AYB340 Company Accounting Lecture 9

1. Translation of a Foreign Subsidiary’s Financial Statements and Segment Reporting AYB340 Company AccountingLecture 9

2. To understand why the provision of segment information is potentially useful to financial report users To appreciate the nature of the process used in the identification of operating segments To understand and be able to explain the nature of segment revenue, segment expense, segment profit or loss, segment assets and segment liabilities To be able to allocate revenues, expenses, assets and liabilities to operating segments and determine the amount of segment profit or loss To understand and apply the basis on which reportable segments is determined To be able to prepare tabulated segment data Segment reporting: Learning objectives

3. AASB 8 Operating Segments Replaced AASB 114 Reporting Financial Information by Segment from 1 January 2009 Introduction

4. Definition of operating segments … a component of an entity: • that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), • whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (c) for which discrete financial information is available. (AASB 8, Appendix A)

5. Scope of operating segments • Segment need not: • currently generate revenues • cover 100% of entity • No guidance on factors considered in identifying segments • but factors considered when combining segments presumably relevant (see AASB 8.12)

6. Allocating revenues, expenses, assets and liabilities to segments • Allocations are determined solely by managerial discretion • depends on rules used for internal reporting • measures can be inconsistent with those used in financial statements • If assets and liabilities allocated must do so on a reasonable basis

7. What segments do we report on? • Need not report on all segments • Need only report on reportable segments • How do we determine which segments are reportable? • those that exceed the quantitative threshold in AASB 8.13 (AASB 8.11(b)) • if number of reportable segments >10 need to consider combining some segments

8. Must be consistent with ‘core principles’ of AASB_8 Segments must have similar economic characteristics Must be similar in all following respects: nature of product or service nature of production process type or class of customer for product or service methods used to distribute product or service nature of regulatory environment When can segments be combined?

9. A segment must be classified as a reportable segment if any of the following conditions is satisfied: its reported revenue– including both sales to external customers and inter-segment sales or transfers – is 10% or more of the combined revenue (internal and external) for all operating segments; or the absolute amount of its reported profit or loss is 10% or moreof the greater of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported losses of all operating segments reporting a loss; or its assets are 10% or more of total assets for all operating segments (AASB 8.13) Rules for reportable segments

10. Rules for reportable segments(cont.) • If ‘total external revenues reported by the operating segments’ constitutes less than 75% of the ‘entity’s revenue’, additional reportable segments must be identified, even though they do not meet the test in 1 above, until at least 75% of the entity’s revenue is included in the reportable segments (AASB 8.15) • Internally reported segments that are ‘substantially similar’, that is they meet the requirements of AASB 8.12 discussed above, may be combined (AASB 8.14)

11. Rules for reportable segments (cont.) • An internally reported segment that is not classified as reportable is treated in one of three ways: • it is designated as reportable despite its size because management believes information about the segment will be useful to users (AASB 8.13); or • it is combined, in accordance with 3, into a separately reportable segment with one or more ‘substantially similar’ segments that do not satisfy 1; or • information about other non-reportable segments and that relating to other business activities are combined and reported as ‘all other segments’ and is distinguished from the items in the reconciliation required by AASB 8.28 (AASB 8.16)

12. Rules for reportable segments (cont.) • If ‘the management judges’ that an operating segment that was a reportable segment in the prior reporting period ‘is of continuing significance’, information about that segment must be reported separately in the current period. Despite test 1 not being satisfied it must be classified as a reportable segment for current reporting period(AASB 8.17)

13. Rules for presentation and disclosure in segment reports • Two broad types of disclosures: • Those about segment revenues, expenses, profit or loss, assets and liabilities • Supplemental information • assist in understanding each reportable operating segment • reconciliation with information in financial statements • Summarised in Table 27.1

17. Measure of profit or loss • Based on amounts of revenues and expenses reported internally • Not necessarily same as any profit or loss reported internally • Consequence of including revenues and expenses reported other than as components of segment profit or loss

18. Supplementary disclosures: measurement related • Include the following • Basis of accounting for inter-segment transactions • Any differences in measurement of segment and entity profit or loss • Any differences in measurement of segment assets and liabilities and those for the entity • Nature and effect of asymmetrical allocations of assets, liabilities, revenues and expenses

19. Supplementary disclosures: reconciliations • total amount of revenues for reportable segments and entity’s revenue; • total amount of profit or loss for reportable segments and entity’s profit or loss before income tax and discontinued operations; • total assets of reportable segments and the entity’s assets; • total liabilities of reportable segments and entity’s liabilities, if liabilities are allocated to reportable segments • total amounts of every other material item reported for reportable segments and corresponding amount for the entity

20. Cash flow disclosures • For each reportable segment the amount of cash flow from: • Operating activities • Investing activities • Financing activities (AASB 107.50(d)) Entity-wide disclosures • About: (i) products and services (ii) geographical areas; and (iii) major customers (AASB 8.33)

21. Entity-wide disclosures(cont.) • For geographical areas • revenues from external customers (i) attributable to entity’s country of domicile and (ii) attributable to all foreign countries (and if material, to individual foreign countries); and • non-current assets located in (i) entity’s country of domicile and (ii) in all foreign countries (and, if material, to individual foreign countries) (AASB 8.33) Disadvantages to entities reporting segment information include: • revealing more than often wished • time-consuming

22. Example 27.1: Segment reporting

24. Example 27.1: Segment reporting (cont.)

25. 940 400 >120 000 so use 940 000

26. Total entity revenue = total segment revenue for all segments less inter-segment revenues plus unallocated revenues

27. Ratio less than 75% – must reclassify one or more segments as reportable

28. Example 27.1: Segment reporting (cont.)

29. Example 27.1: Segment reporting (cont.)

30. READING: Picker et al.,Australian Accounting Standards, Chapter 21 (pp. 864 – 881) andJubb et al., Company Accounting Chapter 27 (pp. 944-958). See CMD. REVIEW QUESTION: Picker, et al., Problem 21.1