MFRS 8

OPERATING SEGMENT
 Introduction
• Issued by MASB in July 2009
• The standard is applicable to entities:
a. whose equity or debt securities are publicly traded; OR
b. in the process issuing securities to the public; OR
c. who voluntarily providing segmental information
• This standard is to be applied in complete sets of
published financial statements that comply with
Financial Reporting Standards.
• An entity that presents its own and consolidated
financial statements has to present information on its
reportable segments only on the basis of the
consolidated financial statements.
• Sets out guidelines on how an entity should report
information about its operating segments in the
annual financial statements and interim financial
reports.
• Sets out the disclosure requirements about the
related products and services, geographical areas
and major customers
• Information about the different business activities
and economic environment is important to assist
users of FS to:
1.Better understand the entity’s past performance;
2.Better assess the entity’s risks and returns; and
3.Make more informed judgement about the entity as
a whole
 Operating Segments (MFRS 8 – para 5)

An operating segment is a component of an entity:

a. That engages in business activities from which it

earns revenue or incur expenses (including inter-
segment transactions),

b. Whose activities are regularly reviewed by the chief

operating decision maker for resource allocation and
assessing performance,

c. For which discrete financial information is

available.
Not operating segments

- head office
- research and development department

Unless they undertakes business activities, such as

treasury functions by the head office and earns
interest.
 What or who is a chief operating
decision maker?
• CODM is a function and not necessarily a person.
That function is to allocate resources to, and assess
the performance of, the operating segments.
• It is likely to vary from entity to entity – it may be the
CEO, the chief operating officer, the senior
management team or the board of directors.
• The title or titles of the person(s) identified as CODM
is not relevant, as long as it is the person(s)
responsible for making strategic decisions about the
entity’s segments.
Identifying reportable segments
• If a particular product or service of the entity is significant
and constitutes as an identifiable business in which the
entity operate, then the product or service would be
reported as a separate operating segment.
• For example: construction activities, property
development activities, hotel operation, banking
operation, insurance operation, oil palm plantation and
etc.
• Not all operating segments need to be separately
reported. Operating segments are only required to be
reportable if they exceed quantitative thresholds.
• Two or more operating segments may be combined
(aggregated) and reported as one if certain conditions are
satisfied.
 Aggregation of Operating Segments
MFRS 8 allows the entity to aggregate similar operating
segments if they meet the following criteria:
1. Segments have similar long-term financial
performance (eg; long-term average gross margins)
2. Segments have similar economic characteristics
3. Segments are similar in the following respects:
 Nature of products or services
 Nature of production process

 Type or class of customers

 Method to distribute their products and services

 Nature of regulatory environment, for example,

banking, insurance or public utilities
Based on the above criteria, only highly homogenous
operating segments are allowed to be aggregated.
 Thresholds for Reportable
Segment (10% Threshold)
For reporting purpose, a reportable segment is one that meets any
one of the following quantitative thresholds:
i. Revenue
Its reported revenues from sales to external customers and
inter-segment sales is 10% or more of the combined revenues
(inernal and external) of all operating segments; or
ii. Results/Profits
The absolute amount of the segment’s reported profit or loss is
10% or more of the greater of (in the absolute amount):
• The combined reported profit of all segments reporting
profits, or
• The combined loss of all segments reporting losses
iii. Assets
The segment assets are 10% or more of the total assets of all
operating segments.
Illustration: Significance Tests—Segmental Reporting

Bacon Industries operates in seven different segments.

Information concerning the operations of these segments for the
most recent fiscal period follows:

Operating Revenue Operating Identifiable

Segment Total Intersegment Profit (Loss) Assets
1 $ 4,200 $ 800 $ (600) $ 7,000
2 6,000 1,200 2,000 8,800
3 51,000 7,000 2,100 35,400
4 48,000 - 8,800 37,600
5 13,000 - 3,200 14,000
6 64,500 3,400 4,900 52,000
7 12,000 2,000 (3,000) 16,400
Standards of Financial Accounting and Reporting

Required: Determine which of the segments must be treated

as reportable segments.
Revenue Test

Operating Total % of Total Reportable

Segment Revenue Revenue Segment
1 $ 4,200 2.1% No
2 6,000 3.0% No
3 51,000 25.7% Yes
4 48,000 24.2% Yes
5 13,000 6.5% No
6 64,500 32.5% Yes
7 12,000 6.0% No
$ 198,700 100.0%

Summary: Segments 3, 4 and 6

are reportable segments.
Standards of Financial Accounting and Reporting

Required: Determine which of the segments must be treated

as reportable segments.

Operating Profit Test

% of Largest
Operating Operating Operating of Op. Profit Reportable
Segment Profit Loss or Op. Loss Segment
1 $ (600)
2 $ 2,000 9.5% No
3 2,100 10.0% Yes
4 8,800 41.9% Yes
5 3,200 15.2% Yes
6 4,900 23.3% Yes
7 (3,000)
$ 21,000 $ (3,600)
Summary: Segments 3, 4, 5,
and 6 are reportable segments.
Standards of Financial Accounting and Reporting

Required: Determine which of the segments must be treated

as reportable segments.

Identifiable Assets Test

Operating Identifiable Reportable

Segment Assets % of Total Segment
1 $ 7,000 4.1% No
2 8,800 5.1% No
3 35,400 20.7% Yes
4 37,600 22.0% Yes
5 14,000 8.2% No
6 52,000 30.4% Yes
7 16,400 9.6% No
$ 171,200

Summary: Segments 3, 4 and 6

are reportable segments.
If a segment does not meet the 10% threshold
criteria:
• It can be designated as a reportable segment despite
its size;
• It can be combined with other similar segments that
are also below the thresholds of significance for the
purpose of meeting the 10% test; or
• It is included as an ‘all other segments’ category.
Minimum number of reportable segments
– 75% Rule
• After determining the reportable segments, the
entity should ensure that the total external
revenue attributable to those reportable segments is
at least 75% of the entity’s total revenue.
• When the 75% threshold is not met, additional
reportable segments should be identified (even if
they do not meet the 10% thresholds), until at least
75% of the entity’s total external revenue is included
in its reportable segments.
Standards of Financial Accounting and Reporting

75% Test

Operating Revenue Revenue from

Segment Total Intersegment External
1 $ 4,200 $ 800 3,400
2 6,000 1,200 4,800
3 51,000 7,000 44,000 External
4 48,000 - 48,000 Revenue from
5 13,000 - 13,000 reportable
segments
6 64,500 3,400 61,100
7 12,000 2,000 10,000 $153,100
$ 198,700 $ 14,400 $ 184,300

External revenue (reportable segments) RM153,100

= 77.05%
Total revenue RM198,700
 Number of reportable segments

• Not specified by Standard

• >10, practical limitation?

 Change in reportability status

• Reportable segment last reporting period but fail 10%

threshold test in current reporting period:
• Continue as reportable segment if information is
significant
• New reportable segment identified this period, fail the
10% threshold test in last reporting period:
• Restate report of last period to include new segment
 Disclosures
• Factors used to identify reportable segments
• Types of products/services generating revenue
• Profit or loss from operation:
• Revenue from external customer & inter-segmental
sales
• Interest income & expense
• Depreciation & amortisation
• Material items of income & expense (eg, impairment)
• Entity’s share of P/L of associates & JVs under equity
accounting
• Tax expense/income
• Material non-cash item (apart from depn &
amortisation)
• Total assets & liabilities
• Investment in associates & JVs under equity
accounting
• Additions to NCA other than financial instruments,
deferred tax assets, retirement benefit assets, &
rights to insurance contracts (Example: properties)
• Reconciliations of:
• Revenues
• P/L before tax & discontinued operations
• Assets & liabilities
• Other reported material items
• Entities-wide disclosures:
The following information is required if it is not already provided as
part of reportable segment information:
•Information about products and services - External revenues
obtained from each product/service
•Information on geographical areas:
• External revenues from each country of domicile & from all
foreign countries
• NCA other than financial instruments, deferred tax assets,
retirement benefit assets, & rights to insurance contracts
located in each country of domicile & all foreign countries
•Information about major customer
• If ≥ 10% of the total external revenue is derived from a single
customer, entity must disclose:
• Total amount derived from that customer
• Identity of the operating segment/s reporting the revenue
• Identity of the customer & amounts derived by individual
reportable segments need not be disclosed.
 Example of format for disclosing information
about reportable segment P/L, Assets and
Liabilities – Segment Report
Car Motor software Electronic Finance All Total
parts vessels other  
  RM’M RM’M RM’M RM’M RM’M RM’M RM’M

Revenue:              

External 3,000 5,000 9,500 12,000 5,000 1,000 35,500

Internal - - 3,000 1,500 - - 4,500

Total Revenue 3,000 5,000 9,500 13,500 5,000 1,000 40,000

Interest Revenue 450 800 1,000 1,500 - - 3,750

Interest Expense 350 600 700 1,10 - - 2,750

Depreciation and 200 100 50 1,500 1,100 - 2,950

amortisation
Segment profit 200  70 900  2,300 500 100  4,070

Segment assets 2,000 5,000 3,000 12,000 57,000 2,000  81,000

Segment liabilities 1,050 3,000 1,800 8,000 30,000 -  43,850 

 Example of disclosure on geographical
information
Geographical information Revenues NCA (RM)
(RM)
Malaysia 8,000 15,000
United States of America 2,000 3,000
China 1,000 2,000
Japan 1,500 2,000
Singapore 2,000 3,000
Other countries 300 600
Total 14,800 25,600
 Example of disclosure on Major
Customers
Major customers
Revenue from one customer of Conglomerate Group’s power
segment represent approximately RM2 billion of the Group’s
total revenues

Revenue from two single customers of the Conglomerate

Group’s oil and gas segment represent approximately RM800
million and RM600 million respectively of the Groups' total
revenue
 Measurement basis
• All items reported in the segments should be
measured using the same basis used in the report to
CODM
• For example application of FV model for Investment
property in the report to CODM as compared to cost
model
• If CODM uses more than 1 basis of measurement to
make decision, entity may choose the measurement
which is more consistent with the basis used to
prepare entity’s financial statements
 Reconciliation Statement
The entity has to provide reconciliations of the totals
disclosed in the segment report to the amounts reported
in the financial statements:

• Segment revenue
• Segment profit or loss before tax and discontinued
operations, or profit after tax if income tax is allocated to the
various segments.
• Segment assets
• Segment liabilities (if reported)
• Other material amounts
 Revenue
RM
Total revenue for reportable segments 15,700
Other revenues 500
Elimination of inter-segment revenues (700)
Entity’s revenues 15,500

Assets
RM
Total assets for reportable segments 26,000
Investment in associates 4,500
Other Assets 1,000
Elimination of receivable from headquarters (500)
Other unallocated amounts 400
Entity’s assets 31,400
 Liabilities
RM
Total liabilities for reportable segments 8,000
Unallocated retirement benefits liabilities 500
Entity’s liabilities 8,500

Profit or loss
RM
Total profit or loss for reportable segments 3,250
Share of profit of associates 800
Other profit or loss 50
Elimination of inter-segment profits (100)
Unallocated amounts:
litigation settlement received 40
Other corporate expenses
Entity’s profit or loss before taxation 3,890
 Other material items
Reportable Adjustments Entity totals
segments (RM)
Interest revenues 3,750 (40) 3,710
Interest expenses 2,750 30 2,780
Expenditure for assets 2,350 300 2,680
Depreciation and amortization 2,450 - 2,450
Impairment of assets 300 - 300
The reconciling item to adjust expenditure for assets is the amount incurred for
the corporate headquarter building which is not included in the segment
information. None of the other adjustment are material
 Restatement of information for prior
periods
• If entity changes the structure of its internal organization
and the change affects the composition of its reportable
segment to change:
• Restate comparative statement of prior periods, and
disclose whether all corresponding items have been
restated
• If chose not to restate: prepare segmental reports in old
and new segmentation basis.
• Entity is allowed not to restate if information for
restatement not available/too costly to obtain/develop
• Disclose reason for not restating prior period
information