COMPULSORY

DISCLOSURES:
SEGMENTS & RELATED
PARTIES
Presented By:
Alex
Lina
Sam
Jess
Introduction
Context:
• Details lost through aggregation in preparing CFSs
• Aggregated data may hide information about risk and return
• Financial information in CFSs is inadequate for decision-
making
• CFSs may hamper ethical investment choice
• Organisational structure becomes increasingly complicated
• In need of complementary dis-aggregation, compulsory
disclosures are required for segments and related parties.
Introduction
Topic:
• AASB 8 Operating Segments & AASB124 Related Party
Disclosures
• AASB 8 is more principle-based than the old standard, using
the ‘management approach’ as opposed to the earlier ‘industry
approach’.
• The questions focus on the purpose and usefulness of the two
disclosure requirements, with a segment reporting exercise to
show the process of disaggregation.
Questions: • Discussion question – compulsory disclosures
• Segment Exercise – Diversified Ltd group
 Discussion Question
Weschler and Wandycz (readings pack) report that the requirement to provide segment
disclosures was imposed only after large corporations lost a “vicious battle” to avoid such
reporting, and that after segment disclosures were required, companies began blurring
distinctions among segments.” Similar events occurred with efforts to require related party
disclosures.
Question i)
Explain briefly the nature and purpose of segment and related party disclosures.
•

Contrast the ways in which the purposes of the two disclosure requirements are similar
•

and the ways in which their purposes might differ.

Question ii)
•

•Identify and explain how any company that is unwilling to report information under
these two standards might respond to such requirement
 Question i)
Explain briefly the nature and purpose of segment and related party disclosures.

Segment Disclosure (SD)

• Nature:
– CFS only provide aggregated information
– Aggregate data hide information about risk
– Need for dis-aggregation
– Restore detail lost through consolidation
• Purpose:
– AASB 8 paragraph 1
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
economic environments in which it operates.
 Related Party Disclosures (RPD)
• Nature:
– RP is not at “arm’s length”
– Transactions may not be in fair value
– May not be the best interest of company
– Possible corporate scandals
• Purpose:
– AASB 124 paragraph 1
The objective of this Standard is to ensure that an entity’s
financial statements contain the disclosures necessary to draw
attention to the possibility that its financial position and profit or
loss may have been affected by the existence of related parties and
by transactions and outstanding balances, including commitments,
with such parties.
– More details: AASB 124 para 5 - 8
 Question i)
Contrast the ways in which the purposes of the two disclosure requirements are similar and
the ways in which their purposes might differ.

Similarities of purposes
Segment reporting and related party disclosure
both:
• Provide complementary disaggregation
• Disclose detailed information
• Impact on management behaviour
• Make effort to serve the best interest for financial
statement users
Differences of purposes
Segment Disclosure
– Give insight into the ‘mind’ of
management
– Improve the evaluation of
financial performances
– Reveal the disparity of risk and
return in different segments
which was covered by
consolidated figures
Related Party Disclosure
– Ensure that FS users are aware of
the possible financial effects of
RPTs
– Potential to modify management
behaviour
– May prevent corporate scandals
and corruptions
Question ii)
Identify and explain how any company that is unwilling to report information under these two
standards might respond to such requirement

Objections from company to

segment reporting
 1. Cost is too great
 2. Gives an advantage to competitors
Response to segment reporting
requirements
 Manipulation of internal segment information used in
performance evaluation.
 May argue that their segments are materially
identical, along with the argument that the risks are
spread and shared across segments.
 May stop entry into related party transactions even
though it may present the best opportunity.
Segment Exercise – Diversified Ltd
group
Required
In accordance with AASB 8:
(a) determine the reportable operating segments of
the Diversified Ltd group;
(b) prepare a note to the consolidated financial
statements of the Diversified Ltd group.
Question (a)

 Determine the reportable operating segments of the

Diversified Ltd group

 Step 1 – Identify the operating segments

 Step 2 – Determine the reportable segments
Step 1- Identify operating segments

 Identify operating segments on the basis of internal

reports regularly reviewed by the CODM:
-Leisure equipment
-Real Estate
-Retail
-Finance
-Other
Step 2 - Determining reportable
segments

 ‘Materiality Test’ (AASB8.13)

(a) Revenue ≥ 10% of both external and internal revenue
of all segments OR,
(b) Absolute amount of P(L) ≥ 10% of the greater of the
absolute amount of total segment profits or losses
OR,
(c) Assets ≥ 10% of total segment assets of all operating
segments.
Revenue Test
Material?
Revenue Compared to
Segment Yes if ≥ revenue
$000 revenue base $000
base
Leisure equipment 780 Yes
Real Estate 740 Yes
Retail 820 Yes
2660*10%=266
Finance 170 No
Other 150 No
Total 2660

Leisure equipment, Real Estate, and Retail are reportable

segments. Their revenue ≥ 10% of revenue of all segments.
Result Test
Compared to Profit Material?
Segment Profit $000
base$000 Yes if ≥ profit base

Leisure equipment 165 Yes

Real Estate 220 Yes
Retail 190 Yes
636*10%=63.6
Finance 30 No
Other 31 No
Total 636

 Leisure equipment, Real Estate and Retail are reportable

segments, their result ≥ 10% of combined result of all
operating segments
Asset Test
Compared to Material?
Segment Assets $000
asset base $000 Yes if ≥ asset base
Leisure equipment 690 Yes
Real Estate 515 Yes
Retail 350 Yes
3470*10%=347
Finance 1695 Yes
Other 220 No
Total 3470
 Finance segment now satisfies the asset test and should be
reportable.
 Only ‘other’ is not reportable segment, since its asset are less
than10% of the total segment assets of all operating segments.
Test Summary

Revenue Result Asset

Business Segment Reportable?
≥10% ≥10% ≥10%
Leisure equipment Yes Yes Yes Yes
Real Estate Yes Yes Yes Yes
Retail Yes Yes Yes Yes
Finance No No Yes Yes
Other No No No No

 Therefore, only ‘Other’ is not reportable segment, it fails all

tests.
Additional Issues

 Management may include a segment that dose not meet the

above tests if it believes segment information will be useful for
users.
 More segments must be added if the total of external revenue
of reportable segments is <75% of total entity revenue.
 ‘75% Test’ avoids where a diversified entity has a number of
small segments and information for the investments is not
available to shareholders and other users
 75% Test (AASB8.15)
Entity revenues Reportable Attributable to
$000 Segment? reportable segments$000
Leisure Equipment 780 Yes 780
Real Estate 550 Yes 550
Retail 820 Yes 820
Finance 170 Yes 170
Other 150 No
Dividend from 70
investment
2540 2320
Revenue attributable to reportable segment: 2320
Total external revenues: 2540
Ratio of reportable segment revenue to total entity revenue: 91.3%
Question (b)

 Prepare a note to the consolidated financial

statements of the Diversified Ltd group.
 Based on the template given, we are preparing
the following disclosures for this question:
 Information about profit or loss, asset and
liabilities (AASB8.23)
 Reconciliations (AASB8.28)
Operating segment information
 According to AASB 8.23, an entity shall disclose the following for
each reportable segment:
1. Revenues from external customers
2. Revenues from inter-segment transactions
3. Interest revenue
4. Interest expense
5. Depreciation and amortisation
6. Material items of income and expense disclosed in accordance with
AASB 101.97
7. The entity’s interest in the profit and loss of associates and joint ventures
accounted for by the Equity method
8. Income tax expense or income
9. Material non-cash items other than depreciation
 Operating segment information
Leisure Real estate Retai Financ Other Total
equipment $000 l e $000 $000
$000 $000 $000
REVENUE
External revenue 780 550 820 170* 150 2470
Inter-segment sales 190 190
Total segment 780 740 820 170 150 2660
revenue
RESULT
Segment result 165 220 190 30 31 636
Segment Assets 690 515 350 1695 220 3470
Segment Liabilities 230 150 140 390 60 970

* As interest revenue for the Finance segment was derived from unrelated
parties, the amount should be included in external revenue.
 Additional information
Leisure Real estate Retai Financ Other Tota
equipment $000 l e $000 l$00
$000 $000 $000 0
Additions to non-current
100 100
Assets*
Interest revenue 170 170
Interest expense 70 70
Income tax expense# 0
Segment depreciation 110 35 65 15 9 234
Non-cash expenses
other than 30┼ 30
depreciation
* Inter-segment sale of property from the Real estate segment to the Leisure equipment
segment was the only acquisition of PPE for the period.
The original cost of the land to the Real estate segment is $20,000 and the gain on sale is
$80,000. Thus, Leisure equipment segment has recognised the land at $100,000.
 Additional information
Leisure Real estate Retai Financ Other Tota
equipment $000 l e $000 l$00
$000 $000 $000 0
Additions to non-current
100 100
Assets*
Interest revenue 170 170
Interest expense 70 70
Income tax expense# 0
Segment depreciation 110 35 65 15 9 234
Non-cash expenses
other than 30┼ 30
depreciation
# Income tax expense is only at the general corporate level and is not allocated to individual
segments.
┼ The inventory impairment of $30,000 recorded by the Retail segment is non-cash
expense.
Operating segment information

 Ratio analysis
 Insights of risks and returns of the business
Reconciliations
 According to AASB8.28, an entity shall provide reconciliations of
revenues, P/L, assets, liabilities and other material items.
 Reconciliation items should include:
 The values from ‘non-reportable’ segments
 Since the bases used for reconciliation in this question already include
values from ‘other segment’, no additional adjustment is needed.
 Amounts never allocated to segments in the first place
 E.g. non-operating income and expenses such as interest revenue,
directors fees, dividend revenue
 All ‘general corporate’ items
 Differences in accounting policies between segment & entity FSs
 Eliminations of intersegment transactions
 E.g. intersegment sales, intersegment borrowings, unrealised profit on
intersegment sale property
Revenue
Revenue $000
Total revenues for operating segments 2660
Intersegment sales (190)
Unallocated corporate revenue 70
Total entity revenues 2540
Intersegment sales $000
Intersegment sales 190
Intersegment sale of property 100
*Intersegment sale of property is not adjusted for revenue as the
gain on sale was credited directly into profit.
Revenue
Revenue $000
Total revenues for operating segments 2660
Intersegment sales (190)
Unallocated corporate revenue 70
Total entity revenues 2540

Unallocated corporate revenue $000

Dividend revenue – general corporate 70
Result
Result $000
Segment result 636
Unallocated corporate revenue 70
Profit on intersegment sales (56)
Unallocated corporate expenses 300
Entity result 490

Unallocated corporate revenue $000

Dividend revenue – general corporate 70
Result
Result $000
Segment result 636
Unallocated corporate revenue 70
Profit on intersegment sales (56)
Unallocated corporate expenses 300
Entity result 490
Profit on intersegment sales $000
Inter-segment sale of property 100
Acquisitions of property at cost (20)
Unrealised profit before tax in segment assets 80
Income tax expense – unrealised profit @ 30% (24)
Unrealised profit after tax in segment result 56
•Assume profit from all other intersegment sales has been realised.
•Adjustment to result should be net impact from the unrealised
Result
Result $000
Segment result 636
Unallocated corporate revenue 70
Profit on intersegment sales (56)
Unallocated corporate expenses (300)
Entity result 350
Unallocated corporate expenses $000
Unallocated interest expense 135
Depreciation – general corporate 2
Income tax 133
Other operating – general corporate 30
Unallocated corporate expenses 300
Asset
Assets $000
Total assets for operating segments 3470
Unallocated corporate assets 464
Unrealised profit (80)
Total entity assets 3854
Unallocated corporate assets $000
PPE – general corporate 45
Investments – general corporate 350
Deferred tax – general corporate 45
Deferred tax – unrealised profit, $ 80,000@30% 24
Unallocated corporate assets 464
Asset
Assets $000
Total assets for operating segments 3470
Unallocated corporate assets 464
Unrealised profit (80)
Total entity assets 3854
Profit on intersegment sales $000
Inter-segment sale of property 100
Acquisitions of property at cost (20)
Unrealised profit before tax in segment assets 80
*Recall the group’s adjusting entries in consolidation: Cr Land to
eliminate the unrealised gain and to reduce the land to its correct
carrying amount.
Liabilities
Liabilities $000
Total liabilities for operating segments 970
Unallocated corporate liabilities 1460
Total entity liabilities 2430

Unallocated corporate liabilities $000

Accounts payable – general corporate 10
Income and deferred tax – general corporate 150
Borrowings – general corporate 1300
Unallocated corporate assets 1460
Conclusion
Compulsory disclosures (both segment and RPT) are
beneficial to potential users of CFSs in that they
•try to restore details lost in consolidation so that they

can assist users in economic decision-making;

•have the potential of modifying entity behaviour so

that shareholder interest is enhanced;

•improve the discharge of management accountability

and may affect the entity’s operations.

Conclusion
However, we should note that there are still several
limitations on these requirements which may diminish the
effectiveness of disclosures:
The compulsory disclosures are prepared only as a note to the
•
CFS – crucial details may be buried at the back;
•Management may tailor the internal reports in order to
conceal financial information made available through external
segment reporting, though it is costly;
The qualitative tests in AASB124 is weak – e.g. ‘close family
•
member’.