Segment Reporting and Discontinued Operations in Annual Reports

1. Chapter 4 Annual Report: Additional Financial Statements

2. By the end of this chapter, you should be able to: discuss the value segmental information adds to published financial statements; understand and evaluate the structure and content of Segmental Reports and discuss the major provisions of IFRS 8 Operating Segments; explain the criteria laid out in IFRS 5 Non-current assets held for sale and discontinued operations that need to be satisfied before an asset (or disposal group) is classified as ‘held for sale’;

3. explain the accounting significance of classifying an asset or disposal group as ‘held for sale’; • explain the meaning of the term ‘discontinued operations’ and discuss the impact of such operations on the statement of comprehensive income; • identify Related Parties in accordance with IAS 24.

4. SEGMENT REPORTING IFRS8 requires a management approach to segment reporting – i.e the identification of operating segments is based on the internal reports regularly reviewed by the entity’s chief operating decision maker (CODM) in order to allocate resources to the segment and assess its performance.

5. SEGMENT REPORTING - IFRS 8 • Attempts to provide investors with the information provided to management • It is specific to the organisation • It is more difficult to make inter-company comparisons because of differences in the ways in which companies compile/use these reports.

6. Criteria for identifying a segment An operating segment is a part of an entity: Discrete financial information has to be available That engages in business activities from which it may earn revenues and incur expenses Whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM)

7. Criteria for reporting a segment A reportable segment is one that meets any of the following criteria Its assets are 10% or more of the combined assets of all operating segments. Its reported revenue, from internal and external customers, is 10% or more of the combined revenue (internal and external) of all operating segments or 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

9. WHICH DIVISIONS ARE REPORTABLE SEGMENTS? Divisions Revenue Profit Assets £000 Exam-based Training 360 21 176 E-Learning 60 3 13 Corporate Training 125 5 84 Print Media 232 27 102 Online Publishing 124 2 31 Cable TV 73539 total 97463 445

10. Which divisions are reportable segments? Divisions Revenue Profit Assets £000 Exam-based Training 360* 21* 176* E-Learning 60 3 13 Corporate Training 125* 5 84* Print Media 232* 27* 102* Online Publishing 124* 2 31 Cable TV 73539 97463445 * = meets 10% requirement. Therefore, E-Learning and Cable TV are not segments.

11. WHICH DIVISIONS ARE REPORTABLE SEGMENTS? Does the total revenue from these reporting segments equal at least 75% of the company’s total revenues? Revenue Profit Assets Exam-based Training 360* 21* 176* Corporate Training 125* 5 84* Print Media 232* 27* 102* Online Publishing 124* 841 841/974 = 86% Therefore, the 75% test is met, so no other segments need to be identified or added

12. Operating segment disclosure IFRS 8 requires detailed disclosure of “information to enable users to evaluate the nature and financial effect of the business activities in which it engages and the economic environment in which it operates”

13. Discontinued operations IFRS 5 A discontinued operation is one that has either been disposed of, or is classified as held for sale Is part of a single coordinated plan to dispose of a separate major line of business, or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale. Represents a separate major line of business or geographical area of operations

14. Held for sale definition IFRS 5 A held for sale is one that has either It must be available for immediate sale in its present condition and its sale must be highly probable. Held for sale assets should not be depreciated from the classification date, be classified on the Balance sheet as a “held for sale” item – usually as part of current assets If the carrying amount will be recovered principally through a sale transaction rather than through continuing use and

15. Held for sale definition IFRS 5 Highly probable criteria • Management must be committed to a plan to sell • An active programme started to locate a buyer Actively marketed for sale at a price that is reasonable in relation to current fair value Sale should be expected to be completed within a year It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

16. PRESENTATION AND DISCLOSURE The results of continuing and discontinued operations should be disclosed separately It is necessary to identify the revenue, cost of sales and expenses that relate to the discontinued operation in arriving at the operating profit.

17. Arm’s length transactions IAS 24 Related Party disclosures Draws attention to the fact that results may have been affected by transactions with related parties. Related party relationships means transactions have not been entered into on an arm’s length basis, e.g. that the buyer and seller have not acted independently and have a relationship to each other.

18. as defined by IAS 24 Where one party has direct or indirect control of the other party or The parties entering into a transaction are subject to such influence from the same source that one party has subordinated its own separate interests. One party has such influence over the financial and operating policies of the other party that the other party might be inhibited from pursuing its own separate interests or

19. Let’s illustrate Let us assume that Arthur has 60% of the shares in, and so controls, Garden Supplies Ltd and: • he also has a 45% significant interest in Plant Growers Ltd. This means that in Garden Supplies Ltd’s financial statements Plant Growers Ltd are a related party, and in Plant Growers Ltd’s financial statements Garden Supplies Ltd are a related party; or • a close member of his family (in this case his domestic partner) owns a 45% interest in Plant Growers Ltd. This means that a similar treatment would be required and the two companies are related; or 3.Arthur still has the 60% interest in Garden Supplies Ltd but instead of having an investment in Plant Growers Ltd he is a member of Plant Growers Ltd’s key management personnel. This means that a similar treatment would be required and the two companies are related.

20. . Disclosures required of: • The person controlling the reporting entity and • Related party transactions such as • Purchase or sale of goods, property or other assets • Giving or receiving services • Agency arrangements, leasing arrangements • Transfer of research and development, license agreements • Provision of finance and management contracts

21. Disclose relationships – even if no transactions Disclose if there have been transactions • Nature of relationship • Types of transactions • Commercial detail – volumes, pricing policy.

22. Prejudicial transactions with related parties These can arise when the business enters into transactions on terms that would not be offered to an unrelated party. There are numerous ways that this could be arranged, such as: • Loans: • borrowing at above market rates; • lending at below market rates; • lending with no agreement as to date for repayment; • lending with little prospect of being repaid; • lending with the intention of writing off; • guaranteeing debts where there is no commercial advantage to the business. • Assets: • selling non-current assets at below market value; • selling goods at less than normal trade price; • providing services at less than normal rates; • transfer of know-how, or research and development transfers. • Trading: • sales made where there is secret agreement to repurchase to inflate current period revenue; • sales to inflate revenue with funds advanced to the debtor to allow the debt to be paid; • paying for services which have not been provided.

23. IAS 24 – NOT DEEMED TO BE RELATED PARTIES • Two companies with a director in common • However consider extent of his interest • Providers of finance, unions and government when in course of normal dealings with the entity • Single customer, supplier simply based on volume of business.

24. Reference Elliott, Barry, Elliott Jamie, Financial Accounting and Reporting 18th Edition chapter 4