FRS 114-SEGMENT FRS 114-SEGMENT REPORTINGREPORTING

INTRODUCTION

• FRS 114 begin 1 Jan 2002 onwards

• Cover the presentation of financial information by business and geographical segments

• Applies to enterprises

- whose equity or debt securities are public traded

- that are in the process of issuing equity or debt securities in public markets

FRS 114 define business segment as:

“a distinguishing component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments”

Factors to be considered in

determining whether the products and services

are relatedNature of products

and services

Nature of the production processes

Type or class of customer for products and

services

Methods used to distribute products or provide services

Nature of the regulatory

environment

FRS 114 also define geographical segment as:

“a distinguishing component of an enterprise that is engaged in providing product or service within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environment”

Factors in identifying

geographical segments

Similarity of economic and

political condition

Relationships between operation in

different geographical area

Proximity of operation

Special risks associated with operation in a particular area

Exchange control

regulation

The underlying

currency risks

Geographical segments may be based on

Location of enterprise’s product or service facilities and other assets

(origin sales)

Location of its markets or customers

(destination of sales)

REPORTABLE SEGMENTSREPORTABLE SEGMENTS

Q: Q: What made a business/geographical segment reportable???What made a business/geographical segment reportable???A: Majority of its revenue is derived from sales to external customers AND satisfies A: Majority of its revenue is derived from sales to external customers AND satisfies one of these three tests :- one of these three tests :-

• Revenue test: revenue from sale to external and inter segment sales is Revenue test: revenue from sale to external and inter segment sales is 10% or more as compared to the combined revenues.10% or more as compared to the combined revenues.

• Profit/Loss test: the profit/loss is 10% or more as compared to combined Profit/Loss test: the profit/loss is 10% or more as compared to combined results of segmentsresults of segments

• Asset test: the segment’s assets are 10% more of the total assetAsset test: the segment’s assets are 10% more of the total asset

Q: What about other segments which does not satisfy the “10% test”???Q: What about other segments which does not satisfy the “10% test”???A: Well, they could be :-A: Well, they could be :-

• treated as a reportable segment nevertheless despite its sizetreated as a reportable segment nevertheless despite its size

• combined with other similar segments for the purpose of meeting the combined with other similar segments for the purpose of meeting the 10% threshold10% threshold

• included as an unallocated reconciling itemincluded as an unallocated reconciling item

REPORTABLE SEGMENTSREPORTABLE SEGMENTS

Materiality test: Materiality test: reportable segment must be substantial portion of the reportable segment must be substantial portion of the operations. Hence, additional segments (<10%) should be identified as operations. Hence, additional segments (<10%) should be identified as reportable segment so that combined revenues at least 75% of total revenues.reportable segment so that combined revenues at least 75% of total revenues.

Emphasis on “comparability” Emphasis on “comparability” (between current & previous year) (between current & previous year) :-:-

• Segment reported in the previous year.Segment reported in the previous year.Q: Q: Is it still considered as a reportable segment in the current Is it still considered as a reportable segment in the current

year??year??A: A: Yes.Yes.

• Segment is reportable in the current period.Segment is reportable in the current period.Q: Q: What about prior period data???What about prior period data???A: A: It should be presented for comparative purposes. It should It should be presented for comparative purposes. It should

also also need to be restated to reflect the newly reportable segment as need to be restated to reflect the newly reportable segment as a a separate segment, unless it is not practical to do so. separate segment, unless it is not practical to do so.

IDENTIFICATION OF PRIMARY & SECONDARY SEGMENTSIDENTIFICATION OF PRIMARY & SECONDARY SEGMENTS

Earlier, we learned that there are two types of reportable segments:-Earlier, we learned that there are two types of reportable segments:-

a)a) Business segmentBusiness segment

b)b) Geographical segmentGeographical segment

Now, we will learn how to identify which segment is to adopt the primary Now, we will learn how to identify which segment is to adopt the primary format or the secondary format.format or the secondary format.

Q: Q: How do we determine whether they are primary segment or secondary How do we determine whether they are primary segment or secondary segment???segment???

A: A: A primary segment is the dominant source and nature of an A primary segment is the dominant source and nature of an enterprise’s enterprise’s risks and return. risks and return. The basis to identify these risks and The basis to identify these risks and return is by examining the internal organizational and management return is by examining the internal organizational and management structure as well as the internal financial reporting system.structure as well as the internal financial reporting system.

IDENTIFICATION OF PRIMARY & SECONDARY SEGMENTSIDENTIFICATION OF PRIMARY & SECONDARY SEGMENTS

When theWhen the primary primary format is format is businessbusiness segment and the segment and the secondarysecondary segment segment is the is the geographicalgeographical segment:- segment:-

i.i. Where risks and return are affected predominantly by differences in Where risks and return are affected predominantly by differences in products and servicesproducts and services

ii.ii. Where risks and return are affected by BOTH products/services Where risks and return are affected by BOTH products/services differences and differences in geographical operating area.differences and differences in geographical operating area.

When theWhen the primary primary format is format is geographicalgeographical segment and the segment and the secondarysecondary segment is thesegment is the business business segment:- segment:-

i.i. Where risks and return are affected predominantly by differences in Where risks and return are affected predominantly by differences in the operating countries/geographic areas.the operating countries/geographic areas.

Q: Q: What if differences in products/services or geographical areas are NOT the What if differences in products/services or geographical areas are NOT the basis for the internal organizational and management structure as well as basis for the internal organizational and management structure as well as the internal reporting system?the internal reporting system?

A: A: Management and directorsManagement and directors will then determine which of these are the will then determine which of these are the dominant source in identifying primary and secondary segment.dominant source in identifying primary and secondary segment.

Disclosure Requirements – Primary SegmentsDisclosure Requirements – Primary Segments

Segment revenue from external customer salesSegment revenue from external customer sales Segment revenue from inter-segment transfersSegment revenue from inter-segment transfers Segment resultsSegment results Segment assetsSegment assets Segment liabilitiesSegment liabilities Capital expenditureCapital expenditure Depreciation and amortization expensesDepreciation and amortization expenses Other significant non-cash expensesOther significant non-cash expenses Share of profit/loss of associate, joint ventures and other Share of profit/loss of associate, joint ventures and other

equity accounted-for investments*equity accounted-for investments* The related aggregate investments, if item * is disclosedThe related aggregate investments, if item * is disclosed

Secondary SegmentsSecondary Segments

1) Primary format-business segments and 21) Primary format-business segments and 2ndnd-geography-geography Segment from external customer revenues Segment from external customer revenues Segment assetsSegment assets Capital expenditureCapital expenditure2) Primary-geographical segments based on location2) Primary-geographical segments based on location of assets and 2of assets and 2ndnd-business segments -business segments Segment from external customer revenues Segment from external customer revenues Segment assetsSegment assets Capital expenditureCapital expenditureAlso, report revenue for each customer-based geographicalAlso, report revenue for each customer-based geographicalsegment whose revenue is at least 10%segment whose revenue is at least 10%

Continued…Continued…

3) Primary-geographical segments based on location of 3) Primary-geographical segments based on location of customers and 2customers and 2ndnd-business segments-business segments

Segment from external customer revenues Segment from external customer revenues Segment assetsSegment assets Capital expenditureCapital expenditure

Also, disclosure for each asset-based geographicalAlso, disclosure for each asset-based geographical

segment whose segment assets are at least 10% of thesegment whose segment assets are at least 10% of the

total assets of the enterprise or grouptotal assets of the enterprise or group Segment assetsSegment assets Capital expenditureCapital expenditure

Other Disclosure MattersOther Disclosure Matters1.1. Description of the business and geographical segments.Description of the business and geographical segments.

2.2. Basis of pricing of inter-segment transfers, and any change Basis of pricing of inter-segment transfers, and any change

therein.therein.

3.3. Revenue-(Revenue-(business or geographical segment) business or geographical segment) whose whose total total

revenue is > 10%revenue is > 10% of enterprise revenue but not a reportable of enterprise revenue but not a reportable

segment because a segment because a majority revenue come from internal majority revenue come from internal

transfers.transfers.

4.4. Changes in accounting policies-have Changes in accounting policies-have material effectmaterial effect..

5.5. Changes to the identification of segments.Changes to the identification of segments.

Voluntary Disclosure Voluntary Disclosure (Encourage)(Encourage)

i.i. All the primary segments disclosure for each of its All the primary segments disclosure for each of its

reportable secondary segment.reportable secondary segment.

ii.ii. The nature and amount of any items of segment The nature and amount of any items of segment

revenue and segment expense (i.e.-size, nature, or revenue and segment expense (i.e.-size, nature, or

incidence) relevant to performance of each incidence) relevant to performance of each

reportable segment.reportable segment.

Definition of segment disclosure Definition of segment disclosure itemsitems

Segment RevenueSegment Revenue Revenue reported in the enterprise or group’s Revenue reported in the enterprise or group’s

income statement that isincome statement that is Directly attributable to a segment; andDirectly attributable to a segment; and Can be allocated on a reasonable basis to a segmentCan be allocated on a reasonable basis to a segment

Segment ExpenseSegment Expense Expense from the operating activities of a segment Expense from the operating activities of a segment

that is:that is: Directly attributable to a segment; andDirectly attributable to a segment; and Can be allocated on a reasonable basis to a segmentCan be allocated on a reasonable basis to a segment

Definition of segment disclosure Definition of segment disclosure itemsitems

Segment Result Segment Result Segment revenue less segment expense.Segment revenue less segment expense. Determined before any adjustment of taxation, Determined before any adjustment of taxation,

share of profits or losses from equity method share of profits or losses from equity method investment and minority interest.investment and minority interest.

Definition of segment disclosure itemsDefinition of segment disclosure items

Segment AssetsSegment Assets Operating assets employed by a segment in its operating Operating assets employed by a segment in its operating

activities that are:activities that are: Directly attributable to a segment; ANDDirectly attributable to a segment; AND Can be allocated on a reasonable basis to a segmentCan be allocated on a reasonable basis to a segment

Determined based on the net book values in BS and do not Determined based on the net book values in BS and do not include income tax assets.include income tax assets.

Cost incurred to acquired the asset during the accounting Cost incurred to acquired the asset during the accounting period that are expected to be used for more than one period that are expected to be used for more than one period is referred to as period is referred to as capital additions or capital capital additions or capital expenditure.expenditure.

Definition of segment disclosure itemsDefinition of segment disclosure items

Segment LiabilitiesSegment Liabilities Operating liabilities that result from the operating Operating liabilities that result from the operating

activities of the segment that are:activities of the segment that are: Directly attributable to a segment; ANDDirectly attributable to a segment; AND Can be allocated on a reasonable basis to a segmentCan be allocated on a reasonable basis to a segment

Do not include income tax liabilitiesDo not include income tax liabilities Above definitions are interrelated, i.e.;Above definitions are interrelated, i.e.;

If segment result include interest-segment liabilities If segment result include interest-segment liabilities include the related interest-bearing costinclude the related interest-bearing cost

If segment result includes dividend income-segment If segment result includes dividend income-segment assets must include investment related.assets must include investment related.

If segment asset include goodwill- segment expenses If segment asset include goodwill- segment expenses should include the amortization of goodwill.should include the amortization of goodwill.

SUMMARYSUMMARY

Segment Reporting

Identification of Business Segment

Identification of Primary and Secondary Segments

GeographicalBusiness Location of markets orCustomers

(destination of sales)

Products or Service facilities (origin of sales)

Dominant Source and nature of risks and returns

Primary•Revenue•Results•Assets•Liabilities•Capital Expenditure•Depreciation/Amortization other non-cash expenses

Secondary•Revenue ext•Assets•Capital expenditures

Information to be disclosed

Reportable Segment•10% Rule•75% Rule

Ext

Int