Workings

1 Cost of goods sold 20X6 20X7

$'000 $'000
As stated in question 34,570 55,800
inventory adjustment 4,200 (4,200)
38,770 51,600
2 Income tax 20X6 20X7
$'000 $'000
As stated in question 3,880 3,400
Inventory adjustment (4,200 × 30%) ((( (1,260) 1,260
2,620 4,660

2 Segment reporting 6/08, 12/11

FAST FORWARD
An important aspect of reporting financial performance is segment reporting. This is covered by IFRS 8
Operating segments, which replaced IAS 14 Segment reporting in 2006.

2.1 Introduction
Large entities produce a wide range of products and services, often in several different countries. Further
information on how the overall results of entities are made up from each of these product or geographical
areas will help the users of the financial statements. This is the reason for segment reporting.
The entity's past performance will be better understood
The entity's risks and returns may be better assessed
More informed judgements may be made about the entity as a whole
Risks and returns of a diversified, multi-national company can only be assessed by looking at the
individual risks and rewards attached to groups of products or services or in different groups of products
or services or in different geographical areas. These are subject to differing rates of profitability,
opportunities for growth, future prospects and risks.
Segment reporting is covered by IFRS 8 Operating segments, which replaced IAS 14 Segment reporting in
November 2006.

2.2 Objective
An entity must disclose information to enable users of its financial statements to evaluate the nature and
financial effects of the business activities in which it engages and the economic environments in which it
operates.

2.3 Scope
Only entities whose equity or debt securities are publicly traded (ie on a stock exchange) need disclose
segment information. In group accounts, only consolidated segmental information needs to be shown.
(The statement also applies to entities filing or in the process of filing financial statements for the purpose
of issuing instruments.)

2.4 Definition of operating segment

FAST FORWARD
Reportable segments are operating segments or aggregation of operating segments that meet specified
criteria.

448 18: Performance reporting Part D Performance reporting

 You need to learn this definition, as it is crucial to the standard.

Key term Operating segment: This is a component of an entity:

(a) That engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other items of the same entity)
(b) Whose operating results are regularly reviewed by the entity's chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance, and
(c) For which discrete financial information is available. IFRS 8

The term 'chief operating decision maker' identifies a function, not necessarily a manager with a specific
title. That function is to allocate resources and to assess the performance of the entity's operating
segments

2.5 Aggregation
Two or more operating segments may be aggregated if the segments have similar economic
characteristics, and the segments are similar in each of the following respects:
The nature of the products or services
The nature of the production process
The type or class of customer for their products or services
The methods used to distribute their products or provide their services, and
If applicable, the nature of the regulatory environment

2.6 Determining reportable segments

An entity must report separate information about each operating segment that:
(a) Has been identified as meeting the definition of an operating segment; and
(b) Segment total is 10% or more of total:
(i) Revenue (internal and external), or
(ii) All segments not reporting a loss (or all segments in loss if greater), or
(iii) Assets
At least 75% of total external revenue must be reported by operating segments. Where this is not the
case, additional segments must be identified (even if they do not meet the 10% thresholds).
Two or more operating segments below the thresholds may be aggregated to produce a reportable
segment if the segments have similar economic characteristics, and the segments are similar in a majority
of the aggregation criteria above.
Operating segments that do not meet any of the quantitative thresholds may be reported separately if
management believes that information about the segment would be useful to users of the financial
statements.

2.6.1 Decision tree to assist in identifying reportable segments

The following decision tree will assist in identifying reportable segments.

Part D Performance reporting 18: Performance reporting 449

Exam focus As this is a financial analysis paper, you may well be given a segment report and asked to interpret it, or to
point comment generally on the need for this kind of report.

2.7 Disclosures
FAST FORWARD
IFRS 8 disclosures are of:
– Operating segment profit or loss
– Segment assets
– Segment liabilities
– Certain income and expense items
Disclosures are also required about the revenues derived from products or services and about the
countries in which revenues are earned or assets held, even if that information is not used by
management in making decisions.

Disclosures required by the IFRS are extensive, and best learned by looking at the example and proforma,
which follow the list.
(a) Factors used to identify the entity's reportable segments
(b) Types of products and services from which each reportable segment derives its revenues

450 18: Performance reporting Part D Performance reporting

(c) Reportable segment revenues, profit or loss, assets, liabilities and other material items:
External
Revenue
inter segment
Interest revenue

Interest expense

Depreciation and amortisation

Oth er material non-cash items

Material income/expen se (IAS 1)

Profit, assets Share of profit of associates/jointly controlled entities equity
& liabilities accounted
Pro fit or loss (as reported to chief operating decision maker)

Income tax expense

Non-current assets

Investments in associates/ jointly controlled entities

Expenditu res for reportable assets

Segment liabilities

A reconciliation of the each of the above material items to the entity's reported figures is required.
Reporting of a measure of profit or loss and total assets by segment is compulsory. Other items
are disclosed if included in the figures reviewed by or regularly provided to the chief operating
decision maker.
(d) External revenue by each product and service (if reported basis is not products and services)
(e) Geographical information:

External revenue (1) b y:

Geographical
entity's count ry o f do micile, and
areas
Non-current assets(2) all foreign countries (subdivided if material)

Notes
(1) External revenue is allocated based on the customer's location.
(2) Non-current assets excludes financial instruments, deferred tax assets, post-employment
benefit assets, and rights under insurance contracts.
(f) Information about reliance on major customers (ie those who represent more than 10% of
external revenue)
(g) Following the improvements to IFRS issued in April 2009, segment asset disclosure is no longer
compulsory if it is not reported internally.

Part D Performance reporting 18: Performance reporting 451

 2.7.1 Disclosure example from IFRS 8
The following example is adapted from the IFRS 8 Implementation Guidance, which emphasises that this
is for illustrative purposes only and that the information must be presented in the most understandable
manner in the specific circumstances.
The hypothetical 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 amortisation in profit or loss. The amounts in this illustration, denominated as dollars,
are assumed to be the amounts in reports used by the chief operating decision maker.
Car Motor All
parts vessel Software Electronics Finance other Totals
$ $ $ $ $ $ $
Revenues from external
customers 3,000 5,000 9,500 12,000 5,000 1,000(a) 35,500
Intersegment 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
(b)
Net interest revenue – – – – 1,000 – 1,000
Depreciation and 200 100 50 1,500 1,100 – 2,950
amortisation
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
Expenditure 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 the 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 IFRS 8, only the net amount is disclosed.

452 18: Performance reporting Part D Performance reporting

2.7.2 Suggested proforma
Information about profit or loss, assets and liabilities
Segment Segment Segment All other Inter Entity
A B C segments segment total
Revenue – external X X X X – X
customers
Revenue – inter segment X X X X X –
X X X X (X) X

Interest revenue X X X X (X) X

Interest expense (X) (X) (X) (X) X (X)
Depreciation and
amortisation (X) (X) (X) (X) – (X)
Other material non-cash
items X/(X) X/(X) X/(X) X/(X) X/(X) X/(X)
Material income/expense
(IAS 1) X/(X) X/(X) X/(X) X/(X) X/(X) X/(X)
Share of profit of
associate/JVs X X X X – X
Segment profit before tax X X X X (X) X
Income tax expense (X) (X) (X) (X) – (X)
Unallocated items X/(X)
Profit for the year X

Segment assets X X X X (X) X

Investments in
associate/JVs X X X X – X
Unallocated assets X
Entity's assets X
Expenditures for reportable
assets X X X X (X) X
Segment liabilities X X X X (X) X
Unallocated liabilities X
Entity's liabilities X

Information about geographical areas

Country of Foreign
domicile countries Total
Revenue – external customers X X X
Non-current assets X X X

Part D Performance reporting 18: Performance reporting 453

 2.8 Advantages and disadvantages of the old and new segment
definition approaches
Advantages Disadvantages
'Risks and returns' The information can be The information may be
approach (IAS 14) reconciled to the financial commercially sensitive
statements The segments may include
It is a consistent method operations with different risks and
The method helps to highlight returns
the profitability, risks and
returns of an identifiable
segment
'Managerial' approach It is cost effective because the Segment determination is the
(IFRS 8) marginal cost of reporting responsibility of directors and is
segmental data will be low subjective
Users can be sure that the Management may report segments
segment data reflects the which are not consistent for internal
operational strategy of the reporting and control purposes
business making its usefulness questionable

2.9 Criticisms of IFRS 8

(a) Some commentators have criticised the 'management approach' as leaving segment identification
too much to the discretion of the entity.
(b) The management approach may mean that financial statements of different entities are not
comparable.
(c) Segment determination is the responsibility of directors and is subjective.
(d) Management may report segments which are not consistent for internal reporting and control
purposes, making its usefulness questionable.
(e) For accounting periods beginning on or after 1 January 2005 listed entities within the EU are
required to use adopted international standards in their consolidated financial statements. The EU
has not yet adopted IFRS 8 and until it does IAS 14 will continue to apply here. Some stakeholders
believe the standard to be flawed due to the amount of discretion it gives to management.
(f) Geographical information has been downgraded. It could be argued that this breaks the link
between a company and its stakeholders.
(g) There is no defined measure of segment profit or loss.

2.10 Example: Determining operating segments

Jesmond, a retail and leisure group, has three businesses operating in different parts of the world.
Jesmond reports to management on the basis of region. The results of the regional segments for the year
ended 31 December 20X9 are as follows.
Revenue Segment results Segment Segment
Region External Internal profit/(loss) assets liabilities
$m $m $m $m $m
European 200 3 (10) 300 200
North America 300 2 60 800 300
Other regions 500 5 105 2,000 1,400
There were no significant intra-group balances in the segment assets and liabilities. The retail outlets and
leisure centres are located in capital cities in the various regions, and the company sets individual
performance indicators for each hotel based on its city location.

454 18: Performance reporting Part D Performance reporting

Required
Discuss the principles in IFRS 8 Operating segments for the determination of a company’s reportable
operating segments and how these principles would be applied for Jesmond plc using the information
given above.

Solution
IFRS 8 Operating segments states that an operating segment is a reported separately if:
(i) It meets the definition of an operating segment, ie:
(1) It engages in business activities from which it may earn revenues and incur expenses,
(2) Its operating results are regularly reviewed by the entity's chief operating decision maker
to make decisions about resources to be allocated to the segment and assess its
performance, and
(3) Discrete financial information is available for the segment,
and
(ii) It exceeds at least one of the following quantitative thresholds:
(1) Reported revenue is 10% or more the combined revenue of all operating segments
(external and intersegment), or
(2) The absolute amount of its reported profit or loss is 10% or more of the greater of, in
absolute amount, all operating segments not reporting a loss, and all operating
segments reporting a loss, or
(3) Its assets are 10% or more of the total assets of all operating segments.
At least 75% of total external revenue must be reported by operating segments. Where this is not the
case, additional segments must be identified (even if they do not meet the 10% thresholds).
Two or more operating segments below the thresholds may be aggregated to produce a reportable
segment if the segments have similar economic characteristics, and the segments are similar in a majority
of the following aggregation criteria:
(1) The nature of the products and services
(2) The nature of the production process
(3) The type or class of customer for their products or services
(4) The methods used to distribute their products or provide their services
(5) If applicable, the nature of the regulatory environment
Operating segments that do not meet any of the quantitative thresholds may be reported separately if
management believes that information about the segment would be useful to users of the financial
statements.
For Jesmond, the thresholds are as follows.
(i) Combined revenue is $1,010 million, so 10% is $101 million.
(ii) Combined reported profit is $165 million, so 10% is $16.5 million.
(iii) Combined reported loss is $10 million, so 10% is $1 million.
(iv) Total assets are $3,100 million, so 10% is $310 million.
The North America segment meets the criteria, passing all three tests. Its combined revenue is
$302 million; its reported profit is $60 million, and its assets are $800 million.
The European segment also meets the criteria, but only marginally. Its reported revenue, at $203 million
is greater than 10% of combined revenue, and only one of the tests must be satisfied. However, its loss of
$10 million is less than the greater of 10% of combined profit and 10% of combined loss, so it fails this
test. It also fails the assets test, as its assets, at $300 million are less than 10% of combined assets
($310 million).

Part D Performance reporting 18: Performance reporting 455

 IFRS 8 requires further that at least 75% of total external revenue must be reported by operating
segments. Currently, only 50% is so reported. Additional operating segments (the ‘other regions’) must be
identified until this 75% threshold is reached.
IFRS 8 may result in a change to the way Jesmond's operating segments are reported, depending on how
segments were previously identified.

2.11 Section summary

IFRS 8 is a disclosure standard D:
Segment reporting is necessary for a better understanding and assessment of:
– Past performance
– Risks and returns
– Informed judgements
IFRS 8 adopts the managerial approach to identifying segments
The standard gives guidance on how segments should be identified and what information should
be disclosed for each
It also sets out requirements for related disclosures about products and services, geographical areas and
major customers.

3 IAS 33 Earnings per share

FAST FORWARD
Earnings per share is a measure of the amount of profits earned by a company for each ordinary share.
Earnings are profits after tax and preferred dividends.

Exam focus You studied the bulk of IAS 33 for earlier papers, The examiner has stated that it is not going to form the
point basis of a full question. However, you may have to talk about the potential for manipulation.

Remember that the objective of IAS 33 is to improve the comparison of the performance of different
entities in the same period and of the same entity in different accounting periods.

3.1 Definitions
The following definitions are given in IAS 33.
Key terms
Ordinary share: an equity instrument that is subordinate to all other classes of equity instruments.
Potential ordinary share: a financial instrument or other contract that may entitle its holder to ordinary
shares.
Options, warrants and their equivalents: financial instruments that give the holder the right to purchase
ordinary shares.
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other
consideration upon the satisfaction of certain conditions in a contingent share agreement.
Contingent share agreement: an agreement to issue shares that is dependent on the satisfaction of
specified conditions.
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of certain conditions.
Antidilution is an increase in earnings per share or a reduction in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of certain conditions. (IAS 33)

456 18: Performance reporting Part D Performance reporting