2023/1/18

Topics

IFRS 8 Operating segments

IAS 24 Related party Disclosures

Ethical Dilemma

Segment reporting
* IFRS 8 Operating segments
* New for SBR
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IFRS 8 Operating segment

To enable users of FS to evaluate the nature and financial effects of the business activities in
which it engages and the economic environments in which it operates.

An operating segment is a component of an entity:

I. That engages in business activities from which it may earn revenues and incur expenses
II.Whose operating results are regularly reviewed by the entity’s chief operating decision
maker (CODM) to make decisions about resources to be allocated to the segment and
assess its performance
III.For which discrete financial information is available.

IFRS 8 Operating segment

IFRS 8 states that reportable segments are those operating segments or aggregations of
operating segments for which segment information must be separately reported*.
Two or more operating segments may be aggregated (but not required) as a single operating
segment provided that they have similar economic characteristics.
I. the nature of the products and services
II. the nature of the production processes
III. the type or class of customer
IV. the methods used to distribute their products or provide their services
V. the nature of the regulatory environment

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TYU1
E-Games is a UK based company that sells computer games and hardware. Sales are made through the E-
Games website as well as through high street stores. The products sold online and in the stores are the
same. E-Games sells new releases for $40 in its stores, but for $30 online.
Internal reports used by the chief operating decision maker show the results of the online business
separately from the stores. However, they will be aggregated together for disclosure in the financial
statements.
Required: Should the online business and the high street stores be aggregated into a single segment in
the operating segments disclosure?
I. The E-games stores and online business sell the same types of product, and there are likely to be no
major differences in the types of customer (individual consumers).(Single?)
II. Customers will collect their goods from the stores, but E-games will deliver the products sold online.
This means that distribution methods are different.(Separate?)
III. Different sales prices between the stores and the online business, means significant differences in
gross margin. This suggests dissimilarity in terms of economic characteristics. (Separate?)
Conclude: It might be more appropriate to disclose separately.
There is no ‘right’ or ‘wrong’ answer. It is more important for you to state 5

the relevant recognition criteria and try to apply them in the case scenario.

How to determine 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 (Quantitative threshold)

1. Its reported revenue (include inter-sales) ≥10% the combined revenue of all operating segments
2. Its reported profit or loss ≥10% of the greater, in absolute amount, of:
• The combined reported profit of all operating segments that didn’t report a loss
• The combined reported loss of all those that reported a loss

3. Its assets ≥ 10% the combined assets of all operating segments

4. At lease 75% of the entity’s external revenue should be included in the reportable segment.

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How to determine reportable 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).

 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.

TYU2
The management of a company have identified operating segments based on geographical
location. Information for these segments is provided below:

Required:
According to IFRS 8, which segments must be reported? 8
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Solutions

First step: try 10% test

(W1) 10% of total sales 10% × $1m = $100,000.
All segments whose total sales exceed $100,000 are reportable.
(W2) 10% of results
10% of profit making segments: 10% × ($98,000 + $47,000 + $121,000 + $12,000) = $27,800
10% of loss making segments: 10% × ($26,000 + $15,000) = $4,100
Therefore, all segments which make a profit or a loss of greater than $27,800 are reportable.
(W3) 10% of total assets 10% × $10m = $1m. All segments whose assets exceed $1m are
reportable.

Solutions

Based on the 10% tests, Europe, Asia and North America are reportable. However, we must
check whether they comprise at least 75% of the company's external revenue. 10
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Solutions

The external revenue of reportable segments is 79% ($485,000/ $612,000) of total external
revenue. The 75% test is met and no other segments need to be reported.
Conclusion: The reportable segments are Europe, Asia and North America.
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Disclosing reportable segments

 General information
 Factors used to identify the entity’s reportable segments, including the basis of
organization.
 The types of products and services from which each reportable segment derives its
revenue.
 Information about P/L and other segment items
 A measure of profit or loss
 A measure of total assets
 A measure of total liabilities
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Disclosing reportable segments

• Common costs may be allocated to different segments on whatever basis the directors
believe is reasonable (arbitrary allocation).
• The head office management costs could be allocated on the basis of turnover or net
assets.
• The pension expense may be allocated on the number of employees or salary expense of
each segment.
• The costs of managing properties could be allocated on the basis of the type, value and
age of the properties used by each segment.
• An entity may allocate interest to a segment profit or loss but does not have to allocate
the related interest-bearing asset to the segment assets or liabilities. IFRS 8 calls this
asymmetrical allocation.

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Disclosing reportable segments

• IFRS 8 states that segments should reflect the way in which the entity is managed.
This means segments information is only useful for comparing the performance of
the same entity over time, not for comparing the performance of different entities.
• A segment's operating results can be distorted by trading with other segments (no
FV transaction).
• The segmentation process is based on management’s perspective, and some users
lack trust in management’s intentions. For example, management may attempt to
conceal loss-making areas if the business within a larger, profitable reportable
segment.

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Related Parties
* IAS24 Related Party Disclosures
* New for SBR

IAS 24 Related Party Disclosures

Definition

 Related party transaction is a transfer of resources, services, or obligations between

a reporting entity to another party which would appear, to the outside world ,to be
linked with the entity in some way. regardless of whether a price is charged.

 Related party relationships and transactions are a normal feature of business,

however, there is a general presumption that transactions reflected in financial
statements have been carried out on an arm's length basis, unless disclosed
otherwise.

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Who is a related party?

A Related party is a person or entity that is related to the entity that is preparing its financial
statements (the 'reporting entity').

(a) A person or a close member of that person’s family is related to a reporting entity if that
person

(i) has control or joint control over the reporting entity;

(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.

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Further details on definitions

Close members are 'those family members who may be expected to influence, or be influenced
by, that person in their dealings with the entity and include:
• that person's children and spouse or domestic partner;
• children of that person's spouse or domestic partner; and
• dependents of that person or that person's spouse or domestic partner.

Control/Significant influence as Business combination requirements

Joint control is ‘the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties sharing
control’

Key management personnel as ‘those with authority and responsibility for planning, directing
and controlling the activities of the entity, including any director (whether executive or otherwise)
of that entity’ 18
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(b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment defined benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan,
the sponsoring employers are also related to the reporting entity
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person in (a)(i) has significant influence over the entity or is a member of the key management
personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services
to the reporting entity or to the parent of the reporting entity*
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The following should not be considered related parties

a) Two entities simply because they have a director or other member of key management
personnel in common, or because a member of key management personnel of one entity has
significant influence over the other entity;
b) Two venturers simply because they share joint control over a joint venture;
c) Providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significantly influence the reporting
entity, simply by virtue of their normal dealings with an entity (even though they may affect
the freedom of action of an entity or participate in its decision-making process)
d) A single customer, supplier, franchiser, distributor, or general agent with whom an entity
transacts a significant volume of business merely by virtue of the resulting economic
dependence
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Related parties summary

下列各方构成企业的关联方：
（一）该企业的母公司。
（二）该企业的子公司。
（三）与该企业受同一母公司控制的其他企业。
（四）对该企业实施共同控制的投资方。 仅与企业存在下列关系的各方，不构成企
（五）对该企业施加重大影响的投资方。 业的关联方：
（六）该企业的合营企业。 （一）与该企业发生日常往来的资金提供
（七）该企业的联营企业。 者、公用事业部门、政府部门和机构。
（八）该企业的主要投资者个人及与其关系密切的家庭成 （二）与该企业发生大量交易而存在经济
员。主要投资者个人，是指能够控制、共同控制一个企业 依存关系的单个客户、供应商、特许商、
或者对一个企业施加重大影响的个人投资者。 经销商或代理商。
（九）该企业或其母公司的关键管理人员及与其关系密切 （三）与该企业共同控制合营企业的合营
的家庭成员。关键管理人员，是指有权力并负责计划、指 者。
挥和控制企业活动的人员。与主要投资者个人或关键管理 仅仅同受国家控制而不存在其他关联方关
人员关系密切的家庭成员，是指在处理与企业的交易时可 系的企业，不按关联方要求披露。
能影响该个人或受该个人影响的家庭成员。
（十）该企业主要投资者个人、关键管理人员或与其关系
密切的家庭成员控制、共同控制或施加重大影响的其他企
业。 21

IAS 24 Related Party Disclosures

Disclosures
 IAS 24 requires that relationships between parents and subsidiaries should always be disclosed.
 The name of the entity's parent and, if different, the ultimate controlling party irrespective of whether
there have been any transactions;
 Where there have been transactions between related parties:
(i) nature of the related party relationship
(ii) information about the transactions and outstanding balances necessary for an understanding of
the relationship on the financial statements.
As a minimum, this includes:
 Amount of the transaction
 Amount of outstanding balances
 Provisions for doubtful debts re the outstanding balances
 Bad and doubtful debt expense re related parties in the period

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IAS 24 Related Party Disclosures

Disclosures

 Key management compensation, in terms of :

 Short-term employee benefits
 Post-employment benefits/pensions
 Share-based payments (e.g. share options)

 A reporting entity is exempt from the above disclosures in respect of transactions and balances that
they have with a government that has control, joint control or significant influence over the reporting
entity.

 Practice 2020 SBR Mar Q2

Specimen Q2 23

Professional and Ethical Duty of the Accountant

* Important for SBR exam
Question 2 in SBR exam Section A
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Ethical issues

• Simple knowledge
• New requirement for SBR
• Question 2 in Section A
• Always tested with accounting issues
• Pay attention to your application of ethical principles (there will be 2 professional
marks awarded to this part).
• The answer points are easy to learn and try to apply them in different scenarios.

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ACCA Code of Ethics

ACCA code of Professional Ethics
1. Integrity
To be straightforward and honest in all professional and business relationships.
E.g. environmental impact, long-term sustainability

2. Objectivity
To not allow bias, conflict of interest or undue influence of others to override professional or
business judgments (FV measures, PPE life estimates, impairment signals, provisions judgment).
E.g. Profit related bonuses, Financing, Achieving a listing

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ACCA Code of Ethics

3. Professional Competence and Due Care
To ensure a client or employer can receive competent professional services based on current
developments in practice, legislation and techniques. (e.g. Continuing Professional
Development)

4. Confidentiality
 Do not disclose any confidential information to third parties without proper and specific
authority, unless there is a legal or professional right or duty to do so.
 Do not use the information for the personal advantage of the professional accountant or
third parties.

5. Professional behavior
To comply with relevant laws and regulations and avoid any action that discredits the
profession. 27

ACCA Code of Ethics

There are times when an accountant may have an incentive to misrepresent the performance or
position of an entity:
• Profit related bonuses
• Financing: an entity is more likely to be given a loan if it has valuable assets on which the loan
can be secured.
• Achieving a listing: a company that is being listed on a stock exchange will want to maximise the
amount that it receives from investors.

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Answer points
Structure your answer to four parts (as requirements required)
Accounting issues
• At least answer two points: one for standard requirement, one for case application
• Always use company names to show application of standards
• Every mini paragraph is earning a mark

Ethical issues
• Use fundamental principles underpin the Code of ethics to explain
• Always in breach of professional competence / integrity / objectivity

Ethical actions
• Discuss(communicate to the involved and others) / independent advice (ACCA or legal) / consider
resignation

Impact on stakeholders
• Various types of stakeholders (usually investors, debtors or bankers, auditors in this case)
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Tips

• This part is a relatively new exam requirement , which means you

may not find many ethical issues in the past P2 exams.

• Refer to SBR papers for more practice.

• Specimen papers and mock exam papers are useful.

• The answer points are easy to learn. Practice and apply!

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Professional and ethical duty

Importance of professional ethics
I. Professional ethics are an inherent part of the profession as well as other major professions such as law
and engineering.
II. The main aim of professional ethics is to serve as a moral guideline for professional accountants.
III. The presence of a code of ethics is a form of declaration by the professional body to the public that it is
committed to ensuring the highest level of professionalism amongst its members.

 Ethics in accounting is of utmost importance to accounting professionals and those who rely on their
services.
 Accounting professionals know that people who use their services, especially decision makers using
financial statements, expect them to be highly competent, reliable, and objective.
 Those who work in the field of accounting must not only be well qualified but must also possess a high
degree of professional integrity.
 A professional’s good reputation is one of his or her most important assets.
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Professional and ethical duty

 Criteria to judge whether manipulation of financial statements occurs
There is a very fine line between acceptable accounting practice and management’s deliberate
misrepresentation in the financial statements. The financial statements must meet the following criteria:

(i) Technical compliance: A transaction must be recorded in accordance with generally accepted
accounting principles (GAAP).

(ii) Economic substance: The resulting financial statements must represent the economic substance of the
event that has occurred.

(iii)Full disclosure and transparency: Sufficient disclosure must be made so that the effects of transactions
are transparent to the reader of the financial statements.

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Professional and ethical duty

 Accountants' responsibility

• Accountants must possess a high degree of professional integrity and the profession’s reputation depends
upon it.
• Professional accountancy bodies set out ethical guidelines within which their members operate covering
standards of behaviour, and acceptable practice. These regulations are supported by a number of codes, for
example, on corporate governance which assist accountants in making ethical decisions.
• The accountant has a responsibility not to mask the true nature of the financial statement.
• The accountant should try and persuade the directors to follow acceptable accounting principles and comply
with accounting standards and the accountant should consider his position if the directors insist on the
adjustments by pointing the inaccuracies out to the auditors.

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Professional and ethical duty

 Directors' responsibility

• Directors are responsible for preparation the financial statement in compliance with IFRS and statutory laws
and regulations.
• If they believe that they are not complying with IFRS, they should take all steps to ensure that the error or
irregularity is rectified.
• Directors have a responsibility to act honestly and ethically
and not be motivated by personal interest and gain.
• If the ethical conduct of the directors is questionable then other areas of the financial statements may need
scrutiny.

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Professional and ethical duty

 Consequence of unethical behavior

 Consequence for preparers of financial statements:
• Prison sentence
• Fines or repayments of amounts fraudulently taken
• Loss of professional reputation
• Being prevented from acting as a director or officer of a public company in the future
• Possibility of being expelled by professional accountancy body, if membership held.

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Professional and ethical duty

 Consequence for auditors of financial statements

• The audit firm being taken to court and charged with a criminal offence
• Individual partners of the audit firm being banned from audit work
• Loss of reputation leading to the loss of clients and income
• Fines or compensation payable
• Investigation by accounting body, such as ACCA or ICAEW

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Professional and ethical duty

 Reason for of unethical practice

• Management often seeks loopholes in financial reporting standards that allow them
to adjust the financial statements as far as is practicable to achieve their desired aim.

• Reasons for such behaviour often include market expectations, personal

realisation of a bonus, and maintenance of position within a market sector.

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Professional and ethical duty

Conflict between ethical behavior and profit motive

I. Ethical guidelines can help by providing insight into how to deal with conflicting principles and
why a certain course of action is desirable.

II. An accountant has an ethical obligation to encourage the directors to operate within certain
boundaries when determining the profit figure.

III. Unethical practices can even have a greater impact on the value of an entity than the
reporting of a smaller profit figure.

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Corporate social responsibility (CSR)

• Corporate social responsibility (CSR) is concerned with business ethics and the company’s
accountability to its stakeholders, and about the way it meets its wider obligations.

• CSR emphasizes the need for companies to adopt a coherent approach to a range of
stakeholders including investors, employees, suppliers, and customers.

• Directors must consider the short-term and long-term consequences of their actions, and take
into account their relationships with employees and the impact of the business on the
community and the environment.

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Corporate social responsibility (CSR)

 Benefits of environmental and social reporting

① It demonstrates coherence of overall management strategy to important external stakeholders.
② It strengthens stakeholder relations.
③ It increases competitive advantages (the 'first mover' effect).
④ Public recognition for corporate accountability and responsibility.
⑤ Target setting and external reporting drives continual environmental and social improvement.
⑥ Effective self-regulation minimises risk of regulatory intervention.
⑦ It may improve access to lists of 'preferred suppliers 'of buyers with green procurement policies.
⑧ It reduces corporate risk, which may reduce financing costs and broaden the range of investors.
⑨ It enhances employee morale.
⑩ Improved profitability. 40