Module 6

MODULE 6 OPERATING SEGMENTS
LEARNING 1. Define an operating segment.

OBJECTIVES
2. Describe the “management approach” to identify reportable
segments.
3. State the quantitative thresholds in identifying reportable
segments.
OVERVIEW PFRS 8 Operating Segments requires particular classes of entities (es-
sentially those with publicly traded securities) to disclose information
about their operating segments, products and services, the geographical
areas in which they operate, and their major customers. Information is
based on internal management reports, both in the identification of
operating segments and measurement of disclosed segment information.
Acquiring new Asynchronous - links to more information: www.farhatlectures.com;
knowledge http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on November
17, 2020 (Tuesday 9:00 – 10:00 AM)
Core principle
PFRS 8 requires an entity to disclose information needed in evaluating
the nature and financial effects of the business activities in which it
engages and the economic environments in which it operates.
The required disclosures under PFRS 8 aim to help users of financial

statements
a. Better understand the entity’s performance.
b. Better assess the entity’s prospects for future cash flows.
c. Make more informed judgments about the entity as a whole
Operating segments
PFRS 8 defines an operating segment as follows. An operating segment
is a component of an entity:
o 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)
o whose operating results are reviewed regularly by the entity's
chief operating decision maker to make decisions about
resources to be allocated to the segment and assess its perfor-
mance and
o for which discrete financial information is available
Reportable Segments
An operating segment is reportable if it:
a. Is used by management in internal reporting or results from
aggregating two or more segments; and
b. Qualifies under the quantitative thresholds
Management approach
PFRS 8 adopts a management approach to identifying reportable
segments. Under this approach, operating segments are identified on
the basis of internal reports that are regularly reviewed by the entity’s
chief operating decision maker in order to allocate resources to the
segment and assess its performance.
Basically, the decision on whether an operating segment is reportable or

not is based on management’s judgment.
Aggregation criteria
Two or more operating segments may be aggregated into a single
operating segment if aggregation is consistent with the core principle of
PFRS 8, the segments have similar economic characteristics, and
segment are similar in each of the following respects:
a. Nature of the products and services;
b. Nature of production processes;
c. Type or class of customer for their products and services;
d. The method used to distribute their products or provide their
services; and
e. Nature of the regulatory environment, if applicable, e.g., banking,
insurance or public utilities.
Quantitative thresholds
Operating segment is reportable if it meets any of the following:
o its reported revenue, from both external customers and interseg-
ment sales or transfers, is 10 per cent or more of the combined
revenue, internal and external, of all operating segments, or
o the absolute measure of its reported profit or loss is 10 per cent
or more of the greater, in absolute amount, of (i) the combined
reported profit of all operating segments that did not report a loss
and (ii) the combined reported loss of all operating segments that
reported a loss, or
o its assets are 10 per cent or more of the combined assets of all
operating segments.
Illustration: Quantitative thresholds

Entity X is preparing its year-end financial statements and has identified
the following operating segments:
Segments Revenue Profit (loss) Assets
A 1,000,000 200,000 14,000,000
B 1,200,000 140,000 18,000,000
C 270,000 (70,000) 12,000,000
D 240,000 (700,000) 1,000,000
E 290,000 50,000 1,400,000
Total 3,000,000 (380,000) 46,400,000
Requirement: Identify the reportable segments.

Solution:
Revenue test – 10% of the total revenue to be reportable
(3,000,000 x 10%) = 300,000 which means that any segment
with revenue of 300,000 are reportable segments. Therefore,
segment A and B are reportable as it meets the 10% thresholds
on revenues.
Profit or loss test

Step 1. Compute for the profit or loss separately.
Segment Profit Loss
A 200,000
B 140,000
C (70,000)
D (700,000)
E 50,000 -
TOTALS 390,000 (770,000)
Step 2. Determine the higher between the totalled amount, in absolute

terms (i.e., ignore the negative value of losses). The higher amount is
used for the 10% test. The loss is higher, therefore that will be the basis
for the 10% thresholds. 770,000 x 10% = 77,000, any segment with
profit or loss of 77,000 are reportable segments. Segment A,B and D
qualify under these test because their profit is at least 77,000.
Asset test
Total assets of all the segments 46,400,000
Multiply by x 10%
Total 4,640,000
Any segment whose asset is 4,640,000 are reportable segments.

Segment A, B, and C are reportable.
Conclusion:
Base on the revenue, profit or loss, and asset test, segment A, B, C, and
D are reportable segments, and these segments will be disclosed
separately in the notes.
Reporting of non-reportable segments

Operating segments that are not reportable are combined and disclosed
in an “all other segments” category.
Limit on external revenue

If the total external revenues of the identified reportable segments are
less than 75% of the entity’s total external revenue, additional operating
segments are included as reportable, even if they do not meet the
quantitative threshold, until at least 75% of the entity’s external revenue
is included in reportable segment. Additional segments are identified
based on management’s judgment.
Reporting of interest revenue and interest expense
Interest revenue and expense are reported separately for each
reportable segment unless segment revenue is primarily from interest
( e.g., the segment is a financial institution) and internal decision-making
is based on net interest revenue.
Information about major customer

A major customer is a single external customer who has provided 10% or
more of the entity’s revenue. The entity shall disclosed the extent of its
reliance on its major customer.
For the purpose of this disclosure, a group of customers under common
control, such as subsidiaries of a common parent, or various government
agencies are considered as a single customer.
Summary:
PFRS 8 uses a “management approach” to identifying reportable
segments.
A reportable operating segment is one which management uses in

making decisions about operating matters or results from the aggregation
of two or more segments and qualifies under any of the quantitative
thresholds.
The quantitative thresholds are (a) at least 10% of the total revenues
( external and internal), (b) at least 10% of the higher of total profits of
segments with profits and total losses of segments with losses, and (c) at
least 10% of the assets ( inclusive of intersegment receivables).
The total reported revenues of reportable segments should be at least

75% of the entity’s total external revenue. If the 75% limit is not met,
additional segments are included as reportable segments, even if they do
not meet the quantitative thresholds, until the 75% limit is met.
Disclosures for major customer are required if revenues from a single

external customer amounts to 10%or more of the entity’s external
revenues.
Operating segments
 An operating segment is 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 reviewed regularly by the entity's chief
operating decision maker to make decisions about resources to
be allocated to the segment and assess its performance and for
which discrete financial information is available
Reportable segments are operating segments or aggregations of
operating segments that meet specified criteria:
 its reported revenue, from both external customers and

intersegment sales or transfers, is 10 per cent or more of the
combined revenue, internal and external, of all operating
segments, or
 the absolute measure of its reported profit or loss is 10 per cent or
more of the greater, in absolute amount, of (i) the combined
reported profit of all operating segments that did not report a loss
and (ii) the combined reported loss of all operating segments that
reported a loss, or
 its assets are 10 per cent or more of the combined assets of all
operating segments.
 Two or more operating segments may be aggregated into a single
operating segment if aggregation is consistent with the core
principles of the standard, the segments have similar economic
characteristics and are similar in various prescribed respects.
 If the total external revenue reported by operating segments
constitutes less than 75 per cent of the entity's revenue, additional
operating segments must be identified as reportable segments
(even if they do not meet the quantitative thresholds set out
above) until at least 75 per cent of the entity's revenue is included
in reportable segments.

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MODULE 6 OPERATING SEGMENTS

LEARNING 1. Define an operating segment.

The required disclosures under PFRS 8 aim to help users of financial

Basically, the decision on whether an operating segment is reportable or

Illustration: Quantitative thresholds

Requirement: Identify the reportable segments.

Profit or loss test

Step 2. Determine the higher between the totalled amount, in absolute

Any segment whose asset is 4,640,000 are reportable segments.

Reporting of non-reportable segments

Limit on external revenue

Information about major customer

A reportable operating segment is one which management uses in

The total reported revenues of reportable segments should be at least

Disclosures for major customer are required if revenues from a single

 An operating segment is a component of an entity: that engages

 its reported revenue, from both external customers and

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