IAS 14 is mandatory for enterprise whose equity or debt is publicly quoted or about to be publicly quoted. IAS 14 encourage other enterprise to provide segmental information, and if they do they should comply with the provisions of IAS 14.
When consolidated financial statements are presented as well as those of the parent, the segmental analysis need only be disclosed on a group basis.
IAS 14 contains the following definitions:
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.
A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments.
A reportable segment is a business segment or a geographical segment identified based on the foregoing definitions for which segment information is required to be disclosed buy this standard.
Segment revenue is revenue reported in the enterprise’s income statement that is directly attributable to a segment and the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, whether from sales to external customers or from transactions with other segments of the same enterprise.
Segment revenue includes a joint venture’s share of the revenue of a jointly controlled entity that us accounted for by proportionate consolidation in accordance with IAS 31 Financial reporting of Interests in Joint Ventures.
Segment expense is expense resulting from the operating activities of a segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to the segment, including expenses relating to sales to external customers and expenses relating to transactions the other segments of the same enterprise.
Segment expense includes a joint venture’s share of the expense of a jointly controlled entity that is accounted for by proportionate consolidation in accordance with IAS 31.
Extent of Segmental Analysis
In view of these definitions, it may be seen that segmental analysis of the income statement is only required as far as operating profit, presumably because allocations of finance costs would be likely to be arbitrary. Even general administrative costs are excluded.
Segmental analysis of assets and liabilities must be consistent with that for revenue and expenses.
In determining whether a segment is a reportable segment, a 10 per cent rule is adopted. A segment is a reportable segment if most of its sales are to external customers and it has at least 10 per cent of:
(i) Total sales, including sales to other segments, or
(ii) Total profit of all profit making segments, or total loss of all loss making segments or
(iii) Total assets of all segments
A segment which is below these levels may still be designated as a reportable segment.
A segment below the 10 per cent thresholds and not designated as a reportable segment may be combined with another similar segment. If this is not possible, it is included as an unallocated reconciling item
Identifying Reportable Segments
The main choice in identifying segments is between business segments and geographical segments. In fact, IAS 14 require some segmental analysis for both of these, but the IAS 14 disclosure requirements are based on the idea of ‘primary’ and ‘secondary’ segment reporting formats. If classification by business is the primary format, a full segmental analysis is required on this basis, with limited disclosure in the secondary geographical format, and vice versa if the geographical format is chosen as primary.
Most businesses will probably choose analysis by business as their primary format. One could also envisage a single product enterprise which produced geographical analysis only.
The geographical analysis may be done in two ways – by location of assets and by location of customers. There are thus three possible choices for the primary format:
Business (analysis by different product or services)
Geographical by location of assets
Geographical by location of customers