According to International accounting standards 14 Segment reporting, the business should ensure reporting of financial information. The disclosures are required for both primary and secondary segment reporting format. The impact of product and services on risks and returns and the fact that the operations are done in different several geographical areas are included in the primary format.
Now that you know what is segment reporting, let’s understand the applicability.
Applicability of IAS 14
- Entities that have publicly traded debt or equity securities should follow the format prescribed by IAS 14.
- If the financial statements of an entity conform to IFRSs but are not publicly traded should also follow IAS 14.
- Instead of separate financial statements for the parent company and its subsidiaries, a consolidated report should be prepared.
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Identification of Business and Geographical Segments
To identify the reportable segments, the entity can consider its organisational structure and internal reporting system. According to IAS 14, the segmentation in the internal financial reports which are prepared for the CEO and board of directors can be used to determine the segments for external financial reporting.
The location of the entity’s assets and customers determines the geographical segments.
What Are The Primary and Secondary Segments?
There are two bases for segmentation primary and secondary. The secondary segments require less disclosure. The format of the reporting of the primary segment should be based on the risks and returns affected by the products and services of the entity.
The business and geographical segments from where most of the revenue is gained through sales and customers are the reportable segments for any entity. It also includes: [IAS 14.35]
- When the revenue earned from the sales generated from external customers and transactions to other segments is 10% or more.
- When the combined segment result is 10% or more. It can be profit or loss.
- When the assets are 10% or more of total assets in the segment.
The related segments can be combined with each other for reporting if the segments are too small to be reported. If there is a segment that is already reported internally, then it cannot be combined with any other segment. In case, the segment is not combined with any other segment and not reported individually, then it is considered as an unallocated reconciling item.
To make the reporting, the entity should include at least 75% of the total revenue. In case the revenue of a segment is less than 75%, then it should identify some more segments so that the combined revenue is 75%.
Segment revenue and expenses do not include interest and dividends, general administrative expenses and gains/losses on the sale of investments.
The intersegment transactions may or may not be reportable segments. In case of vertically integrated segments, the selling and buying segments can be combined if they are not separately reported. [IAS 14.44]
The accounting policies used for segment reporting must be the same as the accounting policies that are followed in consolidated financial statements. The revenue and expenses must be clarified properly when the assets are used by various segments jointly.
The following items must be disclosed while reporting the financial statement of the primary segment: [IAS 14.51-67]
- Sales and Revenue.
- Segment Result.
- Basis for Inter Segment Pricing.
- Unusual Items.
- Non-cash Expenses.
- Capital add-ons.
- Equity Method of Income.
Revenue of a segment includes sales that is generated from one segment to another. As per IAS 14.75, the transfers are actually priced and the inter-segment transfers are determined on that basis.
The disclosures for the second segments are: [IAS 14.69-72]
- Capital Additions.
Also Read: IAS 11 – Construction Contracts
Some Other Disclosures
- External revenue should not be reported because there is an intersegment sale but the external sale is 10% or more than combined revenue. [IAS 14.74]
- It should be disclosed if there are any changes in the segment accounting policies. [IAS 14.76]
- There should be a disclosure if there is a change in the identification of segments. Information for the previous year should be changed. If it is not possible then both old and new data should be reported stating the basis of change.
- Types of products and services must be disclosed.
The entity must present the information of individual segments and consolidated information in the report. It can include: [IAS 14.67]
- The reconciliation of segment revenue and consolidated revenue.
- Reconciliation between segment assets and entity assets.
- Information of segment result and consolidated operating and net profit and loss.
- Liabilities of a segment should be reconciled with the liabilities of the entity.
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