TUTORIAL 3 - MFRS 8 Operating Segment

(Answer)

Tutorial 3- answer

Question 1

(a)
Base on MFRS 8, paragraph (para) 5, an operating segment is a component of an entity:

I. 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),

II. 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

III. for which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn revenues, for
example, start-up operations may be operating segments before earning revenues.

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 MFRS, an entity’s post-employment benefit plans
are not operating segments.

(b)
In accordance with MFRS 8 para 7- The term ‘chief operating decision maker’ 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. Often the chief operating
decision maker of an entity is its chief executive officer or chief operating officer but, for
example, it may be a group of executive directors or others.

1
(c)Based on the information provided below for the different operating segments of Company X,
determine what are the reportable segments, based on the quantitative thresholds that were
mentioned in part (c) above.

Revenues
External Inter-segment Profit / (loss) Assets
Segment (RM m) (RM m) (RM m) (RM m)
s
AA 200 20 40 500
BB 100 10 (10) 200
CC 50 10 (5) 100
DD 120 30 20 250
EE 80 10 10 180
FF 40 10 2 50

1. 10 per cent or more of the combined revenue, internal and external,

Total revenues (590 +90)=680, 10% is RM68 million, only segment CC (RM60m ) and FF
(RM50m)do not qualify as reportable segment.

2. Reported profit or loss is 10 per cent or more of the greater, in absolute amount.

Total profits (40+20+10+2)=72m, 10% profit 7.2M, total losses (10 +5)=15m, 10% loss-1.5M.,
only FF and CC do not qualify as reportable segment,

3. Total assets RM1,280m, thus, 10% is 128m, only segment CC and FF do not qualify as
reportable segment.

The total reportable segments (other than CC and FF segment) constitute 85% (500/590) which
is more than 75 per cent of the total Company X’s external revenue (RM590M), thus, no
additional operating segments shall be identified as reportable segments.

Question 2

Product A B C D E total 10%

Accounting Principles (4m):

2
According to MFRS 8, an operating segment should be reported if it meets any of the following
quantitative thresholds:
1. Its reported revenue, including both sales to external customers and intersegment
sales or transfers, is 10% or more of the combined revenue, internal and external, of
all operating segments.
2. The absolute amount of its reported profit or loss is 10% or more of the greater, in
absolute amount, of
(i) the combined reported profit of all operating segments which did not report a
loss and
(ii) the combined reported loss of all operating segments which reported a loss.
3. Its assets are 10% or more of the combined assets of all operating segments.

MFRS 8 states that if the total external turnover reported by the operating segments identified by
the size criteria is less than 75% of total entity, then additional segments need to be reported on
until the 75% level is reached.

Accounting Treatments:
4. 10 per cent or more of the combined revenue, internal and external,

Total revenue is RM882,500 and 10% of the total assets is RM88,250. Thus, only B and C do
not qualify as reportable segment (2m)
5. Reported profit or loss is 10 per cent or more of the greater, in absolute amount.

Total profit is RM178,000 and 10% of the profit is RM17,800 Thus, A, B, C and E do not
qualify as reportable segment. (2m)

6. 10 per cent or more of the combined assets

Total assets is RM1,535,000 and 10% of the profit is RM153,500 Thus, only C does not qualify
as reportable segment. (2m)

An operating segment should be reported if it meets any of the quantitative thresholds, thus
reportable segment are A, B, D and E (2m)

Question 3

Answer

Upon adoption of MFRS8,‘Operating Segments’, the identification of Nor Bhd’s segments may
or may not change depending on how segments were identified previously. MFRS8 requires
operating segments to be identified on the basis of internal reports about the components of the
entity that are regularly reviewed by the chief operating decision maker in order to allocate
resources to the segment and to assess its performance.

Formerly companies identified business and geographical segments using a risks and rates of
return approach with one set of segments being classed as primary and the other as secondary.
MFRS8 states that a component of an entity that sells primarily or exclusively to other operating
segments of the entity meets the definition of an operating segment if the entity is managed that
way.

3
MFRS8 does not define segment revenue, segment expense, segment result, segment assets, and
segment liabilities but does require an explanation of how segment profit or loss, segment assets,
and segment liabilities are measured for each segment.

This will give entities some discretion in determining what is included in segment profit or loss
but this will be limited by their internal reporting practices. The core principle is that the entity
should disclose information to enable users to evaluate the nature and financial effects of the
types of business activities in which it engages and the economic environments in which it
operates.
MFRS8 ‘Operating Segments’ defines an operating segment as follows. An operating segment is
a component of an entity:

– 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)

– whose operating results are reviewed regularly by the entity’s chief operating decision makers
to make decisions about resources to be allocated to the segment and assess its performance; and
for which discrete financial information is available

MFRS8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments that meet specified criteria:

– the reported revenue, from both external customers and intersegment sales or transfers, is 10%
or more of the combined revenue, internal and external, of all operating segments; or

– the absolute measure of its reported profit or loss is 10% or more of the greater, in absolute
amount, of (i) the combined reported profit of all operating segments that did not report a loss,
and (ii) the combined reported loss of all operating segments that reported a loss; or 

– its assets are 10% or more of the combined assets of all operating segments.

If the total external revenue reported by operating segments constitutes less than 75% of the
entity’s revenue, additional operating segments must be identified as reportable segments (even
if they do not meet the quantitative thresholds set out above) until at least 75% of the entity’s
revenue is included in reportable segments. There is no precise limit to the number of segments
that can be disclosed.

As the key performance indicators are set on a city by city basis, there may be information within
the internal reports about the components of the entity which has been disaggregated further.
Also the company is likely to make decisions about the allocation of resources and about the
nature of performance on a city basis because of the individual key performance indicators.
In the case of the existing segments, the European segment meets the criteria for a segment as its
reported revenue from external and inter segment sales ($203 million) is more than 10% of the
combined revenue ($1,010 million).

4
However, it fails the profit/loss and assets tests. Its results are a loss of $10 million which is
less than 10% of the greater of the reported profit or reported loss which is $165 million.
Similarly its segment assets of $300 million are less than 10% of the combined segment assets
($3,100 million).

The South East Asia segment passes all of the threshold tests. If the company changes its
business segments then the above tests will have to be reperformed. A further issue is that the
current reported segments constitute less than 75% of the company’s external revenue (50%),
thus additional operating segments must be identified until 75% of the entity’s revenue is
included in reportable segments.

Nor Bhd may have to change the basis of reporting its operating segments. Although the group
reports to management on the basis of three geographical regions, it is likely that management
will have information which has been further disaggregated in order to make business decisions.
Therefore, the internal reports of Nor Bhd will need to be examined before it is possible to
determine the nature of the operating segments.

Question 4-answer

MFRS 8 Operating Segments states that an operating segment is a component of an entity which
engages in business activities from which it may earn revenues and incur costs. In addition,
discrete financial information should be available for the segment and these results should be
regularly reviewed by the entity’s chief operating decision maker (CODM) when making
decisions about resource allocation to the segment and assessing its performance. However, if a
function is an integral part of the business, it may be disclosed as a segment even though it may
not earn revenue.
According to MFRS 8, an operating segment should be reported if it meets any of the following
quantitative thresholds:

1 Its reported revenue, including both sales to external customers and intersegment sales or
transfers, is 10% or more of the combined revenue, internal and external, of all operating
segments.

2 The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute
amount, of
(i) the combined reported profit of all operating segments which did not report a loss and
(ii) the combined reported loss of all operating segments which reported a loss.

3 Its assets are 10% or more of the combined assets of all operating segments.

As regards the two research and development laboratories, qualitative and quantitative factors
should be considered in determining the operating segments.

The qualitative factors will include whether the resultant operating segments are consistent with
the principles of MFRS 8, whether the operating segments represent the level at which the
CODM is assessing performance and allocating resources and whether the identified operating
segments enable users of its financial statements to evaluate its activities and financial
performance, and the business environment it operates in.

5
As a result of the application of the above criteria, the first laboratory will not be reported as a
separate operating segment. The laboratory does not have a separate segment manager and the
existence of a segment manager is normally an important factor in determining operating
segments. Instead, the laboratory is responsible to the divisions themselves, which would seem
to indicate that it is simply supporting the existing divisions and not a separate segment.
Additionally, there does not seem to be any discrete performance information for the segment,
which is reviewed by the CODM.

The second laboratory should be reported as a separate segment. It meets the quantitative
threshold for percentage of total revenues and it meets other criteria for an operating segment. It
engages in activities which earn revenues and incurs costs, its operating results are reviewed by
the CODM and discrete information is available for the laboratory’s activities. Finally, it has a
separate segment manager.