Financial Accounting Report: Segment Reporting in Australia

This report provides a comprehensive overview of segment reporting in financial accounting, focusing on its significance for companies. It explores the advantages of segment reporting, such as highlighting financial performance of different business segments and aiding in informed decision-making, as well as the disadvantages, including additional costs and potential disclosure of sensitive financial information to competitors. The report delves into the Australian Accounting Standards Board (AASB) 8, which governs segment reporting, and defines operating segments, reportable segments, and the criteria for their identification. It explains the management approach in segment reporting, the quantitative thresholds for disclosure, and the measurement of segment items. The report also discusses the importance of sufficient segment information and the potential challenges associated with its interpretation. References to relevant academic sources support the analysis, providing a well-rounded understanding of the topic.

FINANCIAL
ACCOUNTING

SEGMENT REPORTING
Segment reporting is considered as a crucial aspect for the companies in the
process of financial reporting. The main aim of segment reporting is to provide
information about the financial performance and financial position of the various
operating segments of the companies. The users of the financial statements can
obtain the useful additional information of the consolidated financial statements
where data aggregation is seen

ADVANTAGES
The advantages of segment reporting are as follows:
 Segment reporting helps in emphasising on the financial performance of
different parts of a business entity
 It helps the users in more informed decision-making process regarding future
profitability and risk exposure
 It increases the accountability of the management (Kang & Gray, 2013)
 The users of the financial statements become able in making more informed
future profitability related prediction through the delivery of more refined data
with the help of segment reporting

DISADVANTAGES
The disadvantages are as below:
 Segment reporting imposes certain additional costs on the companies
 It opens the financial information of the segments to the competitors that
increases the risk of bids for takeover in case segments of a company are running
in loses
 Disclosure of additional data and information through segment reporting might
work as an encouragement for the new business entrants in the industry
(Nichols, Street & Tarca, 2013)
 It needs to be mentioned that the segment data can lead to political attention
from different interest groups like employee, environmental groups and others
(Armitage, Webb & Glynn, 2016)

OPERATING SEGMENT
AASB 8 Operating Segment is considered as the relevant accounting standards for
segment reporting in Australia which is principle based (aasb.gov.au, 2019).
AASB 8 states that it is needed for an entity to disclose the information for enabling
the users in evaluating the financial performance of the companies and its segments.
Management approach is a crucial aspect in segment reporting which helps in
improving financial reporting since it helps the users in reviewing the financial
information of the firms from management’s perspectives.
According to AASB 8, an operating segment can be considered as an entity’s
element which involves in business activities for earning revenue and incurring
expense and the chief operating decision-maker of the regularly review the
operating results of these elements (Bugeja, Czernkowski & Moran, 2015).

OPERATING SEGMENT
As per the requirement of AASB 8, it is needed to identify the operating segments
based on the internal reports that the chief decision-maker of a firm regularly
reviews for the effective allocation of resources to the segment so that
performance can be assessed. AASB 8 also states that ‘chief operating decision
maker’ is considered as a function that is responsible for resource allocation and
performance assessment of the operating segments. Chief Executive Officer and
Chief Operating Officer is often considered as the chief operating decision-
makers (aasb.gov.au, 2019).

REPORTABLE OPERATING
SEGMENT
According to AASB 8 puts the obligation on the companies not to consider all
parts of an entity as operating segments due to the fact that they may nor earn
revenue and incur expenses such as headquarters. A reportable segment is an
operating segment that satisfies the provided criteria of AASB 8 and its
information is disclosed in accordance with the standards of AASB 8
(aasb.gov.au, 2019).
AASB 8 provides the rule to aggregate two or more operating segments into a
single operating segment while adhering to the core principles of segment
reporting. The quantitative threshold to disclose operating segment is a crucial
matter. As per AASB 8, for the separate reporting of information of an operating
segment, one of the three quantitative threshold needs to be met.

REPORTABLE OPERATING
SEGMENT
According to AASB 8, Paragraph 14, in case the operating segments have same
economic characteristics while sharing most of the aggregation criteria mentioned
under Paragraph 12, an entity may combine the operating segment information that
do not satisfy the quantitative threshold for reportable operating segment. The
requirement of AASB 8 states that a certain part of the total revenue of an entity
needs to be attributed towards the operating segment.
It is needed for the entity to identify additional operating segment as reportable
segment in case the total revenue reported by the segments is not more than 75% of
the total revenue of the entity (Birt, Joshi & Kend, 2017). Thus, the requirement of
AASB 8, Paragraph 16 is that an entity needs to combine and disclose information
about the business activities and operating segments that are not reportable.

MEASUREMENT OF OPERATING
SEGMENT
In the process of segment reporting, the appropriate measurement of segment
items is considered as an essential aspect and the detailed guidelines on the
measurement of different segment items like segment revenue, segment profit,
segment assets and segment liabilities can be obtained from AASB 114.
According to the requirement of AASB 8, the reported amount for every operating
segment to be the reported measure to the chief operating decision-maker in order
to allocate the resources to the segments and performance assessment. As per the
requirement of AASB 114, it is needed to prepare the segment information in
accordance with the adopted accounting policies for the preparation and
presentation of the external financial statements (legislation.gov.au, 2019).

SEGMENT INFORMATION
In the presence of sufficient segment information, it is not easy to discuss of the
poor business decisions. Even in the presence of adequate segment data through
segment reporting, high aggregation can be seen in the provided information and
it makes it tough for understanding on how the competitors can be become
advantageous from the provided information.
It is required to be mentioned that the parties are not able in gaining information
about the actual implemented business practice from the provide data from
segment reporting. Thus, in order to get the extra advantage, it is needed for the
competitors to access further private information of the segments of the
companies. These are crucial aspects to consider (Tan et al., 2016).

SEGMENT INFORMATION
It is noteworthy to mention the fact that in case the chief operating decision maker
of an entity undertakes reviewing certain components of an entity in order to
allocate the resources and to assess the performance, it will be required to
consider these components for the purpose of reporting the entity’s operating
segment.
Information that are needed to be presented differently in the reporting segment
are sales, profit, net profit, assets, liabilities and other aspects associated with
these items. Thus, it can be seen from the above discussion that the managements
of the companies are required to undertake the separate reporting of financial data
and information of the reporting segments of an entity (Handley, Wright & Evans,
2018).

REFERENCES
 AASB 114 - Segment Reporting - July 2004. (2019). Legislation.gov.au. Retrieved 8 June 2019, from https://www.legislation.gov.au/Details/F2014C00622
 Aasb.gov.au. (2019). Operating Segments. Retrieved 8 June 2019, from https://www.aasb.gov.au/admin/file/content105/c9/AASB8_08-15_COMPnov15_01-16.pdf
 Armitage, H. M., Webb, A., & Glynn, J. (2016). The use of management accounting techniques by small and medium‐sized enterprises: a field study of Canadian and
Australian practice. Accounting Perspectives, 15(1), 31-69.
 Birt, J., Joshi, M., & Kend, M. (2017). Segment reporting in a developing economy: the Indian banking sector. Asian Review of Accounting, 25(1), 127-147.
 Brown, P. J., Matolcsy, Z., & Wells, P. (2014). Group versus individual compensation schemes for senior executives and firm performance: Some evidence based on
archival data. Journal of Contemporary Accounting & Economics, 10(2), 100-114.
 Bugeja, M., Czernkowski, R., & Moran, D. (2015). The impact of the management approach on segment reporting. Journal of Business Finance & Accounting, 42(3-
4), 310-366.
 Franzen, N., & Weißenberger, B. E. (2015). The adoption of IFRS 8–no headway made? Evidence from segment reporting practices in Germany. Journal of Applied
Accounting Research, 16(1), 88-113.
 Handley, K., Wright, S., & Evans, E. (2018). SME Reporting in Australia: Where to Now for Decision‐usefulness?. Australian Accounting Review, 28(2), 251-265.
 Kang, H., & Gray, S. J. (2013). Segment reporting practices in Australia: has IFRS 8 made a difference?. Australian Accounting Review, 23(3), 232-243.
 Leung, E., & Verriest, A. (2015). The impact of IFRS 8 on geographical segment information. Journal of Business Finance & Accounting, 42(3-4), 273-309.
 Nichols, N. B., Street, D. L., & Tarca, A. (2013). The impact of segment reporting under the IFRS 8 and SFAS 131 management approach: A research
review. Journal of International Financial Management & Accounting, 24(3), 261-312.
 Tan, A., Chatterjee, B., Wise, V., & Hossain, M. (2016). An investigation into the potential adoption of International Financial Reporting Standards in the United
States: implications and implementation. Australian Accounting Review, 26(1), 45-65.