6.3 Interim Financial Reporting (PAS 34) and Operating Segments (PFRS 8)

Interim Financial Reporting (PAS 34) and Operating Segments (PFRS 8)

The FAR syllabus closes its "other topics" with two presentation standards that each carry one item: interim reporting (topic 8.5) and operating segments (topic 8.6). Both reward precise rules rather than long computations: what an interim report must contain, how income tax and seasonal items are measured in an interim period, and the 10% and 75% tests that decide which segments must be reported.

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1. PAS 34: Purpose and Minimum Content

PAS 34 does not require anyone to publish interim reports; regulators do (in the Philippines, the SEC requires quarterly reports from companies subject to its reportorial rules). When an entity states that its interim report complies with PFRS, PAS 34 applies.

A complete set of interim statements may be presented, but the minimum components are:

1. A condensed statement of financial position;
2. A condensed statement of profit or loss and other comprehensive income;
3. A condensed statement of changes in equity;
4. A condensed statement of cash flows; and
5. Selected explanatory notes, focusing on events and transactions significant to understanding changes since the last annual report.

Condensed statements must show at least each heading and subtotal of the most recent annual statements, plus basic and diluted EPS when PAS 33 applies.

Periods to Present

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2. Recognition and Measurement in Interim Periods

The general rule is that an entity applies the same accounting policies in interim statements as in its annual statements, and measurements are made on a year-to-date basis so that the frequency of reporting does not change the annual result.

Worked example. Laoag Corp. estimates annual pre-tax income of PHP 10,000,000 and annual income tax of PHP 2,700,000, an estimated effective rate of 27%. First-quarter pre-tax income is PHP 2,000,000, so Q1 tax expense is 2,000,000 x 27% = PHP 540,000. If by the second quarter the estimated annual rate falls to 26% and year-to-date pre-tax income is PHP 4,500,000, year-to-date tax is 4,500,000 x 26% = PHP 1,170,000, and Q2 tax expense is 1,170,000 - 540,000 = PHP 630,000; the Q1 amount is not restated.

A change in estimate during the final interim period that is not separately reported must be disclosed in the annual statements.

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3. PFRS 8: Identifying Operating Segments

PFRS 8 applies to entities whose debt or equity instruments are traded in a public market or that are filing to issue them. It uses the management approach: segments are reported the way the entity's chief operating decision maker (CODM) looks at the business.

An operating segment is a component of an entity:

1. That engages in business activities from which it may earn revenues and incur expenses (including transactions with other components);
2. Whose operating results are regularly reviewed by the CODM to allocate resources and assess performance; and
3. For which discrete financial information is available.

Corporate headquarters and post-employment benefit plans are not operating segments. A start-up operation can be a segment before it earns revenue. Segments may be aggregated if they have similar economic characteristics and are similar in products, production processes, customers, distribution methods, and regulatory environment.

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4. Quantitative Thresholds and the 75% Test

An operating segment is reportable if it meets any of the three 10% tests:

After the 10% tests, external revenue of the reportable segments must total at least 75% of the entity's external revenue; if not, more segments are added (even if they fail the 10% tests) until 75% is reached. PFRS 8 suggests that above ten reportable segments the information may become too detailed.

Worked example (amounts in PHP millions).

• Revenue threshold: 10% x 10,000 = 1,000, met by A, B, and C.
• Profit or loss threshold: profits total 900 + 150 + 90 + 20 = 1,160 and losses total 460, so the threshold is 10% x 1,160 = 116; A, B (loss of 400 in absolute amount), and C meet it, but D (90) does not.
• Asset threshold: 10% x 9,000 = 900, met by A, B, and C.
• 75% test: external revenue of A, B, and C is 5,000 + 1,500 + 1,200 = 7,700, which is 85.6% of external revenue of 9,000. No further segments are needed; D, E, and F are combined in an "all other segments" category.

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5. Segment Disclosures

For each reportable segment the entity discloses a measure of profit or loss, and measures of total assets and liabilities if those amounts are regularly provided to the CODM, together with specified items such as external and inter-segment revenue, interest, depreciation, and income tax. It also presents reconciliations of segment totals to the entity's revenue, profit or loss, assets, and liabilities.

Entity-wide disclosures apply even to an entity with a single segment: revenue by product or service, revenue and non-current assets by geographic area (the Philippines versus foreign countries), and major customers, meaning the total revenue from any single external customer that accounts for 10% or more of entity revenue and the segments reporting it. The customer's identity need not be disclosed.