Guidance on Implementing

By Ronald Dixon,2014-05-16 12:44
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Guidance on Implementing



    Guidance on Implementing

    Operating Segments








Description of the types of products and services from which each

    reportable segment derives its revenues (paragraph 22(b))

Measurement of operating segment profit or loss, assets and liabilities

    (paragraph 27)

Factors that management used to identify the entity’s reportable

    segments (paragraph 22(a))









Amendments to guidance on other FRSs


Guidance on implementing

    FRS 108 Operating Segments

This guidance accompanies, but is not part of, FRS 108.


IG1 This implementation guidance provides examples that illustrate the disclosures required by

    FRS 108 and a diagram to assist in identifying reportable segments. The formats in the

    illustrations are not requirements. The Board encourages a format that provides the

    information in the most understandable manner in the specific circumstances. The following

    illustrations are for a single hypothetical entity referred to as Diversified Company.

Descriptive information about an entity’s reportable segments

IG2 The following illustrates the disclosure of descriptive information about an entity’s reportable

    segments (the paragraph references are to the relevant requirements in the FRS).

    Description of the types of products and services from which each

    reportable segment derives its revenues (paragraph 22(b))

    Diversified Company has five reportable segments: car parts, motor vessels, software,

    electronics and finance. The car parts segment produces replacement parts for sale to car

    parts retailers. The motor vessels segment produces small motor vessels to serve the

    offshore oil industry and similar businesses. The software segment produces application

    software for sale to 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 customer purchases of products from other segments and property lending


    Measurement of operating segment profit or loss, assets and liabilities

    (paragraph 27)

    The accounting policies of the operating segments are the same as those described in the

    summary of significant accounting policies except that pension expense for each operating

    segment is recognized and measured on the basis of cash payments to the pension plan.

    Diversified Company evaluates performance on the basis of profit or loss from operations

    before tax expense not including non-recurring gains and losses and foreign exchange

    gains and losses.

    Diversified Company accounts for intersegment sales and transfers as if the sales or

    transfers were to third parties, ie at current market prices.

    Factors that management used to identify the entity’s reportable

    segments (paragraph 22(a))

    Diversified Company’s reportable segments are strategic business units that offer different

    products and services. They are managed separately because each business requires

    different technology and marketing strategies. Most of the businesses were acquired as

    individual units, and the management at the time of the acquisition was retained.


    Information about reportable segment profit or loss, assets and


    IG3 The following table illustrates a suggested format for disclosing information about reportable

    segment profit or loss, assets and liabilities (paragraphs 23 and 24). The same type of

    information is required for each year for which an income statement is presented. Diversified

    Company does not allocate tax expense (tax income) or non-recurring gains and losses to

    reportable segments. In addition, not all reportable segments have material non-cash items

    other than depreciation and amortization in profit or loss. The amounts in this illustration,

    denominated as ‘currency units (CU)’, are assumed to be the amounts in reports used by the

    chief operating decision maker.

     Car Motor Software Electronics Finance All Totals

    parts vessels other

     CU CU CU CU CU CU CU (aRevenues from 1,000)external customers 3,000 5,000 9,500 12,000 5,000 35,500


    revenues - - 3,000 1,500 - - 4,500

    Interest revenue 450 800 1,000 1,500 - - 3,750

    Interest expense 350 600 700 1,100 - - 2,750

    Net interest (b)revenue - - - - 1,000 - 1,000

Depreciation and

    amortisation 200 100 50 1,500 1,100 - 2,950

Reportable segment

    profit 200 70 900 2,300 500 100 4,070

Other material non-

    cash items:

    Impairment of

    assets - 200 - - - - 200

Reportable segment

    assets 2,000 5,000 3,000 12,000 57,000 2,000 81,000

Expenditures for

    reportable segment

    non-current assets 300 700 500 800 600 - 2,900

Reportable segment

    liabilities 1,050 3,000 1,800 8,000 30,000 - 43,850

(a) Revenues from segments below the quantitative thresholds are attributable to four

    operating segments of Diversified Company. Those segments include a small property

    business, an electronics equipment rental business, a software consulting practice and a

    warehouse leasing operation. None of those segments has ever met any of the quantitative

    thresholds for determining reportable segments.

(b) The finance segment derives a majority of its revenue from interest. Management primarily

    relies on net interest revenue, not the gross revenue and expense amounts, in managing

    that segment. Therefore, as permitted by paragraph 23, only the net amount is disclosed.


    Reconciliations of reportable segment revenues, profit or loss,

    assets and liabilities

    IG4 The following illustrate reconciliations of reportable segment revenues, profit or loss, assets

    and liabilities to the entity’s corresponding amounts (paragraph 28(a)–(d)). Reconciliations also are required to be shown for every other material item of information disclosed

    (paragraph 28(e)). The entity’s financial statements are assumed not to include discontinued

    operations. As discussed in paragraph IG2, the entity recognises and measures pension

    expense of its reportable segments on the basis of cash payments to the pension plan, and it

    does not allocate certain items to its reportable segments.

    Revenues CU

    Total revenues for reportable segments 39,000

    Other revenues 1,000

    Elimination of intersegment revenues (4,500)

    Entity’s revenues 35,500

    Profit or loss CU

    Total profit or loss for reportable segments 3,970

    Other profit or loss 100

    Elimination of intersegment profits (500)

    Unallocated amounts:

    Litigation settlement received 500

    Other corporate expenses (750)

    Adjustment to pension expense in consolidation (250)

    Income before income tax expense 3,070

    Assets CU

    Total assets for reportable segments 79,000

    Other assets 2,000

    Elimination of receivable from corporate headquarters (1,000)

    Other unallocated amounts 1,500

    Entity’s assets 81,500


    Liabilities CU

    Total liabilities for reportable segments 43,850

    Unallocated defined benefit pension liabilities 25,000

    Entity’s liabilities 68,850

    Other material items Reportable Adjustments Entity totals

    segment totals

     CU CU CU Interest revenue 3,750 75 3,825

    Interest expense 2,750 (50) 2,700

Net interest revenue

    (finance segment only) 1,000 - 1,000

    Expenditures for assets 2,900 1,000 3,900

Depreciation and

    amortisation 2,950 - 2,950

    Impairment of assets 200 - 200

The reconciling item to adjust expenditures for assets is the amount incurred for the corporate

    headquarters building, which is not included in segment information. None of the other

    adjustments are material.


Geographical information

IG5 The following illustrates the geographical information required by paragraph 33. (Because

    Diversified Company’s reportable segments are based on differences in products and

    services, no additional disclosures of revenue information about products and services are

    required (paragraph 32).)

     (a)Geographical information Revenues Non-current assets

     CU CU

    United States 19,000 11,000

    Canada 4,200 -

    China 3,400 6,500

    Japan 2,900 3,500

    Other countries 6,000 3,000

    Total 35,500 24,000

    (a) Revenues are attributed to countries on the basis of the customer’s location.

Information about major customers

IG6 The following illustrates the information about major customers required by paragraph 34.

    Neither the identity of the customer nor the amount of revenues for each operating segment is


    Revenues from one customer of Diversified Company’s software and electronics segments

    represent approximately CU5,000 of the Company’s total revenues.

Diagram to assist in identifying reportable segments

IG7 The following diagram illustrates how to apply the main provisions for identifying reportable

    segments as defined in the FRS. The diagram is a visual supplement to the FRS. It should

    not be interpreted as altering or adding to any requirements of the FRS nor should it be

    regarded as a substitute for the requirements.


    Diagram for identifying reportable segments

     Identify operating segments based

    on management reporting system (paragraphs 510)

     Do some operating Aggregate Yes segments meet all segments if aggregation criteria? desired (paragraph 12)


     Do some operating Yes segments meet the quantitative thresholds? (paragraph 13)


     Do some remaining Yes Aggregate operating segments meet segments if a majority of the desired aggregation criteria? (paragraph 14)


     Do identified reportable Yes segments account for 75 per cent of the entity’s revenue? (paragraph 15)


     Report additional segment if external revenue of all segments is less than 75 per cent of the entity’s revenue (paragraph 15)

     Aggregate remaining segments into 'all other segments’ category These are reportable (paragraph 16) segments to be disclosed



Amendments to other Implementation Guidance

This appendix contains amendments to guidance on other FRSs that are necessary in order to ensure

    consistency with FRS 108. In the amended paragraphs, new text is underlined and deleted text is

    struck through.

    IGA1 In the Guidance on Implementing FRS 104 Insurance Contracts, paragraph IG43 is amended

    as follows:

    IG43 Under FRS 104 Segment Reporting FRS 108 Operating Segments, the identification

    of reportable segments reflects differences in the risks and returns of an entity’s

    products and services the way in which management allocates resources and

    assesses performance. FRS 104 takes the position that the segments identified in an

    organisational and management structure and internal financial reporting system

    normally provide an appropriate segmentation for financial reporting. An insurer might

    adopt a similar approach to identify broad classes of insurance contracts for

    disclosure purposes, although it might be appropriate to disaggregate disclosures

    down to the next level. For example, if an insurer identifies life insurance as a

    reportable segment for FRS 104 FRS 108, it might be appropriate to report separate

    information about, say, life insurance, annuities in the accumulation phase and

    annuities in the payout phase.

    IGA2 In the Illustrative Examples accompanying FRS 36 Impairment of Assets, paragraph IE80 is

    amended as follows:

    IE80 Entity M is a multinational manufacturing firm that uses geographical segments as its

    primary format for reporting segment information. M’s three reportable segments

    based on that format are Europe, North America and Asia. Goodwill has been

    allocated for impairment testing purposes to three individual cash-generating units

    two in Europe (units A and B) and one in North America (unit C)and to one group of

    cash-generating units (comprising operation XYZ) in Asia. Units A, B and C and

    operation XYZ each represent the lowest level within M at which the goodwill is

    monitored for internal management purposes.


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