SEGMENTAL REPORTING (IAS 14/IFRS 8/IPSAS 18)

A segment refers to a component of a business that is capable of generating revenue and incurring
expenses and whose performance is regularly reviewed by company’s top management. The
revenue of a segment may arise as a result of transfer prices (inter-segment trading) or sales to 3 rd
party.
IFRS 8 require the management of an entity to provide information to the users on internal
performance of each department in the organization. A segmental report provides information
about the performance of the different units of business to enable users have a wider perspective of
the company and allow for even more informed decision making. For example users can be able to
understand the risk and return profile of each segment of the business.

Disclosure requirement in segmental report

1. General information about how the entity identified its operating segments and the types of
products and services from which each operating segment derives its revenues [IFRS 8.22]
2. Judgments made by management in applying the aggregation criteria to allow two or more
operating segments to be aggregated [IFRS 8.22(aa)]
3. Information about the profit or loss for each reportable segment, including certain specified
revenues and expenses such as revenue from external customers and from transactions with
other segments, interest revenue and expense, depreciation and amortisation, income tax
expense or income and material non-cash items [IFRS 8.21(b) and 23]
4. A measure of total assets and total liabilities for each reportable segment, and the amount of
investments in associates and joint ventures and the amounts of additions to certain non-
current assets ('capital expenditure') [IFRS 8.23-24]
5. An explanation of the measurements of segment profit or loss, segment assets and segment
liabilities, including certain minimum disclosures, e.g. how transactions between segments
are measured, the nature of measurement differences between segment information and
other information included in the financial statements, and asymmetrical allocations to
reportable segments [IFRS 8.27]
6. Reconciliations of the totals of segment revenues, reported segment profit or loss, segment
assets, segment liabilities and other material items to corresponding items in the entity's
financial statements [IFRS 8.21(b) and 28]
7. Some entity-wide disclosures that are required even when an entity has only one reportable
segment, including information about each product and service or groups of products and
services [IFRS 8.32]
8. Analyses of revenues and certain non-current assets by geographical area – with an
expanded requirement to disclose revenues/assets by individual foreign country (if
material), irrespective of the identification of operating segments [IFRS 8.33]
9. Information about transactions with major customers

Format for segmental report

Xltd
Segmental report
For the year ended 31st Dec 201x
Segment Segment Segment Total
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1 3

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Revenue /sales
Total sales xxx xxx xxx
Less. Intersegment sales (xxx) (xxx) (xxx)
Sales to 3rd parties Xxx Xxx Xxx Xx
Profit before tax
Operating profit (PBIT) xxx xxx xxx Xx
Less. Intersegment profit (xxx) (xxx) (xxx)
Profit on sale too 3rd parties Xxx Xxx Xxx Xx
Other items
Interest expense (xxx) (xxx) (xxx) Xx
Interest income xxx xxx xxx Xx
Depreciation (xxx) (xxx) (xxx) Xx
Profit before tax xxx xxx xxx Xx
Segment assets:
Identifiable xx xx xx Xx
Unidentifiable Xx xx xx Xx
Total xx xx Xx Xx
Segment liabilities:
Identifiable xx xx xx Xx
Unidentifiable Xx xx xx xx
Total xx xx Xx xx

Definitions
1. Operating segment
IFRS 8 defines an operating segment as 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
maker to make decisions about resources to be allocated to the segment and assess its
performance and
● For which discrete financial information is available
2. Business segment: A component of an enterprise that:
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 (a) Provides a single product or service or a group of related products and services and
(b) That is subject to risks and returns that are different from those of other business segments.
3. Geographical segment: A component of an enterprise that:
(a) Provides products and services within a particular economic environment and
(b) That is subject to risks and returns that are different from those of components operating in
other economic environments.
4. Reportable segment: A business segment or geographical segment for which IFRS 8 requires
segment information to be reported. For a segment to be reported upon, its revenue, profits, assets
and liabilities must be 10% of the total company’s revenue, profits/loss, assets and liabilities
respectively.
Where a segment operating does not meet the 10% criterion, then its operations should be
combined with those of other segments to form the 10% of the revenue, profit, assets and
liabilities.
If total external revenue attributable to reportable segments identified using the 10% thresholds
outlined above is less than 75% of the total consolidated or enterprise revenue, additional segments
should be identified as reportable segments until at least 75% of total consolidated or enterprise
revenue is included in reportable segments.

Approaches of identifying reportable segments

There are two main approaches that an entity can approach when identifying reportable segments.
They include;
i) Risk and return approach
ii) Managerial approach
Risk and return approach
Under this method, segments are identified on the basis of different risks and returns arising from
different lines of business and geographical areas.
Advantages
- It produces information that is more comparable between different segments.
- It assists in assessment of profitability, risk and returns for each segment within the
entity.
- It provides information which is consistent over time.
Disadvantages
- It is subjective
- Defining and determine risk and return for each segment may be difficult and bias
due to different geographical areas.
Managerial approach
Under this method, segment is identified based on the organization structure
This is the option adopted by the IFRS

5. Segment revenue: Revenue, including inter-segment revenue that is directly attributable or

reasonably allocable to a segment. This includes interest and dividend income and related securities
gains only if the segment is a financial segment (bank, insurance company, etc.).
6. Segment expenses: Expenses, including expenses relating to inter-segment transactions, that:
(a) Result from operating activities and
(b) Are directly attributable or reasonably allocable to a segment. This includes interest expense
and related securities losses only if the segment is a financial segment (bank, insurance company,
etc.). Segment expenses never include:
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 ● Extraordinary items;
● Losses on investments accounted for by the equity method;
● Income taxes;
● General corporate administrative and head-office expenses.
7. Segment result: Segment revenue minus segment expenses, before deducting minority interest.
8. Segment assets and segment liabilities: Those operating assets (liabilities) that are directly
attributable or reasonably allocable to a segment where same assets (liabilities) are used by more
than one segment.

Advantages of segmental reporting

1. Enhance decision making
2. Ease of performance appraisal
3. Improve resource allocation
4. Help in risk assessment

Disadvantages of segmental reporting

1. Identifying primary segment for reporting purposes may be difficult
2. Allocation of common items eg finance cost may be difficult
3. Inter segment transactions (transfer pricing) may create reporting problems
4. Increased operational costs ie cost of preparation and presentation of financial statements.

Example 1: June 2012 4c

The following information was extracted from the Kerenga Ltd for the year ended 31 March 2012.
Sh. ‘million’ Sh. ‘million’
Sales :
Food products 5,650
Plastics 625
Pharmaceuticals 345
Others 162 6,782
Expenses :
Food products 3,335
Plastics 425
Pharmaceuticals 222
Others 200 4,182
Other items:
General operating expenses 562
Income from investments 132

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 Interest expenses 65
Identifiable assets:
Food products 7,320
Plastics 1,320
Pharmaceuticals 1,050
Others 665 10,355
General assets 722

Additional information
1. Inter-segment sales for the year ended 31 march 2012 were as follows
Food products 55
Plastics 72
Pharmaceuticals 21
Others 7
2. Operating profit includes sh. 33 million on inter-segment sales
3. Information about inter-segment expenses is not available.
Required
Segmental financial information according to the requirements of IFRS 8 (operating segments)

Suggested solution
Karega Ltd.
Segmental report
For the year ended 31/3/2012
Food Plastic Pharmaceutical Others Total
production
Sh ‘m’
Sh ‘m’ Sh’m’ Sh ‘m’ Sh ‘m’
Sales
Total sales 5,650 625 345 162 6,782
Inter segment sales (55) (72) (21) (7) (155)
Sales to 3rd parties 5,595 553 324 155 6,627
Profit before tax
Operating profit 2,315 200 125 (38) 2,600
Less intersegment profit (33)

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Profit on sales to 3rd parties 2,567
Other items
General operating expenses (562)
Income from investment 132
Interest expense (65)
Profit before tax 2,072
Segment assets
Identifiable assets 7,320 1,320 1,050 655 10,355
General assets 722
11,077

Example 2
The following information has been extracted from the consolidated financial statements of Wengi
Ltd. and its subsidiaries for the year ended 31 October 2018.
Sh.
‘million’
Sales revenue 900
Cost of sales 634
Distribution cost 87
Central administration 37
Amortisation of goodwill during the year 20
Finance costs (lease Sh.10m debenture interest Sh.12 22
m)
Dividends 50
Goodwill on consolidation 60
Non-current assets Owned 370
Leased 150
Current assets 160
Current liabilities 90
Finance lease obligation 200
10% debentures 120

The activities of Wengi Ltd. relate to three operational segments: Engineering, Chemical
and Supermarket chain. Information relating to each of the segments is as follows:

Engineering Chemical Supermarket

Sales revenue Sh.420 Sh.340 Sh.200
Gross profit margin on external million million million
sales 20% 40% 25%
Owned non-current assets Sh.150 Sh.120 Sh.100
million million million
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 Proportion of leased assets 60% 40% Nil
Current assets Sh.70 million Sh.60 million Sh.30 million
Current liabilities Sh.40 million Sh.20 million Sh.30 million
Proportion of lease obligations 50% 50% Nil

Additional information:
1. The consolidated figures exclude inter-segment trading whereas the segmental figures include
the results of inter-segment trading
2. During the year ended 31 October 2018, the engineering division manufactured the steelwork
for the superstructure of several new supermarkets. This work was invoiced at cost (Sh.20
million) to the supermarket division. The other inter-segment sales (Sh.40 million) were from
the chemicals division to the engineering division at the normal profit margins. There were no
group unrealised profits.
3. The finance cost comprise interest on finance lease and debenture interest. The management of
Wengi Ltd. considers the debenture interest to be a common cost but not the interest on finance
leases. This can be assumed to accrue in proportion to the value of the outstanding lease
obligations.
4. The goodwill on consolidation and its amortisation relate to a subsidiary that has both
engineering and chemicals operations. The management estimated that based on the relative
profitability at the time of acquisition, the value of goodwill should be allocated on the basis of
30% to the engineering operations and 70% to the chemicals operations.
5. Distribution cost was sh 24 million and sh 38 million for engineering and chemical
respectively.
6. When preparing segment reports. Wengi Ltd. uses its operating activities as the basis for its
primary reporting format.

Required:
Segment report for Wengi Ltd. for the year ended 31 October 2018.

Suggested solution

Revenue Engineering Chemicals Supermarket Elimination Consolidated

Sh. Sh. Sh. Sh. Sh.
’million’ ’million’ ’million’ ’million’ ’million’
External sales 400 300 200 900
Inter segment sales _20 _40 __- (60)
Total sales 420 340 200 60
Segment profit 45 79 25 149
Unallocated
expenses-admn (37)
Interest on
debentures @ 10% (12)
Profit before tax 100

Other information
Segment/ 328 282 130 740
consolidated assets

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Segment/
consolidated (140) (120) (30) (290)
liabilities
(debentures)
Unallocated (120)
corporate
liabilities(debentures
)
Consolidated total (410)
liabilities
Amortisation of (6) (14) (20)z
goodwill

Engineering Chemicals Supermarket

Cost of external sale 80% x 400 = 320 60% x 300 = 180 75% x 200 = 150
Inter-segment cost of sales 20 60% x 40 = 24 Nil
Distribution Sh.24 million Sh.38 million Sh.25 million
Goodwill amortisation Sh.6 million Sh.14 million Nil
Interest costs
(22-12 allocate 50:50) 5 5 Nil
total apportioned costs 375 261 175
total sales (420) (340) (200)

Segmental profit Sh.45 million Sh.79 million Sh.25 million

Engineering Chemicals Supermarket

Sh. Sh. Sh
’million’ ’million’ .’million’
Goodwill 60x30% 18 60x70% 42 Nil
Owned non current assets 150 120 100
Leased assets 150 x .6 90 150x .4) 60 Nil
Current assets 70 60 30
328 282 130

Segment liabilities
Current liabilities (40) (20) (30)
Lease obligations
200 x1/2 (100) 200x1/2 (100) Nil
(140) (120) (30)