Question

In: Accounting

A.  You were able to acquire some notes which the assistant had jotted down on a sheet...

A.  You were able to acquire some notes which the assistant had jotted down on a sheet of paper while he was preparing to work on the report.  These were as follows:

      1.   The total revenues of the Surveillancedivision was 25% of the total revenues of the company.  

      2.   The total revenues of the Appareldivision was 7% of the external revenues of the company.

      3.   The return on assets for the Communicationdivision was 35%.

      4.   The return on sales for the Appareldivision was 40%.

      5.   The profits for the Aviation division was 180% of its total assets.

B.   Next, the assistant applied the required tests to determine which of the six divisions discussed above are to be considered as reportable segments and obtained the following information:

      (i)  Revenue test

      1.   The total revenues for the Combatdivision exceeded the revenue test threshold figure by $260,000.  

      2.   Similarly, the total revenues for the Aviationdivision exceeded the revenue test threshold figure by $176,000.

      (ii)   Operating profit test       

              Not sure about this section.  To be determined later.

      (iii)  Identifiable Assets test:   The test threshold figure for identifiable assets amounted to $64,000.

      1.     The identifiable assets for the Combatdivision exceeded the test threshold figure by $136,000.

      2.     Similarly, the identifiable assets for the Appareldivision was less than the test threshold figure by $27,000.

      3.     The Transportdivision reported its annual interest expense for the year to be $1,280.  This interest expense, accruing annually, was paid in cash at a coupon rate of 5% on long term bonds.  The bonds were the only liabilities for the division and their amount was duly reported at the year end.

C.   The liabilities for each segment equaled 80% of the assets of that respective segment.

Figure I - in ‘000

Operations/Divisions

Combat

Surveillance

Transport

Apparel

Communication

Aviation

Total

Revenues-External

N01

N02

N03

N04

N05

N06

1,100,000

Inter-segment

0

0

5,000

21,000

20,000

54,000

N07

Total Revenues

N08

N09

N10

N11

N12

N13

Cost of Goods Sold %

0.55

0.6

0.7

0.75

0.55

0.45

Cost of Goods Sold $

N14

N15

(25,900)

N16

N17

N18

Operating Expenses

(108,000)

N19

N20

N21

(29,900)

N22

Operating Profit/(Loss) $

N23

62,000

(2,600)

N24

N25

N26

Assets

N27

N28

N29

N30

56,000

45,000

Liabilities

N31

N32

N33

N34

N35

N36

REQUIRED:

1.   Identify and describe the three additional factors under IFRS to be considered while applying the tests identifying reportable segments.

Solutions

Expert Solution

The following table is prepared by using the information given in the question:-

Operations/Divisions Combat Surveillance Transport Apparel Communication Aviation Total
Revenues-External 3,80,000.00 2,75,000.00 57,000.00 56,000.00             90,000.00 2,42,000.00 11,00,000.00
Inter-segment                    -                      -       5,000.00 21,000.00             20,000.00      54,000.00    1,00,000.00
Total Revenues 3,80,000.00 2,75,000.00 62,000.00 77,000.00         1,10,000.00 2,96,000.00
Cost of Goods Sold % 55.00% 60.00% 70.00% 75.00% 55.00% 45.00%
Cost of Goods Sold $ 2,09,000.00 1,65,000.00 43,400.00 57,750.00             60,500.00 1,33,200.00
Operating Expenses 1,08,000.00      48,000.00 21,200.00     4,450.00             29,900.00      81,800.00
Operating Profit/(Loss) $      63,000.00      62,000.00 -2,600.00 14,800.00            19,600.00      81,000.00
Assets 2,00,000.00 2,70,000.00 32,000.00 37,000.00             56,000.00      45,000.00    6,40,000.00
Liabilities 1,60,000.00 2,16,000.00 25,600.00 29,600.00             44,800.00      36,000.00

Note: The return on sales for the Apparel division was 40%. However it is error in the question. The word sale is replaced with asset. Therefore, Retun on assets is 40% is considered.

Identification of reportable Segments as per IFRS 7

IFRS 8 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: [IFRS 8.13]

  • its reported revenue, from both external customers and intersegment sales or transfers, is 10 per cent 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 per cent 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 per cent or more of the combined assets of all operating segments.
Operations/Divisions Combat Surveillance Transport Apparel Communication Aviation Total
Total Revenues 3,80,000.00 2,75,000.00 62,000.00 77,000.00         1,10,000.00 2,96,000.00     12,00,000.00
%age 31.67% 22.92% 5.17% 6.42% 9.17% 24.67%
Operating Profit/(Loss) $      63,000.00      62,000.00 -2,600.00 14,800.00             19,600.00      81,000.00       2,40,400.00
%age 26.21% 25.79% -1.08% 6.16% 8.15% 33.69% Sum of Profits
Assets 2,00,000.00 2,70,000.00 32,000.00 37,000.00             56,000.00      45,000.00       6,40,000.00
%age 31.25% 42.19% 5.00% 5.78% 8.75% 7.03%

Reportable Segments are Combat, Surveillance, Aviation (all cover more than 75% of total revenue also).


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