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Flashcards in Segement reporting and analysis Deck (21)
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1
Q

What is segement reporting, why is it useful and what type of companies is it required for?

A

Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. ( we cant idenitfy for example what subisdiary is doing well, so thats where segement reporting comes in and how help us predict what entities will do well in the future)Segment reporting is required for publicly-held entities, and is not required for privately held ones

2
Q

Why must we disclose operating segements? 3 things ive noted

A

Understand past performance ( you can identify what are the profit making and loss making segments)
Understand the risk and rewards of each segement ( how your risk is diversified
Make better informed judgements.

3
Q

IFRS defines a operating segment which is ‘a component of equity……..’ that and then finish off?

A

1) May earn revenues and incur expenses from business activities
2) Whose operating results are regularly reviewed by entitiy’s chief ( its a function not a person, so can be management board, ceo extra)
3) discrete financial information must be avaliable for segement

4
Q

Once we have determined whether a division is an operating segement what do we do after ?

A

Determine whether the operating segment is reportable, not all segements idenitfied are reportable.

5
Q

A reportable segment will usually comprise a single operating segment but two or more operating segments may be combined into one reportable segment if……

A

they have similar economic characteristics and are similar in certain other respects.

6
Q

What are the 2 tests to determine whether an operating segment is reportable ?

A

The 10% rule

The 75% rule.

7
Q

What is the 10% rule?

A

It must satisfy ONE of these this.
With the segement profits > 10% of total profits or loss

key = its reported profit or loss is 10% or more of the
greater of
(i) the combined 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
so CHOOSE THE HIGHER OF PROFIT OR LOSS AND IT HAS TO BE 10% OF TOTAL PROFIT OR LOSS ( E.G. LETS SAY i) 200 and ii) 300 you choice ii) and if total profit is 60, well 10% of 300 = 30 which is 50% of 60, so its reportable

8
Q

What is the 75% rule? ( hint this is after you have identified which segements are reportable.

A
9
Q

Determine this.

A
10
Q

Now using this an information determine the 10% and 75% rule.

A
11
Q

Once we have idenitified our operating segements and determined which segments are reportable, we need to make apporpriate disclousers on each segement, which can be classfied into 4 categories?

A

1) General information
2) Information about reportable segments
3) Reconciliations
4) Entity-wide information

12
Q

For general information what are the 3 things you should disclose?

A

1) Factors used to identify the reportable segments.
2) Judgements in applying the aggregation criteria
3) Types of products/services generating revenue.

13
Q

What should be disclosed with information about reportable segements?

A

Dont have to learn but you know main idea.

14
Q

What should be disclosed with reconciliations?

A

Explanations of the indiviudal number per segement to total numbers
YOU HAVE TO RECONCILE THESE 4.
Total revenue of reportable segments to the
entity’s revenue
• Total profit or loss of reportable segments to
the entity’s profit or loss
• Total assets of reportable segments to the
entity’s assets
• Total liabilities of reportable segments to the
entity’s liabilities

15
Q

What needs to be disclosed with entity wide infomation?

A

This is entitiy level of all the segements
1) info about products or services (revenue for each product
or service)
2) • Geographical areas: revenue and non-current
assets for the entity’s home country and (in
total) for all foreign countries.
3) Major customer: if any single customer
accounts for at least 10% of total external
revenue

16
Q

What is a massive problem with segement reporting?

A

Who’s CODM? IFRS 8 defines it as a function.
• CODM’s discretion as to the:
– definition of each segment
– allocation of common costs to segments
– definition of some of the items to be disclosed, e.g., net
assets
– “quality” of the items to be disclosed, e.g., depending
on the availability of information.
( just say the CODM have a lot of power)

17
Q

If firms were to provide all relevant and highest standards

of information ….

A

, regulation would be redundant.

18
Q

The benefits of more and high quality disclosure of

accounting information are…..

A

reduces costs of capital, reduces information asymmetry, improves
market efficiency, attracts more investments, etc.

19
Q

What are 2 theories that explain why firms do not disclose all information?

A

Proprietary cost theory

Agency theory

20
Q

What is the Proprietary cost theory ?

A

Its costs to owner, as you are providing trade secrets to outside world, it could provide advantage to them. Also to block new rivilarly.

21
Q

What is the agency theory?

A

– Withholding information could conceal managers’ self-interests, and hence lower monitoring/agency costs.