Professional Documents
Culture Documents
Hubungan Etnik
Hubungan Etnik
Question 1:
IFRS 8 Operating Segments focuses on the determination of a company’s operating segments
and how to apply certain principles to determine the reportable segments.
Required:
(a) Illustrate in detail the quantitative and qualitative thresholds for determining
reportable segments, as required by IFRS 8. (8 marks)
(b) The following information was extracted from Evergreen Bhd., an international
restaurant group and has five business segments in different region. The results of the
regional segment for the year ended 31 December 2019 are as follows:
Revenue
External Internal Profit /loss Assets
There were no significant inter-company balances in the segment assets and liabilities.
Required:
Based on the quantitative thresholds mentioned in part (a) above, assess which are the
reportable segments of Evergreen Bhd.
Question 2:
Jesmond, a retailer and leisure group, has three businesses operating in different part 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
Segment
Revenue Results Segment
There were insignificant intra-group balance in the segment assets and liabilities. Due to the
disappointing performance of Europe in the year, the management of Jesmond would prefer
not to include Europe as a reportable segment. They believe reporting North America and
other regions will provide the stakeholders with sufficiency information.
Required:
Advise the management of Jesmond on the principles for determining reportable segments
under IFRS 8 and comment on whether Europe can be omitted as a reportable segment.
Question 3:
Klanet is a public limited company operating in the pharmaceutical sector. The company
advice on the following financial reporting issue.
Klanet produces and sells its range of drugs through three separate divisions. In addition, it
has two laboratories which carry out research and development activities.
In the first laboratory, the research and development activity is funded internally and
centrally for each of the three divisions. It does not carry out research and development
activities for other entities. Each of the three divisions is given a budget allocation which it
uses to purchase research and development activities from the laboratory. The laboratory is
directly accountable to the division heads for this expenditure.
The second laboratory performs contract investigation activities for other laboratories and
pharmaceutical companies. This laboratory earns 75% of its revenue from external customers
and these external revenues represent 18% of the organisation’s total revenue.
The performance of the second laboratory’s activities and of the three separate divisions is
regularly reviewed by the chief operating decision maker (CODM). In addition to the heads
of divisions, there is a head of the second laboratory. The head of second laboratory is
directly accountable to the CODM and they discuss the operating activities, allocation of
resources and financial results of the laboratory.
The managing director does not think IFRS 8 provides information that is useful to investors.
He feels it just add more pages to financial statements that are already very lengthy. The
finance director partially agrees with the managing director and believes that the IASB’s
practice statement on materiality confirms his opinion that not all the disclosure requirements
in IFRS 8 are necessary.
Required:
(i) Advise the managing director, with reference to IFRS 8 Operating Segments, whether
the research and development laboratories should be reported as two separate
segments.
(ii) Discuss the managing director’s view that IFRS 8 does not provide useful information
to investors.
(iii) Discuss whether the finance director is correct in his opinion about IFRS 8,
identifying any ethical concerns you may have. You should briefly refer to Practise
Statement 2 Making Materiality Judgement in your answer.
Suggested Solution:
Question 1:
IFRS 8 states that in determining reportable segment, it should meet both qualitative and quantitative
characteristic.
QUALITATIVE CHARACTERISTICS
An operating segment 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 components 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
The reported revenue (external and inter-segment) is 10% or more of the combined revenue of all
operating segments
The absolute amount of the segment’s reported profit or loss is 10% or more of the greater of
profit and loss making segments
The segment’s assets are 10% or more of the combined assets of all operating segments.
After determining the reportable segments, an entity must ensure that the total external
revenue attributable to those reportable segments is at least 75% of the entity’s total revenue.
If the total external revenue reported by the operating segment constitutes less than 75% of
the entity’s total revenue, then additional operating segments shall be identified as reportable
segment.
Revenue test
North
Europea
South-east Ameri South
n
Asia Africa ca America total
RM’mi
RM’mil RM’mil RM’mil l RM’mil RM’mil
External revenue 650 450 250 150 300 1800
Internal 180 100 50 50 40 420
830 550 300 200 340 2220
10%
10% -revenue Yes Yes Yes No Yes 222
10% of the combined external (RM1,800 million) and internal revenue (RM420
million) totaling RM2,220 million amounts to RM222 million. Thus, the 10%
threshold would be RM222 million. As such, the segments that report a combined
(external and internal) revenue of RM222 million or more will pass the test.
Therefore, all other regions qualify as reportable segments, except the North
America region.
The total profit reported by the profit-making segments (SEA, Africa, North and
South America) is RM230 million. The European region is the only loss-making
segment at RM10 million. Thus, 10% of the greater of these two amounts is RM23
million. A segment will qualify as a reportable segment as long as its reported profit
or loss is RM23 million and above. Thus, all regions except the European and North
America regions fail the test.
Assets test
Assets 900 400 200 300 2000 3800
10%
10% - assets Yes Yes No No Yes 380
10% of the combined assets of all segments is RM3,800 × 10% = RM380. Thus, all other
regions qualify as a reportable segment. The Africa and North America regions fail the test.
Conclusion
The European, SEA, Africa and South America regions are reportable segments. However,
the North America region fails all three tests and should be categorized as ‘other region’.
Question 2:
IFRS 8 requires a business to determine its operating segment on the basis of its internal
management reporting. As Jesmond reports to management on the basis of geographical
reasons, this is how Jesmond determines its segment.
IFRS 8 requires an entity to report separate information about each operating segment that:
(a) Has been identified as meeting the definition of an operating segment;
√ √
Segment revenue > 10% of total revenue = North America & Asia
Result Test:
-10 60 105
√ √
10% - loss -1
Segment assets > 10% of total assets = North America & Asia
From the 10% quantitative test, Europe is not a reportable segment.
However, IRFS 8 also requires that at least 75% of total external revenue must be reportable
by operating segments. Reportable North America and Asia accounts for 81% of external
revenue ($600m/740m) and therefore the test is satisfied. There is no requirement for
Jesmond to include Europe as a reportable segment.
Nevertheless, it could be perceived as being unethical not to report Europe separately if the
sales motivation were to hide losses. Given that IFRS 8 allows management to choose to
report segment that do not meet any of the qualitative thresholds, Jesmond might like to
consider disclosing Europe as a separate reportable segment.
Question 3:
(i)
IFRS 8 Operating Segments states that an operating segment is a component of an entity
which engages in business activities from which it may earn revenues and incur cost. In
addition, discrete financial information should be available for the sgement and these result
should be regularly reviewed by the entity’s CODM when making decisions about allocation
to segment and assessing its performance.
Other factors should be taken into account, including the nature of the business activities of
each component, the existence of manager responsible for them, and information presented to
the board of directors.
According to IFRS 8, an operating segment is one which meets any of the following
quantitative thresholds:
(a) It reportable revenue 10% or more of the combined revenue of all operating segments.
(b) The absolute amount of its reportable profit or loss is 10% or more of the greater, in
absolute amount, of (1) the combined reported profit of all operating segments which did not
report to loss and (2) the combined reported loss of all operating segment which reported a
loss.
(c ) Its assets are 10% or more of the combined assets of all operating segments.
As a result of the application of the above criteria, the first laboratory will not be reported as
a separate operating segment. The division have heads directly accountable to, and
maintaining regular contact with, the CODM to discuss all aspect of their division’s
performance The division seem to be consistent with the core principle of IFRS 8 and
should be reported as separate segments. However, the laboratory does not have a separate
segment manager and the existence of a segment manager is normally an important factor in
(ii) Contrary to the managing director’s view, IFRS 8 provides information that makes the
financial statements more relevant and more useful to investors. IFRS financial statements
are highly aggregated and may prevent investors from understanding the many different
business areas and activities that an activity is engaged in. IFRS 8 requires information to be
disclosed that is not readily available elsewhere in the financial statements, therefore it
provides additional information which aids an investor’s understanding of how the business
operates and is managed.
IFRS 8 uses a ‘management approach’ to report information on an entity’s segments and
results from the point of view of the decision makers of the entity. This allows investors to
examine an entity ‘through the eye of management’ - to see the business in the way in which
the manager who run the business segments allowing them to better assess the return being
earned from those business segments, the risks that are associated with those segments and
how those risk are manged. The more detailed information provides investors with more
insight into an entity’s longer term performance.
The requirement to disclose information that is actually used by internal decision makers is
an important feature in IFRS 8 but it also one of its main criticism. The fact that the reporting
does not need to be based on IFRS makes it difficult to make comparisons with information
that was reported in prior periods and with other companies in the sector. The flexibility in
reporting can make it used in conjunction with narrative disclosures prepared by the directors
of the company.
(iii)
The finance director’s opinion that ‘not all disclosure in IFRS 8 is necessary’ could be
interpreted to mean that he believes he can pick and choose which disclosure requirements he
feels are necessary and which he believes are not.
This is not correct. IAS 1 Presentation of Financial Statements requires all standards to be
applied if fair presentation is to be achieved. Directors cannot choose which parts of
standards they do or do not apply.
The directors should apply the principles given in Practice Statement 2 to review how they
have made materiality judgement in their financial reporting. It may be that their current
financial report is very lengthy because they include information that is not material.
Both directors appear reluctant to give the disclosures required by IFRS 8. This raises
concern. If the finance director is not aware that he cannot pick and choose requirements
from IFRSs, then his professional competence may be called into question. If he is aware of
this, and an assessment of whether the disclosure s are material has not been done, or has
been done inappropriately, then it may be that the directors are trying to hide an issue. This
should be considered in more detail.