ACCT 6010 Advanced Financial Reporting
Class 8: Segment Reporting
The University of 1
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– Good Friday replacement tutorial: Please attend alternate online tutorial during Week 8. Zoom links posted on Canvas
– Week 8 tutorials: No group presentations
– Week 9 lecture: 2pm on Tuesday 26 April due to Anzac Day public holiday
– Small Test 3: Held during lecture time in Week 10 instead of Week 9 due to Anzac Day public holiday
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LS Class 8 1
Learning objectives
After completing this topic, students should be able to:
Chapter sections
1. Explain the information value of segment reporting for financial statement users, especially in the group context;
11.1, 11.2
2. Identify operating segments
3. Determine whether operating segments are reportable
4. Prepare required segment disclosures
11.4, 11.5 and 11.6
5. Explain how and why management may opportunistically report segment information;
11.2.2, 11.4, CP readings
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Segment Reporting
– Arthur et al. Chapter 11
– Class 8 supplementary materials
(mostly abstracts): – Hope et al.
– Wang and Ettredge – Bens et al.
– Bugeja et al.
– Gaertner et al. – University of 4
LS Class 8 2
1. What is segment information and why is it disclosed?
– Consolidatedfinancialstatements(SFP,SCI,SOCIE,CFS)resultfrom aggregation; segment reporting attempts to provide some disaggregation;
– Providesinsightsintothedetailofthebusinessandsosome understanding for users of where the key risks and returns are:
– Without segment reporting, CFS would lack detailed information about the main sources of revenues, and earnings;
– Without segment reporting, CFS would not provide detailed information about the main activities the group is undertaking, where the assets are located, how successful are each of those business elements and to what extent might profitable segments be supporting unprofitable ones;
– An examination of segment disclosures from one year to the next reveals more about new activities that management has invested in.
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1. Why is segment information disclosed?
– Provide insight so users can make informed decisions [AASB 8.1] – Better understand entitys performance;
– Better assess the risk & returns of different parts of an entity; – An indicator of future cash flows;
– Shareholders and other users can thereby gain some understanding of how the entities may be exposed to different geographical & business risks and opportunities.
– Ethical investors and others seeking to discriminate can determine whether the group operates in segments that are unsuitable to them (e.g. gambling).
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LS Class 8 3
1. Why is segment information disclosed ?
Research evidence indicates that segment reporting may:
Mitigate mis-pricing of shares;
Ø Refer Hope et al. (2008)
Increase the forecast accuracy of analysts
Ø Refer to Behn et. al (2002)] Signal future earnings
Ø Refer Wang and Ettredge (2015)
Help to monitor and constrain empire building managers. Ø Refer to Hope and Thomas (2008)
Assist in firm valuation through estimating value of real options Ø Refer Rao et al. (2018)
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1. Segment reporting limitations
Research evidence indicates that the qualitative principles-based approach to segment reporting may:
– Facilitate management aims to minimise the insight provided into the business;
Ø Refer toBotosan and Stanford (2005); Bens et al. (2011)] Management may fear disclosing detail
may be concerned that advantage may be given to competitors (“proprietary costs”).
Ø Refer Bugeja et al. (2015)
use discretion in reporting segment-level profits to reduce tax expense disclosures
Ø Refer Gaertner et al. (2016)
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LS Class 8 4
2. Identifying Segments
Step 1: Identify the group’s ‘operating’ segments.
An operating segment is a component of the entity:
i) that engages in business activities;
ii) whose results are regularly reported internally to the ‘Chief Operating Decision Maker’ (CODM); and
iii) for which discrete financial information is available. [AASB 8.5]
– Objective:whateverdissectionofthebusinessthatmanagementlooksat is the dissection of the business that standard setters also think is useful for external users.
ØRefer to Shanahan (Qantas reporting):
– Sometimes the level of disaggregation “needs expanding” to assist
evaluation of management and operations.
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2. Identifying segments (cont.)
– What if the is a matrix style of organisation?
– Is the report based on different products and services offered
or geographic lines? – Under IFRS
– Use the core principle to decide whether to report based on industry or geographic lines
Point of difference:
Under US GAAP, report based on products and services offered.
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LS Class 8 5
2. Combining segments
Operating segments can be combined where:
(i) they have similar “economic characteristics”; and
(ii) They are similar in each of the following 5 dimensions :
(a) nature of product and service;
(b) nature of the production process;
(c) type/class of customer;
(d) methods used to distribute the product or provide the service; (e) nature of the regulatory environment
[AASB 8.12]
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2. Determination of operating segments
1. “Old” AASB 114 (IAS 14) Approach:
The determination of what was an operating segment was based on management’s assessment of where the major risks and returns were within their group
2. AASB 8 Approach
– Segments are mostly the same as what is reported to CODM;
– Allocations of revenues and expenses can only be included in segment result if included in the measure of result used by the CODM [AASB 8.25]
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3. Are those segments reportable? – 3 quantitative thresholds
Step 2: Determine if each operating segment is “large”.
An ‘operating’ segment will be a ‘reportable’ segment if any one of the following tests is met:
(i) Sales to external and internal customers are 10% or more of total of the operating segment revenues;
(ii) The profit or loss of the operating segment is 10% or more of the higher of the absolute amount of:
• The combined profits of profit-making operating segments; or
• the combined losses of the loss-making operating segments;
(iii) Segment assets are 10% or more of the total of all operating segment assets.
[AASB 8.13]
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3. Treatment of Immaterial Segments
Immaterial (small) segments can :
(a) Designated as reportable [AASB 8.13];
(b) Combined with other similar “small” segments [AASB 8.14]; or
(c) Included as an unallocated reconciling item in the segmental reporting note [AASB 8.21]
ØRefer to Bluescope Steel’s segment report
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LS Class 8 7
3. 75% test
Step 3: Apply “75% test”
At least 75% of the entity’s revenues must be included as reportable segments
– If necessary, additional “small” segments must identified as reportable until at least 75% of the entity’s total revenues are included in reportable segments. [AASB 8.15]
vNow do exercise 11.2
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4. Step 3: Disclosure
Old AASB 114 (IAS 14) approach
– More information required for the primary reporting segment – Focus on dominant source of risk and return
– If products or services: Business segments
– If geographical areas : Geographical segments
– If both segments affected equally : Business segments
Current AASB 8 (IFRS 8) approach
– AASB 8 removes the primary / secondary distinction
– Separate disclosures are still required for geographical areas [AASB 8.33]
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LS Class 8 8
4. Disclosure
Segment assets and liabilities
– DisclosesegmentassetsandliabilitiesifregularlyprovidedtotheCODM
Other disclosure items for each segment
– Disclosurefollowingitemsif:
(i) included in segment profit; or (ii) regularly provided to CODM:
– Segmentrevenue
• separatelyshowingoutside&intersegmentrevenue
– Depreciation&amortisation;
– Materialnon-cashitemsotherthandepreciation&amortisation; – Interestrevenue;
– Interestexpense;
– Incometaxexpense(orincome)
In some cases interest expense and revenues can be shown net [AASB 8.23] The University of 19
4. Disclosure
– Include the following if included in the measure of segment assets and/ or regularly provided to the CODM:
– Additions to segment non-current assets (there are some exclusions);
– Share of equity accounted profit or loss if investees operations are within the segment;
– Carrying amount of equity investments (week 11) if share of equity accounted profit has been disclosed. [AASB 8.24]
Ø Refer to AASB 8.23 & 8.24 for the complete list and further details; v Activity: review the extent of disclosure in the BSL segment note.
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LS Class 8 9
4. Measurement
– In most cases, the sum of the segment earnings ≠ group earnings;
v Q: What would be the main reasons? __________________________________________
Ø Refer Wang and Ettredge (2015) who find that the size of this “gap” is positively related to:
– Industry concentration; and
– Income items that are difficult to allocate
We therefore also need to disclose a number of reconciliations … The University of 21
4. Disclosure requirements
Reconciliations are required so that users can see how that segment data relate back to the amounts reported on the group Statement of Comprehensive Income and Statement of Financial Position. Reconciliations include:
– Total reportable segment revenues to total entity revenues;
– Total of the reportable segment results to the group’s net profit or loss before tax
and after discontinued operations (unless tax is allocated to segments);
– Total reportable segment assets to total entity assets (if segment assets are reported);
– Total reportable segment liabilities to total entity liabilities (if segment liabilities are reported)
– Every other material item disclosed needs to be reconciled to the amount for the group.
[AASB 8.28]
v Activity: review the BSL asset reconciliation.
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LS Class 8 10
4. Other disclosures
– Factors used to identify reportable segments [AASB 8.22]
– For each segment, explanation of measurement of:
– Profit or loss; – Assets;
– Liabilities [AASB 8.27]
– Explanation of differences between segment information and financial statements, where not apparent from the reconciliations [AASB 8.27]
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4. Information about geographic areas
Disclosure requirements
On level of individual country (where material) – Segment revenue from external customers;
– Disclose method of tracing revenues to countries, e.g. based on location of the factory or customer?
– Carrying amount of non-current assets – Note excludes specific assets:
FI, DTA, rights relating to insurance contracts; post-employment benefits [AASB 8.33].
v Note what is not required to be disclosed __________________. The University of 24
LS Class 8 11
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