclosed to the corresponding amount for the            the cost to develop it would be excessive shall be made for each
undertaking.                                                            individual item of disclosure.

EXAMPLES-other material items                                           Following a change in its reportable segments, an undertaking shall
Write-downs of inventories and property, plant, and equipment,          disclose whether it has restated the corresponding items of
provisions for restructurings, disposals of property, plant, and        segment information for earlier periods.
equipment and long-term investments, discontinued operations,
litigation settlements, and reversals of provisions.                    If an undertaking has changed its reportable segments and if
                                                                        segment information for earlier periods, including interim periods, is
All material reconciling items shall be separately identified and       not restated, in the year of the change the undertaking shall
described.                                                              disclose segment information for the current period on both the old
EXAMPLE-material reconciling item                                       basis and the new basis of segmentation, unless the necessary
For example, the amount of each material adjustment needed to           information is not available and the cost to develop it would be
reconcile reportable segment profit or loss to the undertaking’s        excessive.
profit or loss arising from different accounting policies shall be
separately identified and described.                                    Information about products and services – total undertaking
Restatement of previously reported information
                                                                        An undertaking shall report the revenues from external clients for
If an undertaking changes its reportable segments, the                  each product and service, or each group of similar products and
corresponding information for earlier periods, including interim        services, unless the necessary information is not available and the

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                                                                                                           IFRS 8 Operating Segments

cost to develop it would be excessive, in which case that fact shall    If assets in an individual foreign country are material, those assets
be disclosed.                                                           shall be disclosed separately.

The amounts of revenues reported shall be based on the financial        The amounts reported shall be based on the financial statements. If
information used to produce the undertaking’s financial statements.     the necessary information is not available and the cost to develop it
                                                                        would be excessive, that fact shall be disclosed. An undertaking
Information about geographical areas – total undertaking                may provide, in addition to the information required by this
                                                                        paragraph, subtotals of geographical information about groups of
An undertaking shall report the following geographical information,     countries.
unless the necessary information is not available and the cost to
develop it would be excessive:                                          Information about major clients areas – total undertaking

(1) revenues from external clients                                      An undertaking shall provide information about the extent of its
                                                                        reliance on its major clients. If revenues from a single external client
(i) attributed to the undertaking’s country of domicile and             amount to 10 per cent or more of an undertaking’s revenues, the
                                                                        undertaking shall disclose that fact, the total amount of revenues
(ii) attributed to all foreign countries in total from which the        from each such client, and the segment or segments reporting the
undertaking derives revenues.                                           revenues.

If revenues from external clients attributed to an individual foreign   EXAMPLE - information about major clients
country are material, those revenues shall be disclosed separately.
An undertaking shall disclose the basis for attributing revenues from   Revenues from one client of Big Company’s software and
external clients to individual countries.                               electronics segments represent approximately $150 million of the
                                                                        Company’s total revenues.
(2) non-current assets other than financial instruments, deferred tax
assets, post-employment benefit assets, and rights arising under
insurance contracts                                                     The undertaking need not disclose the identity of a major client or
    (i)   located in the undertaking’s country of domicile and          the amount of revenues that each segment reports from that client.
                                                                        A group of undertakings under common control shall be considered
   (ii)    located in all foreign countries in total in which the       a single client
           undertaking holds assets.                                    .


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                                                                                                         IFRS 8 Operating Segments

However, judgement is required to assess whether a government           those described in the summary of significant accounting policies,
and undertakings under the control of that government are               except that pension expense for each operating segment is
considered a single customer. In assessing this, the reporting entity   recorded and measured on the basis of cash payments to the
shall consider the extent of economic integration between those         pension plan. Big Company evaluates performance on the basis of
entities.                                                               profit or loss from operations before tax expense, not including non-
                                                                        recurring gains and losses and foreign exchange gains and losses.
Segment information for prior years that is reported as comparative
information for the initial year of application shall be restated to    Big Company accounts for intersegment sales and transfers as if
conform to the requirements of IFRS 8, unless the necessary             the sales or transfers were to third parties, ie at current market
information is not available and the cost to develop it would be        prices.
excessive.


EXAMPLE - description of the types of products and services from        EXAMPLE - factors that management used to identify the
which each reportable segment derives its revenues                      undertaking’s reportable segments

Big Company has five reportable segments: car parts, motor              Big Company’s reportable segments are strategic business units
vessels, software, electronics and finance. --The car parts segment     that offer different products and services. They are managed
produces replacement parts for sale to car parts retailers.             separately because each business requires different technology
-The motor vessels segment produces small motor vessels to serve        and marketing strategies. Most of the businesses were acquired as
the offshore oil industry and similar businesses.                       individual units, and the management at the time of the acquisition
-The software segment produces application software for sale to         was retained.
computer manufacturers and retailers. --The electronics segment
produces integrated circuits and related products for sale to
computer manufacturers.
-The finance segment is responsible for portions of the company’s
financial operations including financing client purchases of products
from other segments and property lending operations.
                                                                        Multiple choice questions
EXAMPLE -measurement of operating segment profit or loss,
assets and liabilities                                                  1. Operating segment information should:

The accounting policies of the operating segments are the same as
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                                                                                                           IFRS 8 Operating Segments

(i) increase the number of reported segments and provide more
information;                                                            (iii) Practice has demonstrated that the term ‘industry’ is subjective.
                                                                            Segments based on an existing internal structure should be less
(ii) enable users to see an undertaking through the eyes of                 subjective.
management;
                                                                        (iv) Earnings per share calculations can be compared between
(iii) enable an undertaking to provide timely segment information for   segments.
external interim reporting with relatively low incremental cost;
                                                                           1 (i)-(ii)
(iv) enhance consistency with the management discussion and                2. (i)-(iii)
analysis or other annual report disclosures;                               3. (i)-(iv)

(v) provide various measures of segment performance:

(vi) reduce staff.

   1.   (i)-(ii)
   2.   (i)-(iii)
   3.   (i)-(iv)
   4.   (i)-(v)
   5.   (i)-(vi)

2. Segments based on the structure of an undertaking’s internal
organisation have other significant advantages:

(i) An ability to see an undertaking “through the eyes of
    management” enhances a user’s ability to predict actions or
    reactions of management that can significantly affect the           3. An operating segment is a component of an undertaking:
    undertaking’s prospects for future cash flows.
                                                                        (i) that engages in business activities from which it may earn
(ii) As information about those segments is generated for               revenues and incur expenses (including revenues and expenses
    management’s use, the incremental cost of providing information     relating to transactions with other components of the same
    for external reporting should be relatively low.                    undertaking),
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                                                                                                              IFRS 8 Operating Segments

                                                                               (iii)   differences between the measurements used in reporting
(ii) whose operating results are regularly reviewed by the                             segment information and those used in the undertaking’s
undertaking’s chief operating decision maker to make decisions                         financial statements,
about resources to be allocated to the segment and assess its                  (iv)    changes in the measurement of segment amounts from
performance,                                                                           period to period,
                                                                               (v)     the impact of staff development policies on the segment.
(iii) for which discrete financial information is available,
                                                                               1 (i)-(ii)
(iv) which is taxed separately from other components.                          2. (i)-(iii)
                                                                               3. (i)-(iv)
     1 (i)-(ii)                                                                4. (i)-(v)
     2. (i)-(iii)
     3. (i)-(iv)                                                            6. A component of an undertaking that sells primarily or exclusively
                                                                            to other operating segments of the undertaking:
4.           IFRS 8 requires an undertaking to report information about:
                                                                               1. Must be classed as an operating segment.
     (i)         the revenues derived from its products or services (or        2. Must be excluded from being an operating segment.
                 groups of similar products and services),                     3. Is included as an operating segment if the undertaking is
     (ii)        about the countries in which it earns revenues and holds         managed that way.
                 assets,
     (iii)       about major clients,
     (iv)        about transactions with governments.

     1        (i)-(ii)
     2.       (i)-(iii)
     3.       (i)-(iv)

5. IFRS 8 requires an undertaking to give descriptive information
about:                                                                      7. IFRS 8 requires the following information:

     (i)         the way the operating segments were determined,            (i) factors used to identify the undertaking’s operating segments,
     (ii)        the products and services provided by the segments,        including the basis of organisation (for example, whether
                                                                            management organises the undertaking around differences in
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                                                                                                        IFRS 8 Operating Segments

products and services, geographical areas, regulatory                (iii) all other companies reporting under IFRS.
environments, or a combination of factors and whether segments
have been aggregated),                                                  1     (i)-(ii)
                                                                        2.    (i)-(iii)
(ii) types of products and services from which each reportable
segment derives its revenues,                                        10. If information is not presented to the directors in sectors:

(iii) the economic environment of each segment,                         1. Look to the next lower level of internal segmentation that
                                                                              reports information along product and service lines or
(iv) the legal structure of each segment.                                     geographical lines.
                                                                        2. Construct segments solely for external reporting purposes.
   1     (i)-(ii)                                                       3. Segment information is not required for published financial
   2.    (i)-(iii)                                                            statements.
   3.    (i)-(iv)
                                                                     11. If a financial report contains both the consolidated financial
8. Interest:                                                         statements of a parent, as well as the parent’s separate financial
                                                                     statements, segment information is required:
   1. Net interest revenue must be shown.
   2. Neither interest revenue nor interest expense is required to      1. only in the consolidated financial statements
      be shown.                                                         2. only in the parent’s separate financial statements
   3. Both interest revenue and interest expense are required to        3. both sets of financial statements
      be shown.
   4. Both interest revenue and interest expense are required to     12. An operating segment may engage in business activities for
      be shown, unless a majority of the segment’s revenues are      which it has yet to earn revenues, for example, start-up operations:
      from interest and the chief operating decision maker relies
      primarily on net interest revenue to assess the performance    1. will be operating segments before earning revenues.
      of the segment.                                                2. may be operating segments before earning revenues.
                                                                     3. will not be operating segments before earning revenues.
9. IFRS 8 shall apply to:                                            13. Head office expenses:

(i) listed companies,                                                 1.     Can be allocated to segments on a reasonable basis.
(ii) any company reporting under IFRS that wishes to provide the      2.     Must not be allocated to segments.
information,                                                          3.     Must be allocated to segments based on their turnover.
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                                                                                                       IFRS 8 Operating Segments

                                                                      16. As a percentage of sales, profits or assets, a segment should
14. An undertaking’s pension plans :                                  be at least:
                                                                             1. 5%
1. will be operating segments.                                               2. 7,5%
2. may be operating segments.                                                3. 10%
3. will not be operating segments.                                           4. 15%
                                                                             5. 20%
15. Two or more operating segments may be aggregated into a           17. The total amount of revenue that should be covered by
single operating segment if aggregation is consistent with the core   reportable segments is, at least:
principle of IFRS 8, the segments have similar economic                      1. 50%
characteristics, and the segments are similar in each of the                 2. 60%
following respects:                                                          3. 70%
 (i) the nature of the products and services;                                4. 75%
                                                                             5. 80%
(ii) the nature of the production processes                                  6. 100%
(iii) the type or class of client for their products and services;    18. Operating segments that do not meet any of the quantitative
                                                                      thresholds:
(iv) the methods used to distribute their products or provide their
services;                                                                1. may be considered reportable, and separately disclosed.
                                                                          2. must be combined and disclosed in an ‘all other
(v) if applicable, the nature of the regulatory environment, for             segments’.
example, banking, insurance or public utilities;                         3. must be ignored.
(vi) staff numbers.

   1     (i)-(ii)
   2.    (i)-(iii)
   3.    (i)-(iv)                                                     19. If an operating segment is identified as a reportable segment in
   4.    (i)-(v)                                                      the current period, segment data for a prior period:
   5.    (i)-(vi)
                                                                         1. is not required.
                                                                         2. is optional.
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                                                                                                         IFRS 8 Operating Segments

   3. is required unless the necessary information is not available   (ii) revenues from transactions with other operating segments of the
      and the cost to develop it would be excessive.                  same undertaking;

20. IFRS 8 requires reconciliations of segement totals to total       (iii) interest revenue;
undertaking amounts:
                                                                      (iv) interest expense;
(i) of segment revenues,
                                                                      (v) depreciation and amortisation;
(ii) reported segment profit or loss,
                                                                      (vi) material items of income and expense;
(iii) segment assets,
                                                                      (vii) the undertaking’s interest in the profit or loss of associates and
(iv) segment liabilities                                              joint ventures accounted for by the equity method;

(v) other material segment items                                      (viii) income tax expense or income; and

(vi) staff numbers.                                                   (ix) material non-cash items other than depreciation and
                                                                      amortisation.
   1     (i)-(ii)
   2.    (i)-(iii)                                                       1    (i)-(ii)
   3.    (i)-(iv)                                                        2.   (i)-(iii)
   4.    (i)-(v)                                                         3.   (i)-(iv)
   5.    (i)-(vi)                                                        4.   (i)-(v)
                                                                         5.   (i)-(vi)
                                                                         6.   (i)-(vii)
                                                                         7.   (i)-(viii)
                                                                         8.   (i)-(ix)

21. Information about the segments should include:
                                                                      22. An undertaking shall report the following geographical
(i) revenues from external clients;                                   information:


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                                                                                                          IFRS 8 Operating Segments

(i) revenues from external clients attributed to the undertaking’s         Question      Answer
country of domicile and                                                    1.              4
                                                                           2.              2
 attributed to all foreign countries in total from which the undertaking   3.              2
derives revenues.                                                          4.              2
                                                                           5.              3
(ii) non-current assets other than financial instruments, deferred tax     6.              3
assets, post-employment benefit assets, and rights arising under           7.              1
insurance contracts located in the undertaking’s country of domicile       8.              4
and                                                                        9.              1
located in all foreign countries in total in which the undertaking         10.             1
holds assets.                                                              11.             1
                                                                           12.             2
(iii) non-current liabilities other than financial instruments, deferred
                                                                           13.             1
tax liabilities, post-employment benefit liabilities, and rights arising
                                                                           14.             3
under insurance contracts located in the undertaking’s country of
domicile and                                                               15.             4
located in all foreign countries in total in which the undertaking has     16.             3
liabilities.                                                               17.             4
                                                                           18.             1
                                                                           19.             3
   1     (i)-(ii)                                                          20.             4
   2.    (i)-(iii)                                                         21.             8
                                                                           22.             1

                                                                           Note: Material from the following PricewaterhouseCoopers
                                                                           publications has been used in this workbook:

                                                                           -Applying IFRS
                                                                           -IFRS News
                                                                           -Accounting Solutions
Answers to multiple choice questions

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