OPERATING SEGMENT

Chapter 12
Operating segment
An operating segment is a component of an entity:

a. That engages in business activities from which it may earn

revenue and incur expenses, including revenue and expenses
relating to transactions with other components of the same entity.
b. Whose operating results are regularly reviewed by the entity’s
chief operating maker to make decisions about resources to be
allocated to the segment and assess its performance.
c. And for which discrete financial information is available.
Chief operating decision maker

The term “chief operating decision maker” identifies a function

and not necessarily a manager with a special title.

This function is “to allocate resources to the segments and

assess their performance.
The chief operating decision maker may be the entity’s chief
executive officer, chief operating officer or a group of executive
directors depending on who within the organization is responsible for
the allocation of resources and assessing the performance of
operating segments.
Identifying operating segments

The “ management approach” is used in identifying operating

segments.

The management approach means that the operating segments are

identified on the basis of internal reports about components of an
entity that are regularly reviewed by the chief operating decision
maker in order to allocate resources to the segment and to assess
its performance.
The idea is that the reporting of segment information is seen
through the “ eyes of the management” and users would wish to see
the business as the chief operating decision maker sees it.

IFRS has abandoned the “risk and reward approach” of identifying

operations by business segments and geographical.
Reportable segments
An entity shall report information about an operating segment that
meets any of the following qualitative thresholds;

1. The segment revenue, including both sales to external customers

and intersegment sales or transfers, is 10% or more of the
combined revenue, internal and external, of all operating
segments.

2. The absolute amount of profit or loss of the segment is 10% or

more of the greater in absolute amount of:
a. Combined profit of all operating segments that reported
a profit.

b. Combined loss of all operating segments that reported a

loss

3. The assets of the segment are 10% or more of the

combined assets of all operating segments
Operating segments that do not meet any of the
quantitative thresholds may be considered reportable
and separately disclosed on a voluntary basis if
management believes that the information about the
segment would be useful to the users of the financial
statements.
Overall size test – 75% threshold

If the total external revenue of reportable operating

segments constitutes less than 75% of the entity
external revenue, additional operating segments shall
be identified as reportable segments even if they do
not meet the 10% quantitative thresholds until at the
least 75% of the entity external revenue is included in
reportable segments.
Aggregation of segments
Two or more operating segments may be aggregated into a “single
operating segment” if the segments have similar economic
characteristics and the segments share a majority of the following
five aggregation criteria:

a. Nature of product or service

b. Nature of production process
c. Type of class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment
Limit to the number of segments

There may be a practical limit to the number of reportable segments to

be disclosed separately by an entity beyond which segment
information may become too detailed.

Although no precise limit has been determined, as the number

increase above ten, the entity shall consider whether a practical limit
has been reached.
Information to be disclosed for each segment
An entity shall disclose the following for each reportable operating segment:

1. General information about the operating segment

2. Information about profit or loss, including specified revenue and expenses
included in the measure of profit or loss
3. Information about segment assets and segment liabilities and the basis of
measurement.
4. Reconciliations of the totals of segment revenue, segment profit or loss,
segment assets, segment liabilities and other material segment items to
corresponding items in the entity’s financial statements.
Disclosure about general information
An entity shall disclose the following general information about an
operating segment:

1. Factors used to identify the reportable segments

2. Type of products and services from which each reportable segment

derives revenue.
Disclosure of profit or loss, assets and liabilities

An entity shall disclose for each reportable segment a measure of

profit or loss, total assets and total liabilities.

An entity shall disclose a measure of profit or loss under all

circumstances.

However, an entity shall disclose aa measure of total assets and total

liabilities for each reportable segment if such an amount is regularly
provided to the chief operating decision maker.
Profit or loss
An entity shall disclose the following if the specified amounts are
included in the measure of the segment profit or loss or otherwise
regularly provided to the chief operating decision maker even if not
included in the measure of segment profit or loss:

1. Revenue from external customers

2. Revenue from transactions with other operating segments of the
same entity
3. Interest revenue
4. Interest expense
5. Depreciation and amortization.
6. Material items of income and expense.
7. The entity’s interest in the profit or loss of associate and joint
venture accounted for by the equity method.
8. Income tax expense
9. Material noncash items other than depreciation and amortization
Segment revenue and segment expense

Segment revenue – is a revenue that is directly attribute to a

segment and the relevant portion of entity revenue that can be
allocated on a reasonable basis to the segment.

Segment expense – is expense resulting from the operating

activities of the segment that is directly attributable to the
segment and the portion of an expense that can be allocated
on a reasonable basis to the segment.
Segment assets – are those operating assets that are employed by a
segment in its ca operating activities that are either directly
attributable to the segment or can be allocated to the segment on a
reasonable basis.

Segment liabilities – are those liabilities that result from the operating
activities of a segment and that are either directly attributable to the
segment or can be allocated to the segment on a reasonable basis.
Entity-wide disclosures
Entity-wide disclosures are additional information that is required to be
disclosed by all entities if such information is provided as part of the
reportable segment information.

An entity shall disclose information about the following:

a. Information about products and services

b. Information about geographical areas
c. Information about major customers
Revenue from products and services
An entity shall disclose the revenue from external customers for each
product and service, or each group of similar products and services,
unless the necessary information is not available and the cost to
develop it would be excessive.

Revenue and assets from geographical areas

An entity shall disclose the following geographical information:

a. Revenue from external customers in the entity’s country of

domicile, and in all foreign operations in total.
b. Separate disclosure of material revenue from external customers in
an individual foreign country.

c. The basis for attributing revenue from external customers to

individual countries.

d. Noncurrent assets, other than financial instruments, deferred tax

assets, postemployment benefit assets and rights under insurance
contracts, located in the entity’s country domicile and in all foreign
countries in total.
Example of entity-wide disclosure
An example of an entity-wide disclosure of information about geographical areas is as follows:

Revenue Noncurrent assets

Philippines 19,000 11,000
Japan 4000 -
China 3,500 6,000
USA 3,000 4,000
Other countries 6,000 3,000
Total 35,500 24,000
Major customer
A “major customer” is defined as a single external customer providing
revenue which amounts to 10% of more of an entity’s external
revenue.

The following shall be considered a single customer:

a. A group of entities under a common control

b. A government and entities under the control of such government.