SEGMENT REPORTING

If a whole financial year could be broken up into interim periods, the reporting
enterprise could also be divided into smaller units called segment. Segment reporting
refers to the reporting of the activities of an entity in terms of certain parts, or segments
of operations. This is also known as disaggregated reporting. PAS 14, Segment
Reporting, prescribes the requirements for reporting financial information by segment.

The purpose of segment information is to inform users about the different types
of products and services an enterprise produces and the different geographical areas in
which it operates to help users of financial statements better understand the enterprise’s
past performance; better assess the enterprise’s risks and returns and make more
informed judgments about the enterprise as a whole.

Segment reporting is required for enterprises whose equity or debt securities are
publicly traded and for enterprises that are in the process of issuing equity and debt
securities in public securities market. Some enterprises may choose to disclose
segment information and when they do so, they shall comply with all the requirements
of PAS 14.

BUSINESS SEGMENT AND GEOGRAPHICAL SEGMENT

An entity which reports segment information decides as how the enterprise will
be divided into segments. The predominant sources and nature of risks and returns
may result from the entity’s locations or from the nature of products or services. If the
enterprise’s risks and rates of return are affected predominantly by differences in
products and services it produces, its primary reporting format for reporting segment
information should be business segments. Similarly, if the enterprise’s risks and rates
of return are affected predominantly by location of operation (location of production
facilities or location of markets), its primary reporting format for segment information
should be geographical segments.

A business segment is a distinguishable component of an enterprise that is

engaged in providing an individual product or service or a group of related products or
services and that is subject to risks and returns that are different from those of other
business segments.
Factors that should be considered in determining whether products and services
are related include:

 the nature of the products or services

 the nature of the production processes

 the type or class of customers for the products or services

  the methods used to distribute the products or provide the services
 if applicable, the nature of the regulatory environment, such as banking,
insurance or public utilities

A geographical segment is a distinguishable component of an enterprise that is

engaged in providing products or services within a particular economic environment and
that is subject to risks and returns that are different from those of components operating
in other economic environments.

Factors that should be considered in identifying geographical segments include:

 similarities of economic and political conditions

 relationships between operations in different geographical areas

 proximity of operations

 special risks associated with operations in a particular area

 exchange control regulations

 underlying currency risks

If an enterprise’s risks and rates of return are strongly affected both by

differences in its products and services and by differences in the geographical areas in
which it operates, the entity shall use business segments as its primary segment
reporting format and geographical segments as its secondary reporting format.

In most cases, the management and internal reporting structure of an enterprise

is also based predominantly on whether the risks and rates of return are affected by the
nature of products and services or geographical area of operation. As a consequence,
this management and internal reporting structure parallels the reporting format for
segment information for external reporting purposes. The approach of looking to an
entity’s organizational and management structure and its internal financial reporting
system to identity the entity’s segments for external reporting is called the
management approach.

SEGMENT’S FINANCIAL INFORMATION

SEGMENT REVENUE

Segment revenue is revenue reported in the enterprise’s income statement that

is directly attributable to a segment and the relevant portion of enterprise revenue that
can be allocated on a reasonable basis to a segment, whether from sales to external
customers or from transactions with other segments of the same enterprise. Segment
revenue also includes the following:

 an enterprise’s share of income or losses of associates, joint ventures, or

other investments accounted for under the equity method if those items
are included in consolidated or total enterprise revenue

 A joint venturer’s share of the revenue of a jointly controlled entity that is

accounted for by proportionate consolidation

Segment revenue, however, does not include the following:

 interest or dividends, including interest earned on advances or loans to

other segments, unless the segment’s operations are primarily of a
financial nature

 gains on sales of investments or gains on extinguishment of debt unless

the segment’s operations are primarily of a financial nature

SEGMENT EXPENSE

Segment expense is expense resulting from the operating activities of a

segment that is directly attributable to the segment and the relevant portion of an
expense that can be allocated on a reasonable basis to the segment, including
expenses relating to sales to external customers and expenses relating to transactions
with other segments of the same enterprise. Segment expense also includes a joint
venture’s share of the expenses in a jointly controlled entity that is accounted for by
proportionate consolidation.

Segment expense does not include the following:

 interest, including interest incurred on advances or loans from other

segments, unless the segment’s operations are primarily of a financial
nature
 losses on sales of investments or losses on extinguishment of debt unless
the segment’s operations are primarily of a financial nature

 An enterprise’s share of losses of associates, joint ventures, or other

investments accounted for under the equity method

 Income tax expense

 General administrative expenses, head-office expenses, and other

expenses that arise at the enterprise level and relate to the enterprise as a
whole. However, costs are sometimes incurred at the enterprise level on
 behalf of a segment. Such costs are segment expenses if they relate to
the segment’s operating activities and they can be directly attributed or
allocated to the segment on a reasonable basis.

For a segment’s operations that are primarily of a financial nature, interest

income and interest expense may be reported as a single net amount for segment
reporting purposes only if those items are netted in the consolidated or enterprise
financial statements.

SEGMENT RESULT

Segment result is segment revenue less segment expense. Segment result is

determined before any adjustments for minority interest.

SEGMENT ASSETS

Segment assets are those operating assets that are employed by a segment in
its operating activities and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

Segment assets include -

 Current assets that are used in the operating activities of the segment

 Property, plant and equipment that are the subject of finance leases and
intangible assets. (If a particular item of depreciation or amortization is
included in segment expense, the related asset is also included in
segment assets.)

 Operating assets shared by two or more segments if a reasonable basis

for allocation exists

 Goodwill that is directly attributable to a segment or that can be allocated

to a segment on a reasonable basis and segment expense includes
related amortization of goodwill

 Investments accounted for under the equity method, if the income or loss
from such investments is included in segment revenue

Segment assets do not include –

 income tax assets

 assets used for general enterprise or head office purposes

 SEGMENT LIABILITIES

Segment liabilities are those operating liabilities that result from the operating
activities of a segment and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

Segment liabilities include –

 trade and other payables, accrued liabilities, customer advances, product

warranty provisions, and other claims relating to the provision of goods
and services

 interest bearing liabilities (if the segment’s segment result includes related
interest expense)

Segment liabilities do not include –

 income tax liabilities

 borrowings, liabilities related to assets that are the subject of finance

leases

 liabilities incurred for financing rather than operating purposes.

REPORTABLE SEGMENT

A reportable segment is a business segment or a geographical segment for

which segment information is required to be disclosed. For purposes of identifying
reportable segments, two or more internally reported segments may be combined as a
single segment if they show similar long-term financial performance and the factors that
influence their risks and rates of return are similar.

A segment is considered a reportable segment if -

(a) a majority of its revenue is earned from sales to external

customers, and

(b) it meets any of the following 10% thresholds:

 Its revenue from sales to external customers and transactions with

other segments is 10% or more of the total revenue, external and
internal, of all segments.
  Its segment result, whether profit or loss, is 10% or more of the
combined result of all segments in profit or the combined result of
all segments in loss, whichever is the greater in absolute amount.

 Its assets are 10% or more of the total assets of all segments.

If an internally reported segment is below all of the foregoing 10% thresholds;

o The segment may be designated as a reportable segment despite its size;

o The segment may be combined with one or more similar segments not
meeting any of the 10% thresholds to form a separately reportable
segment. Similar means the segment/s should share a majority of the
factors that influence their risks and rates of return.

o If the segment is not reported separately or combined, it shall be included

as an unallocated reconciling item.

The aggregate external revenues of the identified reportable segments, based on

the foregoing tests and procedures, shall be at least 75 % of the total external revenues
of the enterprise. If the total external revenue attributable to reportable segments
constitutes less than 75% of the total consolidated (external) revenues of the enterprise,
additional segments shall be taken in as reportable even if they do not meet any of the
10% test, until the minimum 75% is met,

To illustrate the procedures for the identification of reportable segments, consider

the following information:

Blue Bay operates in different geographic areas since 2023. The following information
pertains to Blue Bay’s operation for the year 2027.

Revenues
Geographi Identifiabl Profit
cal e Assets Extern Internal Total (Loss)
Segment al
A P10M P25M P5M P30M P8M
B 4M 8M 2M 10M (3M)
C 4M 6M 1M 7M 1M
D 20M 5M 8M 13M (4M)
E 11M 22M 4M 26M 11M

What segments are deemed reportable?

Solution:

Total assets of all segments P49M

 Total revenues of all segments 86M
Combined profits of all segments operating at a profit 20M
Combined losses of all segments operating at a loss 7M

To be identified as a reportable segment, majority of the segment’s revenues

should have come from external customers and the segment should have any of the
following characteristics:

 Its identifiable assets are at least P4.9M

 Its total revenues are at least 8.6M; or
 Its operating result (whether profit or loss )
is at least 2M

 The following segments meet the first criterion (majority of revenues

should come from external customers): A, B, C and E.

 Applying the 10% thresholds, the following qualify as reportable segments

(there is no need to test D) :

A Asset test, revenue test and operating result

test
B Revenue test and operating result test
E Asset test, revenue test and operating result
test

 C did not meet any one of the 10% thresholds.

 Total revenues from external customers of A, B and E were P55M which

represent 83% of consolidated revenues of the enterprise.

 Thus, the identified reportable segments are A, B and E.

In case the aggregate external revenues of A, B and E were less than 75% of
consolidated revenues of the enterprise, even C would be taken in as reportable even if
it did not meet any one of the 10% thresholds.

REQUIRED DISCLOSURES

For each reportable segment, the following shall be disclosed as part of segment
information:

(a) Segment revenue, revenue from sales to external customers and

segment revenue from transactions with other segments being identified
separately;
 (b) Segment result, continuing operations being separately shown from
the result from discontinued operations;

(c) The total carrying amount of segment assets;

(d) The total cost incurred, on an accrual basis, during the period to
acquire segment assets that are expected to be used during more than
one period for each reportable segment;

(e) The total amount of expense included in segment result for

depreciation and amortization of segment assets;

(f) The total amount of significant non-cash expenses other than

depreciation and amortization that were included in segment expenses;

(g) The aggregate of the entity’s share of the profit or loss of associates,
joint ventures, or other investments accounted for under the equity method
if substantially all of those associates’ operations are within that single
segment;

(h) The aggregate investments in associates and joint ventures from which
the segment’s share in profit or loss is part of segment revenues.

An entity shall present a reconciliation between the information disclosed for

reportable segments and the aggregated information in the consolidated or individual
financial statements. For instance, the entity shall reconcile total assets of reportable
segments with total assets of the enterprise; segment liabilities shall be reconciled with
the entity liabilities, and so on.
 Segment Reporting

Accounting policies specific principles, bases, conventions, rules and practices

adopted by an entity in preparing and presenting its financial statements.
Business segment a distinguishable component of an entity that is engaged in
providing a product or service or group of related products or services, and that is
subject to risks and returns that are different from those of other business segments.
Common costs operating expenses incurred by the enterprise for the benefit of more
than one business segment.
Consolidated financial information aggregate (financial) information relating to an
entity as a whole whether or not the entity has consolidated subsidiaries.
Corporate assets assets maintained for general corporate purposes and not used in
the operations of any business segment.

Discontinued operation resulting from the sale or abandonment of an operation that

represents a separate, major line of business of an entity; the assets, net profit or
loss, and activities can be distinguished physically, operationally, and for financial
reporting purposes.
General corporate expenses expenses incurred for the benefit of the corporation as
a whole, which cannot be reasonably allocated to any segment.
Geographical segment distinguishable component of an entity engaged in operations
in individual countries or groups of countries within particular geographic areas, as
may be determined to be appropriate in the circumstances to reflect the nature of the
entity’s operations.
Identifiable assets those tangible and intangible assets used by a business segment,
including those the segment uses exclusively and an allocated portion of assets
used jointly by more than one segment.
Intersegment sales transfers of products or services, similar to those sold to
unaffiliated customers, between business segments or geographic areas of the
entity.
Intra-segment sales transfers within a business segment or geographic area.
Minority interest that part of the net results of operations and of net assets of a
subsidiary attributable to interests which are not owned, directly or indirectly through
subsidiaries, by the parent.
Operating profit or loss a business segment’s revenue minus all operating expenses,
including an allocated portion of common costs.
Ordinary activities any activities which are undertaken by an entity as part of its
business and such related activities in which the entity engages in furtherance of,
incidental to or arising from, these activities.
Reportable segment a business or geographical segment for which segment
information is required to be disclosed.
Segment accounting policies the policies adopted for reporting the consolidated
financial statements of the entity, as well as for segment reporting.
Segment assets operating assets employed by a segment in operating activities
whether directly attributable or reasonably allocable to the segment; these should
exclude those generating revenues or expenses which are excluded from the
definition of segment revenue and segment expense.

Segment expense expense that is directly attributable to a segment, or the relevant

portion of expense that can be allocated on a reasonable basis to a segment; it
excludes interest expense, losses on sales of investments or extinguishment of debt,
equity method losses of associates and joint ventures, income taxes and corporate
expenses not identified with specific segments.
Segment revenue revenue that is directly attributable to a segment, or the relevant
portion of revenue that can be allocated on a reasonable basis to a segment, and
that is derived from transactions with parties outside the enterprise and from other
segments of the same entity; it excludes interest and dividend income and gains on
sale of investments or extinguishment of debt.
Transfer pricing the pricing of products or services between business segments or
geographic areas.
CHAPTER SUMMARY

 Enterprises that trade their securities in the public securities market or are in the
process of trading their securities in public securities market are required to
present segment information.

 The predominant sources of risks and rates of return of an entity shall be the
determining factors in determining whether the entity will adopt, as its primary
reporting format, business segment or geographical segment.

 A reportable segment is one for which segment information is required to be

disclosed. A segment is deemed reportable if majority of its revenue comes from
external customers and it meets any of the 10% thresholds: assets, revenues,
and operating result.

 A segment that is not reportable based on the 10% test may be reported
separately, or may be combined with other segments not meeting the 10% tests,
or may be presented as a reconciling item.
1. Blue Bay operates in different geographic areas since 2003. The following
information pertains to Blue Bay’s operation for the year 2007.

Geographic Identifiabl Revenues Profi

al e t
Segment Assets External Intern Total (Los
al s)
A P10M P25M P5M P30M P8M
B 4M 8M 2M 10M (3M)
C 5M 6M 1M 7M 1M
D 20M 5M 8M 13M (4M)
E 11M 22M 4M 26M 11M

What segments are deemed reportable?

2. The Red Company and its divisions are engaged solely in manufacturing
operations. The following data (consistent with prior years’ data) pertain to the
industries in which operations were conducted for the year ended December 31,
2007:

Operating Identifiable
Industry Total Profit Assets at 12/31/07
Revenue
A P10,000,000 P1,750,000 P20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,500,000
F 1,500,000 225,000 3,000,000

Determine which of the following company’s industry segments are considered

reportable business segments?

3. The following information pertains to Blue Company and its divisions for the year
ended December 31, 2007:
Sales to unaffiliated customers P1,000,000
Intersegment sales of products similar to
those sold to unaffiliated customers 300,000
 Interest earned on loans to other industry segments 20,000

Blue and all of its divisions are engaged solely in manufacturing operations.

Blue is a reportable segment if that segment’s revenue exceeds

a. P100,000 c. P130,000
b. P102,000 d. P132,000

4. Green Company reports operating profit as to industry segments in its

supplementary financial information annually. The following information is
available for 2007:

Sales Traceable Costs

Segment 1 P 750,000 P450,000
Segment 2 500,000 225,000
Segment 3 250,000 125,000
P1,500,000 P800,000

Additional expenses not included above are as follows:

Indirect operating expenses P240,000
General corporate expenses 180,000
Interest expense 96,000
Green allocates common costs based on the ratio of a segment’s sales to total
sales.

What should be the operating profit for Segment 2 for 2007?

a. P103,000 c. P163,000
b. P135,000 d. P195,000

5. Purple Company operates in six different industries, each of which is

appropriately regarded as a reportable segment. Purple’s 2007 combined sales
for all segments aggregated P10 million. Segment No. 4 had sales of P2.0
million and traceable costs of P900,000. Combined common costs for all
segments totaled P3.0 million. Common costs are allocated among the six
segments on the basis of each segment’s percentage of Purple’s total sales,
which is an acceptable allocation method.

How much should be reported as Segment No. 4’s operating income for 2007?
a. P 500,000 c. P1,220,000
b. P1,100,000 d. P1,400,000
6. Yellow Company has five business divisions. The following data with regard to
its operating segments for the year ended December 31, 2007 are as follows:

Costs and Interest

Division Sales Expenses Expense
1 P 40,000,000 P 30,000,000 P
1,000,000
2 38,000,000 32,000,000 2,000,000
3 14,000,000 20,000,000 0
4 51,000,000 42,000,000 3,000,000
5 10,000,000 16,000,000 0
Total P153,000,000 P140,000,000 P6,000,000

Yellow Company shall consider a segment reportable if its operating profit is at

least

a. P2,500,000 c. P1,300,000
b. P1,900,000 d. P 570,000

7. Ebony Company has three lines of business, each of which was determined to
be a reportable segment. Ebony Company sales aggregate P10,000,000 in
2007, of which Segment No. 1 contributed 40%. Traceable costs were
P2,200,000 for Segment No. 1 out of the total of P7,000,000 for the company as
a whole. For internal reporting, Ebony Company allocates common costs of
P1,200,000 based on the ratio of a segment’s income before common costs to
the total income before common costs.

In its 2007 financial statements, how much should Ebony Company report as
operating profit for Segment No. 1?

a. P1,000,000 c. P1,200,000
b. P1,080,000 d. P1,800,000