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IAS 14: Segment Reporting

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  • 1. IAS 14: Segment Reporting Roshankumar Pimpalkarroshankumar.2007@rediffmail.com
  • 2. Segment reporting gives information about the: Different types of products and services an entity produces, and The different types of geographical areas in which it operates.Objective:The objective of IAS 14 is to establish the principles of reporting financial information bysegments, to help the users of financial statements: Better understand entity’s past performance Better assess the entity’s risks and returns, and Make more informed judgement about entity as a wholeScope:IAS 14 must be applied by entities: Whose equity or debt securities are publicly traded, or Who are in the process of issuing such securities Other entities are encouraged to disclose segment information voluntarily. Segment information is only required on consolidated basis if a financial report contains both the consolidated and parent’s own financial statement. When a subsidiary, associate or joint venture of group issues publically traded securities, they must give segment information in their own financial statements. Types of Segment: 1. Business Segment It is a distinguishable component of the entity that is: Engaged in providing an individual product or service or group of related products or services, and Subject to risk and returns that are different from those of other business segments For example for a publishing entity business segments may include consumer books, consumer magazines and business magazines. 2. Geographical Segments A geographical segment is a distinguishable component of an entity that is engaged in providing products or services within a particular economic environment and subject to risks and returns that are different from those of components operating in other economic environment.Two or more internally reported business segments or geographical segments that aresubstantially similar may be combined as a single segment. Two or more segments aresubstantially similar only if:roshankumar.2007@rediffmail.com
  • 3. They exhibit similar long term financial performance, and They are similar in all the factors in the relevant definition of that type of segment (i.e. Business or Geographical)IAS 14 requires entities to report data for both business segments and geographicalsegments.Based on the structure of its internal financial reporting system, management identifies: One of those bases of segmentation as primary, and The other as SecondaryThe dominant source and nature of an entity’s risks and returns should govern whether it’sprimary segment reporting will be business segments or geographical segments.If the entity’s risks and rates of return are strongly affected by both by differences inproducts and by differences in geographical area then the entity should use: Business segments as its primary segment reporting format, and Geographical segments as its secondary reporting formatHowever IAS 14 neither requires nor prohibits an entity from presenting the secondaryreporting format in the same detailed form as primary reporting format, this is called asMatrix Presentation.Determining Reportable Segments:A business segment or a geographical segment should be identified as a reportablesegment if a majority of its revenue is earned from sales to external customer and its revenue from sales to external customers and from transactions with other segments is 10% or more of total revenue, external or internal, of all segments or its segment results, whether profit or loss, is 10% or more of the combined results of all segments in profit or the combined results of all segments in loss, whichever is greater in absolute amount, or Its assets are 10% or more of total assets of all segments.If an internally reported segment doesn’t meet any of the 10% thresholds as mentionedabove then there are three options available. The segment may be Designated as a reportable segment despite its size Combined into separately reportable segment with other similar internally reported segment(s) that are also below the 10% thresholds, or Included as an unallocated reconciling itemAn entity may choose to select a segment that doesn’t meet any of the thresholds as areportable segment if expectations are that this segment will soon exceed the criteria or thesegment is very volatile.75% Thresholdroshankumar.2007@rediffmail.com
  • 4. If the total external revenue attributable to reportable segments is less than 75% of the totalconsolidated (in consolidation internal revenue is eliminated) or entity revenue thenadditional segments must be identified as reportable segments, even if they do not meet the10% threshold. IAS 14 does not specify how to select the additional segments. They do notneed to be next largest by any measure. Judgement should be based on individualcircumstances.General requirements of allocationWhen allocating amounts to segments following should be considered Segment revenue, expense, assets and liabilities are determined before eliminating intra group transactions. This is done because it gives information how segments are linked. Segment information should be prepared in conformity with the accounting policies adopted for preparing the consolidated financial statements and not internal accounting procedures. The amounts must be allocated to segments on consistent and reasonable basis. Related revenues and assets should be allocated in a consistent way e.g. if the depreciation is reported in a specific segment then the related asset should also be reported the same segment. Related expenses and liabilities should be allocated in a consistent way e.g. if the interest expense is reported in a specific segment, related interest bearing liability should also be reported in same segment. Definitions 1. Segment Revenue Segment revenue is the revenue Reported in entity’s statement of comprehensive income Directly attributable to segment, and That is the relevant portion of entity revenue that can be allocated on a reasonable basis to a segment, whether from external sales or from transactions with other segments Segment revenue also includes An entity’s share of profits or losses of associates of associates, joint ventures or other investment accounted for under the equity method only if those items are included in the consolidated or total entity revenue and A joint venturer’s share of revenue of jointly controlled entity accounted for by proportionate consolidation 2. Segment Expense Segment expenses is the expense From the segment’s operating activitiesroshankumar.2007@rediffmail.com
  • 5. Directly attributable to segments, and The relevant part of an expense allocable on a reasonable basis to the segments It also includes the joint venturer’s share of the expenses of a jointly controlled entity accounted for by proportionate consolidation. 3. Segment Result is segment revenue less segment expense. Segment result is determined before any adjustments for minority interest. Segment revenue and expense do not include: Interest/dividend including interest on advances or loans to/from other segments, unless the segment’s operations are primarily financial in nature Gains/losses on disposal/sale of investments or gains/losses on extinguishment of debt unless the segment’s operations are primarily financial in nature Income tax expense General administrative expenses, head office expenses and other expenses relating to the entity as a whole. 4. Segment Assets are those operating assets that are employed by a segment in its operating activities and are directly attributable to the segment, or can be allocated to it on a reasonable basis. They include: Investments accounted for under equity method if the profit or loss from such investments is included in segment revenue A joint venturer’s share of operating assets of a jointly controlled entity accounted for by proportionate consolidation Assets held under finance lease are included in segment assets, if they are attributable. 5. Segment Liabilities are those operating liabilities resulting from the operating activities of a segment and those are directly attributable, or can be allocated on a reasonable basis to the segment. Segment liabilities include a joint venturer’s share of liabilities of a jointly controlled entity accounted for by proportionate consolidation. Liabilities related to finance lease are not included in segment liabilities unless the segments operation are primarily of financial nature. This is because liability is incurred for financing rather than operating purposes. How the asset is used is not affected by how it is financed. Segment assets and liabilities do not include: Income tax assets and liabilities Interest-bearing liabilities, loans, investments or other income producing assets unless a segment’s revenue or result includes the related interest income or expense, or dividend income Assets employed for general entity or head office purposesWhen a company produces its products in many countries and the products are sold oninternational markets and global commodity exchange it is likely that the risks and returnsroshankumar.2007@rediffmail.com
  • 6. will be impacted more strongly by its products, as sale prices are determined on a global, notan individual country, basis.roshankumar.2007@rediffmail.com