In: Accounting
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.
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]
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).