PFRS 8 (OPERATING SEGMENTS)

Core principle:

• “An entity shall 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” (PFRS 8)
Scope

• PFRS 8 applies to the separate, individual and consolidated financial statements of an

entity which is publicly listed or in the process of enlisting publicly.
• An unlisted entity that chooses to apply PFRS 8 shall comply with all of the requirements
of PFRS 8; otherwise, it shall not describe the information as segment information.
• If a financial report contains both the consolidated and separate financial statements of a
parent that is within the scope of PFRS 8, segment information is requires only in the
consolidated financial statements.
Operating Segments

• An operating segment is a component of entity:

1. 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),
2. 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
3. For which discrete financial information is available.
Component of an entity

• A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity. It can be generating unit or group of cash generating units.
Reportable Segments

• An entity shall report separately information about each operating segment that:
1. Management uses in making decisions about operating matters or those which
results from aggregating two or more of those segments; and
2. Qualify under the quantitative thresholds
Management Approach

• PFRS 8 adopts a management approach

• Under the management approach, operating segments are identified on the basis of
internal reports that are regularly reviewed by the entity’s chief operating decision maker
in order to allocate resources to the segment and assess its performance.
Aggregation criteria

• Two or more operating segments may be aggregated into a single operating segment if
the segments have similar economic characteristics, and the segments are similar in
each of the following respects:
1. Nature of the products and services;
2. Nature of the production processes;
3. Type or class of customer for their products and services;
4. The methods used to distribute their products or provide their services; and
5. Nature of the regulatory environment, if applicable, e.g., banking, insurance or public
utilities
Quantitative thresholds

• An entity shall report separately information about an operating segment that meets any
of the following quantitative thresholds:
1. The segment’s revenue is at least 10% of the total revenues (external and internal);
2. The segment’s assets is at least 10% of the total assets (external and internal, e.g.,
intersegment receivables)
3. The segments profit or loss is at least 10% of the greater, in absolute amount of:
a) The combined reported profit of all operating segments that did not report a
loss and
b) The combined reported loss of all operating segments that reported a loss.
Changes to a plan of sale

• A non-current asset that ceases to be classified as held for sale shall be measured at the
lower of the asset’s:
1. Carrying amount before it was classified as held for sale, adjusted for any
depreciation, amortization or revaluation that would have been recognized had the
asset not been classified as held for sale, and
2. Recoverable amount at the date of subsequent decision not to sell.
Limit on external revenue

• The total external revenue reported by reportable segments shall at least 75% of the
entity’s external revenue Represents a major line of business or geographical area of
operations;
Disclosure of Major Customer

• A major customer is a single external customer providing revenues of 10% or more of an

entity’s revenues.
Other disclosures

• Entity-wide disclosures apply to all entities subject to PFRS 8 including those entities
that have a single reportable segment.
• Revenues from external customers attributed to the entity’s country of domicile and
attributed to all foreign countries in total from which the entity derives revenues.
 • Non-current assets other than financial instruments, deferred tax assets,
potsemployment benefits assets, and rights arising under insurance contracts located in
the entity’s country of domicile and located in all foreign countries in total in which the
entity hold assets.
Direct costs associated to decision to dispose a component

• Costs or adjustments directly associated with the decision to dispose a component

should be recognized and shown as part of discontinued operations. Examples of such
costs include:
1. Such items as severance pay or employee termination costs,
2. Additional pension costs,
3. Employee relocation expenses, and
4. Future rentals on long-term leases
PFRS 9: (FINANCIAL INSTRUMENTS)
Purpose of PFRS 9

• PFRS 9 establishes financial reporting principles for financial assets and financial
liabilities, particularly their classification and measurement
Initial recognition

• Recognized only when the entity becomes a party

Classification of Financial Assets

• Subsequently measured at:

1. Amortized cost,
2. Fair value through other comprehensive income (FVOCI) or
3. Fair value through profit or loss (FVPL)
Basis of classification

• Classified on the basis of both

1. Business model for managing the financial assets
2. Contractual cash flow characteristics of the financial asset
Classification at Amortized cost

• Financial asset is measured at amortized cost if both conditions are met

1. Objective is to hold financial assets in order to collect contractual cash flows
2. Solely payments of principal and interest on the principal amount outstanding (SPPI)
Classification at Fair value through Other Comprehensive Income

• Financial asset is measured at fair value through other comprehensive income (FVOCI)
if both conditions are met
1. Objective is achieved by both collecting contractual cash flows and selling financial
assets
2. Principal and interest on the principal amount outstanding (SPPI)
Classification at Fair value through Profit or Loss

• Financial asset that does not meet the conditions for measurement at amortized cost or
FVOCI is measured at fair value through profit or loss (FVPL)
Exceptions

• Investment in equity instruments at FVOCI

• Option to Designate a financial asset at FVPL
Investment in equity instrument at FVOCI

• Entity may make an irrevocable election at initial recognition

Option to Designate a financial asset at FVPL

• Entity may irrevocably designate a financial asset

Business Model

• How an entity manages its financial assets in order to generate cash flows whether
1. Hold to collect
2. Hold to collect and sell
• Business model is a matter of fact that is observable through the entity’s activities rather
than merely an assertion
• The assessment of a business model is forward-looking
Hold to collect business model

• Financial assets are managed to realize cash flows by collection payments over the life
of the instrument, consider the following factors when determining whether cash flows
will be generated through collections
1. Frequency, value an timing of sales in prior periods
2. Reasons for those sales
3. Expectations about future sales
• Hold to collect business model is appropriate even when some sales occur or are
expected to occur in the future
Hold to collect and sell business model

• Both collecting and contractual cash flows and selling financial assets are integral to
achieving the entity’s objective of holding financial assets
• This business model will typically involve greater frequency and value of sales This
model may be appropriate when the entity’s objective is
1. Manage everyday liquidity needs,
2. Maintain a particular interest yield profile, to
3. Match the duration of the financial assets to the duration of the liabilities that those
assets are funding
Other business models

• Measured at fair value through profit or loss (FVPL), case for

 1. Debt instrument neither hold to collect nor hold to collect and sell
2. Equity instrument that the entity does not elect to classify as FVOCI
3. Equity or debt instrument of a held for trading security
Held for Trading Security

• Financial asset that is

1. Purpose of selling it in the near term
2. There is evidence of a recent actual pattern of short-term profittaking
3. Derivative
Financial guarantee contract

• Contract that requires the issuer to make specified payments to reimburse the holder for
a loss it incurs because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt instrument
Contractual cash flow characteristic

• Financial assets classified either amortized cost or FVOCI if their contractual terms give
rise on specified dates to cash flows that are solely payments of principal and interest on
the principal amount outspending (SPPI)
• Financial assets that do not qualify under this SPPI test are classified as FVPL
• PFRS 9 provides the following definitions for purposes of applying the SPPI test
1. Principal - Fair value of the financial asset at initial recognition
2. Interest - Consideration for the time value of the money, for the credit risk associated
with the principal amount outstanding during a particular period of time and for other
basic lending risks and costs, as well as a profit margin
Measurement of Financial Assets: Initial Measurement

• Financial assets measured at fair value plus transaction costs, except FVPL
• Financial assets classified as FVPL, initially measured at fair value; transaction costs are
expensed immediately
Transaction price

• Fair value of an asset on initial recognition

Transaction Costs

• Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability
• An incremental Ost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument
Measurement of Financial Assets: Subsequent Measurement

• Financial assets measured at

1. Amortized cost
2. Fair value through other comprehensive income (FVOCI)
3. Fair value through profit or loss (FVPL)
Measurement of Financial Assets: Gains and Losses on FVPL or FVOCI; Amortized Cost

• Financial assets measured at FVPL are recognized in profit or loss

• Financial assets that are mandatorily measure at FVOCI recognized in other
comprehensive income until the financial asset is recognized or reclassified
• Investments in equity securities irrevocably elected to be measured at FVOCI,
recognized in other comprehensive income
• Dividends received are recognized in profit or loss
• Measured at amortized cost
• Fair value changes are not recognized
Amortized Cost

• Amount at which the financial asset or financial liability is measured at initial recognition
minus principal repayments, plus or minus the cumulative amortization using the
effective interest method of any difference between that initial amount and the maturity
amount and, for financial assets adjusted for any loss allowance
Reclassification

• Financial assets reclassified only when the entity changes its business model
• Reclassification of financial assets are applied prospectively from the reclassification
date
Reclassification Date

• The first day of the reporting period following the change in business model that results
in an entity reclassifying financial assets
• Only debt instruments can be reclassified
• Financial assets that are reclassified are remeasured to the fair value on reclassification
date
Impairment

• PFRS 9 uses an expected credit loss model for recognizing impairment losses on debt-
type financial assets that are measured at amortized cost or FVOIC (Mandatory)
General Approach

• Entity recognizes a loss allowance for expected credit losses

1. Loss allowance
2. Expected credit losses
3. Credit losses
12 - month expected credit losses

• Portion of lifetime expected credit losses that represent the expected credit losses that
result from defaults events on a financial instrument that are possible within the 12
months after the reporting date
Credit risk

• Risk that one party to a financial instrument will cause a financial loss for the other party
by failing to discharge an obligation
Lifetime expected credit losses

• Expected credit losses that result from all possible default events over the expected life
of a financial instrument
Derecognition

• Financial assets are derecognised when

1. Contractual rights to the cash flows from the financial asset expire
2. Financial assets are transferred and qualifies for derecognition
Transfers

• Financial asset is transferred

1. Transfers the contractual rights to receive the cash flows of the financial asset
2. Retains the contractual rights to receive the cash flows of the financial asset, but
assumes an obligation to remit the collections to a recipient in an arrangement that
meets all of the condition
a) Entity is not obligated to pay the recipient
b) Entity is prohibited from selling or pledging the original asset
c) Entity is obligated to remit collections to the eventual recipients without
material delay, the entity is prohibited from reinvesting the collections
Evaluation of Transfer

• If the entity transfers substantially all the risks and rewards of ownership of the financial
asset, entity derecognizes the financial asset and recognizes separately as assets or
liabilities any rights and obligations created or retained in transfer
• If the entity retains substantially, entity continues to recognize the financial asset
• Entity determines whether it has retained control of the financial asset:
1. Entity has not retained control, it derecognizes the financial asset
2. Entity has retained control, it continues to recognize the financial asset
Classification of Financial Liabilities

• Financial liabilities subsequently measured at amortised cost except

1. Financial liabilities at fair value through profit or loss (FVPL) and derivative liabilities
2. Financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition
3. Financial guarantee contracts and Commitments to provide a loan at below-market
interest rate
4. Contingent consideration recognized by an acquirer in a business combination
• Reclassification of financial liabilities after initial recognition is prohibited
Measurement of Financial Liabilities

• Financial liabilities measured at fair value minus transaction costs

Measurement of Financial Labilities: Subsequent Measurement

• Financial liabilities classified amortized cost are subsequently measured at amortized

cost
• Financial liabilities held for trading subsequently measured at fair value with changes in
fair values recognized in profit or loss
• Financial liabilities designated at FVPL subsequently measured fair value with changes
in fair values recognized as follows
1. Amount of change in the fair value of the financial liability
2. Remaining amount of change in the fair value of liability