lecture note on IFRS 8 AND IAS for under.ppt

At the completion of studying this chapter, you will be able to:

define what is operating segment and interim report
explain the benefit of segment reporting
Explain the criteria by which segment is qualified/identified
identify the kind of required disclosure for a segment
distinguish between the accounting treatment for segment and interim reporting for a segment under US GAAP and IFRS

1. IFRS 8 and IAS 34
Operating Segment Reporting
and
Interim Reporting
1

2. LEARNING OBJECTIVES
At the completion of studying this chapter, you will be able to:
•define what is operating segment and interim report
•explain the benefit of segment reporting
•Explain the criteria by which segment is qualified/identified
•identify the kind of required disclosure for a segment
•distinguish between the accounting treatment for segment and
interim reporting for a segment under US GAAP and IFRS
2

3. LIST OF APPLICABLE IFRS
Topic List Standards
Operating Segment reporting IFRS 8
Interim Reporting IAS 34
3

4. Introduction IFRS 8
The objective of IFRS 8 IS:
to prescribe the accounting treatment for:
―Operating segment reporting.
―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
4

5. What is an Operating Segments?
●An operating segment is a component of an enterprise:
That engages in business activities from which it earns
revenues and incurs expenses
Whose operating results are regularly reviewed by the
chief operating decision maker to assess performance and
make resource allocation decisions
For which discrete financial information is available
5

6. RATIONALE FOR SEGMENT REPORTING
●Segment reporting provides information to help users of
financial statements to:
Better understand the entity’s performance.
Better assess the entity’s prospects for future cash flow.
Make more informed judgments about the enterprise as a whole.
6

7. Introduction
•The IFRS 8 requires an entity to report
– a measure of operating segment profit or loss and of
segment assets.
–a measure of segment liabilities and particular income
and expense items if such measures are regularly
provided to the chief operating decision maker.
•The term ‘chief operating decision maker’(CODM)
identifies a function, not necessarily a manager with
a specific title.
–That function is to allocate resources to and assess the
performance of the operating segments of an entity
7

8. Introduction
•The IFRS requires an entity to report information about
–the revenues derived from its products or services (or
groups of similar products and services),
Product/Services
–the countries in which it earns revenues and holds assets,
and
Countries
–major customers, regardless of whether that information is
used by management in making operating decisions.
Customer
8

9. Introduction
•The IFRS also requires an entity to give descriptive
information about the way
–the operating segments were determined,
–the products and services provided by the segments,
–differences between the measurements used in reporting segment
information and those used in the entity’s financial statements,
and changes in the measurement of segment amounts from
period to period.
9

10. THE SCOPE OF IFRS 8
This IFRS shall apply to:
a)the separate or individual financial statements of an
entity:
lwhose debt or equity instruments are traded in a public
market (a domestic or foreign stock exchange or an over-
the-counter market, including local and regional markets),
(TRADE) or
lthat files, or is in the process of filing, its financial
statements with a securities commission or other
regulatory organization for the purpose of issuing any class of
instruments in a public market; PURPOSE and
10

11. THE SCOPE OF IFRS 8
b)The consolidated financial statements of a group with a
parent:
i.whose debt or equity instruments are traded in a public
market (a domestic or foreign stock exchange or an over-
the-counter market, including local and regional markets),
or
ii.that files, or is in the process of filing, the consolidated
financial statements with a securities commission or other
regulatory organization for the purpose of issuing any
class of instruments in a public market.
11

12. Reportable segments
•The IFRS requires an entity to report financial and
descriptive information about its reportable segments.
•Reportable segments are operating segments or aggregations
of operating segments that meet specified criteria.
How to aggregate operating segments?
12

13. 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:
the nature of the products and services;
 the nature of the production processes;
the type or class of customer for their products and
services;
the methods used to distribute their products or provide
their services; and
if applicable, the nature of the regulatory environment,
for example, banking, insurance or public utilities.
13

14. Reportable segment Criteria:
•Quantitative thresholds
•An entity shall report separately information about an
operating segment that meets any of the following
quantitative thresholds: AT LEAST ONE
a)Its reported revenue, including both sales to external
customers and intersegment sales or transfers, is 10 per cent
or more of the combined revenue, internal and external, of all
operating segments. Revenue Test
b)The absolute amount of its reported profit or loss is 10
per cent or more of the greater. Profit/Loss Test
c) Its assets are 10 per cent or more of the combined
assets of all operating segments. Asset Test
14

15. OPERATING SEGMENT TESTS - OTHER GUIDELINES
●The combined sales revenues of the disclosed segments
must be at least 75% of total company sales, excluding intra-
entity sales.
●Segments must be added until the 75% test is met (even if
the additional segments do not meet the reportable segment
criteria).
●Although a maximum number is not prescribed, authoritative
literature suggests that 10 separately reported segments
might be the practical limit.
15

16. Reportable segment Criteria:
•Contrary to the Criteria
•Operating segments that do not meet any of the
quantitative thresholds may be considered reportable,
and separately disclosed, if management believes that
information about the segment would be useful to users of
the financial statements.
•An entity may combine information about operating
segments that do not meet the quantitative thresholds with
information about other operating segments that do not
meet the quantitative thresholds to produce a reportable segment
only if the operating segments have similar economic
characteristics and share a majority of the aggregation
criteria .(similar economic characteristics)
16

17. Not operating segments
•Not every part of an entity is necessarily an operating
segment or part of an operating segment.
–For example, a corporate headquarters or some functional
departments may not earn revenues or may earn revenues
that are only incidental to the activities of the entity and
would not be operating segments.
•For the purposes of this IFRS, an entity’s post-
employment benefit plans are not operating segments.
17

18. Measurement
•Uses only one measure
•If the CODM uses only one measure of an operating segment’s
profit or loss, the segment’s assets or the segment’s liabilities in
assessing segment performance and deciding how to allocate
resources, segment profit or loss, assets and liabilities shall be
reported at those measures.
•Uses more than one measure
•If the CODM uses more than one measure of an operating
segment’s profit or loss, the segment’s assets or the segment’s
liabilities, the reported measures shall be those that management
believes are determined in accordance with the measurement principles
most consistent with those used in measuring the corresponding
amounts in the entity’s financial statements.
18

19. Measurement: Segment Vs Entity
•An entity shall provide an explanation of the
measurements of segment profit or loss, segment
assets and segment liabilities for each reportable
segment. At a minimum, an entity shall disclose the
following:
–the basis of accounting for any transactions between reportable segments.
–the nature of any differences between the measurements of the reportable
segments’ assets and the entity’s assets .ASSETS
–the nature of any differences between the measurements of the reportable
segments’ liabilities and the entity’s liabilities . LIABILITIES
–the nature of any differences between the measurements of the reportable
segments’ profits or losses and the entity’s profit or loss before income tax
expense or income and discontinued operations. P/L
19

20. Disclosure
•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.
A. general information
B.information about reported segment profit or loss and
C. reconciliations of the totals of segment
corresponding entity amounts
20

21. Disclosure
General information
•factors used to identify the entity’s reportable segments, products and services,
geographical areas, regulatory environments, or a combination of factors and
whether operating segments have been aggregated
Segment profit or loss
•revenues from external customers;
•revenues from transactions with other operating segments of the same entity;
•interest revenue;
•interest expense;
•depreciation and amortisation;
•material items of income and expense ,
•the entity’s interest in the profit or loss of associates and joint ventures
accounted for by the equity method;
• income tax expense or income; and
• material non-cash items other than depreciation and amortisation.
Reconciliations of the totals of segment corresponding entity amounts
21

22. GEOGRAPHIC AREAS
●Revenues from external customers and long-lived
assets must be disclosed for:
The domestic country.
All foreign countries where the enterprise
derives revenue or holds assets.
Each foreign country in which a material
amount of revenue is derived or assets are held.
LO 4
22

23. MAJOR CUSTOMERS
●When 10% or more of a company’s revenue is
derived from a single customer, the company
must disclose that it has a major customer.
●The IDENTITY of the major customer
need not be disclosed.
LO 5
23

24. IFRS Vs GAAP
●IFRS and GAAP are substantially the same, except…
IFRS requires disclosure of total assets AND liabilities if
that information is provided to the chief decision maker.
IFRS specifically includes intangible assets as long-lived assets.
In a company with a matrix form of organization, IFRS
permits operating segments to be based on geographic
area, as opposed to products/services.
24

25. INTERIM REPORTING: IAS 34
LO 7
25

26. Objective of IAS 34
•The objective of this Standard is
–to prescribe the minimum content of an interim financial
report and
–to prescribe the principles for recognition and
measurement in complete or condensed financial
statements for an interim period.
26

27. What is an Interim financial reporting ?
•An interim financial report is a financial report that
contains either a complete or condensed set of
financial statements for a period shorter than an entity’s
full financial year.
•Timely and reliable interim financial reporting
improves the ability of investors, creditors, and
others to understand an entity’s capacity to generate
earnings and cash flows and its financial condition
and liquidity.
27

28. INTERIM REPORTING
●To provide more timely information, the SEC
requires quarterly statements from publicly-
traded companies in the U.S.
●But how do the statements fairly reflect expenses
that do not occur evenly throughout the year?
LO 7
28

29. Scope IAS 34
•This Standard does not mandate which entities should
publish interim financial reports, how frequently, or
how soon after the end of an interim period.
•In IASC’s judgement, those matters should be decided by
national governments, securities regulators, stock
exchanges, and accountancy bodies.

•This Standard applies if a company is required or
elects to publish an interim financial report in
accordance with Standards..
29

30. Scope IAS 34
•The IASC encourages publicly traded entities to
provide interim financial reports that conform to the
recognition, measurement, and disclosure principles
set out in this Standard.
•Specifically, publicly traded entities are encouraged:
(a) to provide interim financial reports at least as of the
end of the first half of their financial year; and
(b) to make their interim financial reports available not
later than 60 days after the end of the interim period.
30

31. Recognition and measurement
Same accounting policies as annual
An entity shall apply the same accounting policies in its interim
financial statements as are applied in its annual financial
statements,
●IAS 34 requires each interim period to be treated as a discrete
period in determining the amounts to be recognized.
●Expenses that are incurred in one quarter are recognized in full in
that quarter, even though the expenditure benefits the entire year.
●No accrual of expenses in earlier quarters for expenses
expected to be incurred in a later quarter of the year.
●The only exception to this rule is the accrual of income tax
expense at the end of each interim period.
31

32. Recognition and measurement
•Discrete approach vs. integral approach
–The same accounting policies are applied in an entity’s
interim financial statements as are applied in its annual
financial statements.
–Interim financial reporting according to IAS 34 is
primarily based on a discrete view.
–By contrast, interim financial reporting according to US
GAAP is more based on an integral view.
32

33. Discrete
•Under the discrete approach (IAS 34) interim period
profit or loss is measured by viewing each interim
period separately and not by anticipation of the annual
financial statements.
–For assets, the same tests of future economic benefits
apply at interim dates as at the end of the financial year.
–Costs that by their nature would not qualify as assets at
the financial year-end would not qualify at interim dates
either.
–Similarly, a liability at the end of an interim period has to
represent an existing obligation at that date, just as it must
at the end of an annual reporting period.
33

34. Integral
•Under the integral approach, interim period profit or
loss is measured by viewing each interim period as an
integral part of the corresponding annual period.
•The interim report is intended to enable forecasts of
the annual financial statements.
–For example, it may be the case that an entity performs the day-to-
day servicing for its machines during its off-season, which is the first
quarter of the year. The expenditures for this work do not qualify
for capitalization in the entity’s annual financial statements as at
Dec 31.
34

35. Discrete VS Integral
•Under the discrete approach, the total of these
expenditures would be recognized in profit or loss
in the entity’s first quarterly financial statements as at
Mar 31 .
•However, under the integral approach, an appropriate
portion of these expenditures is allocated to each
interim period of the year.
35

36. Significant events and transactions
•An entity should include an explanation of
events and transactions that are significant to
an understanding of the changes in financial
position and performance of the entity since
the end of the last annual reporting period

37. Periods and dates to be presented in interim reports
•The statement of financial position has to be presented as at
the end of the current interim period and as at the end of the
immediately preceding financial year.
•The single statement of comprehensive income (one
statement approach) have to be presented for the following
periods:
– Current interim period
– Cumulatively for the current financial year to date
– Comparable periods (current and year-to-date) of the immediately
preceding financial year
•The statement of changes in equity and the statement of
cash flows are presented cumulatively for the current financial
year to date with a comparative statement for the comparable
year-to-date period of the immediately preceding financial year.
LO 7
37

38. Example: Statements required for entities that report half-yearly
Current Reporting
Period Comparative
Statement of Financial
Position 30 June 2012
31 December
2011
Statement of profit or loss and
other comprehensive income
(and, where applicable,
separate income statement) –
6 months ended 30 June 201230 June 2011
Statement of changes in equity
– 6 months ended 30 June 201230 June 2011
Statement of cash flows – 6
month ended 30 June 201230 June 2011

39. Measurement
•Same accounting policies as those in annual
financial statements
•Revenues received occasionally, seasonally or
cyclically should not be anticipated or
deferred
•Costs incurred unevenly during the financial
year should only be anticipated or deferred if
it would be appropriate to do so in the annual
FS

40. Examples of measurement principles
Employee payroll taxes and insurance contributions In some
countries these are assessed on an annual basis but paid at an uneven
rate during the year. It is therefore appropriate, in this situation, to
adopt an estimated average annual tax rate for the year in an interim
statement, not the actual tax paid. Taxes are average annual
assessment, but payment is uneven.
Cost of a planned major periodic overhaul The cost of such an
event must not be anticipated unless there is a legal or constructive
obligation to carry out the work. A mere intention to carry out work
later in the year is not sufficient justification to create a liability.
Year end Bonus This should not be provided in the interim report
unless there is a constructive obligation to pay such a bonus and it can
be reliably measured.

41. Examples of measurement principles
Intangible asset IAS 34 must follow IAS 38 Intangible
assets and thus it would be inappropriate in an interim
report to defer a cost in the expectation that it will
eventually be part of a non monetary intangible asset that
has not yet been recognised.
Holiday pay If holiday pay is an enforceable obligation
on the employer, than any unpaid accumulated holiday pay
should be accrued in the interim report.
Tax on income An expense for tax should be included in
the interim report and the tax rate should be estimated
average annual tax rate for the year.

42. Example: Tax on income
1. Assume a quarterly reporting entity expects to earn €10,000
pre-tax each quarter and operates in a tax jurisdiction with a tax
rate of 20% on the first €20,000 and 30% on all additional
earnings.
If actual earnings match expectations, the tax reported in each
quarter is as follows:
Tax expense: €2,500; €2,500; €2,500; €2,500 = Total €10,000
Total earnings estimate: €40,000 (€20,000 x 20%) = €4,000 +
€20,000 x 30% = €6,000 (i.e. €10,000 / 4 = €2,500)
 

43. Example: Tax on income
2. Assume a quarterly reporting entity expects to earn €15,000
pre-tax in quarter 1 but incur losses of €5,000 in quarters 2-4.
If the tax rate is 20%, the tax reported in each quarter is as
follows:
 
Tax expense: €3,000; (€1,000); (€1,000); (€1,000) = Total €Nil
 
3. Assume a year end of 30 June and a taxable year end of 31
December, together with pre-tax earnings of €10,000 each
quarter and an average tax rate of 30% in year 1 and 40% in
year 2.
Tax expense: €3,000; €3,000; €4,000; €4,000 = Total €14,000

44. Examples of measurement principles
Inventory valuations Inventory should be valued in the
same way as for year end accounts but it will be necessary
to rely more heavily on estimates for interim reports.
Depreciation This should only be charged in the interim
statement on assets that have been controlled during the
period but not on assets that will be acquired later in the
financial year.
Foreign currency translation gains and losses This
should be calculated using the same principles at the end
of the year in accordance with IAS 21.

45. Use of estimates
•Many estimates are made in the preparation of financial statements
(for example, inventory valuation, estimated useful lives of assets,
recoverability of debts)
•Being cautious when exercising judgement in arriving at these
estimates is known as prudence
•While prudence is a generally accepted concept, it does not extend
to including excess provisions, overstating liabilities or understating
income or assets
•While accounting information must be reliable and free from
material error, it may be necessary to sacrifice some accuracy and
reliability for the sake of timeliness and cost benefits
•This is particularly relevant for interim reports (e.g. inventory,
provisions and income taxes)

46. INTERIM REPORTING – MINIMUM DISCLOSURES
EPS
Seasonal

Revenues
&
Expenses
Provision
for Income
Taxes
(and significant
changes
in estimates
)
Sales
or Gross
Revenues
Unusual
or
Extraordinary

Items
Other

significant

changes
Net
Income
Disposal
of
a
Business
Segment
Contingent

items
46