Question

Whats the purpose of segmental reporting as per IFRS8 and what are the criteria for segmental information disclosures in financial statements? What are the main difficulties in disclosures of segmental information and what are possible arguments against the disclosure of segmentation information?

Answer 1

Purpose of semental reporting as per IFRS 8-  

Disclose information to enable users of its financial statements to evaluate the nature and financial effects of the different business activities in which it engages and the economic environments in which it operates.”

Criteria-

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.

Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principles of the the standard, the segments have similar economic characteristics and are similar in various prescribed respects.

Difficuties:

Allocation problem: In business organisation where more than one product are dealt. There are likely to be costs which are common to two or more products. Joint Costs can be general administrative expenses and legal expenses. Allocation of these joint costs becomes a complex problem while doing segment reporting. However there can be some common costs which can be apportioned on some reasonable basis for example electricity charges which can be apportioned on the basis of light Points in a particular segment on the other hand there can be some common costs like salary of a director which can only be apportioned on some arbitrary basis.

Arguments:

1. View that Investors participate in the company as a whole, not in partvular segment

2. Additional disclosures may weaken the company commercial position.