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Subject Area - Accounting Financial Accounting Performance Segment Reporting AASB 114 is segment reporting. According to Deegan (2007), reporting entities gets involved in different activities therefore they provide aggregated results to financial statement users in their consolidated financial statements including some eliminations and adjustments derived from those different activities and locations (p.839). So, we are aggregating the results of many individual entities when we talk about reporting entity but among those individual entities, some might perform well or some perform poorly. Therefore, consolidated balance sheet is provided in order to hide those poor performances. Moreover, these combining balance sheets will have different financial structures and as a result there will be loss of information. Despite this, in the aggregation process profits and losses are out of sight. Operating Segment AASB 8 is operating segment. According to AASB 8, an operating segment is a component of an entity 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 to make decisions about resources to be allocated to the segment and assess its performance; and for which discrete financial information is available. 1. The advantages of segment reporting According to Deegan (2007), advantages of segment reporting are as follows: Segment reporting highlights performance of different segments at different levels of success and determines the overall business risk of an organization. It helps managers in decision making even if regulation is missing. Segment data provides managers to reveal accountability which in turn attracts additional investment funds. Even though if different segments in an organization are involved in different activities, it shows users of financial statements to forecast future profitability of an organization. It provides information to interested parties about operations of various sectors and locations of an organization (p.844845). 2. The disadvantages of requiring the provision of segment information According to Deegan (2007), disadvantages of segment reporting are as follows: Segment information increase costs for the organization where managers refused to take business risks in that particular segment which performs poorly. Find out how our expert essay writers can help you with your work... Due to segment reporting, competitors will get information about high profit segments of an organization. Thus, they will know how that organization is performing well than other organizations. As a result, competitors can further investigate Find more free essays like this one... We have a large reference library of essays that you can use as research materials to help with your own writing check out our free accounting essays. Share this resource with your friends... We hope you found this information in this free pdf useful. Please spread the word and tell your friends how this information has helped you with your studies and feel free to share this pdf with others, so it can help them too.
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The UK’s original provider of custom essays www.ukessays.com If you are using this resource in your work please remember to reference and cite the original work found here: http://www.ukessays.com/essays/accounting/financial-accounting-performance.php into a particular segment. Segment reporting highlights poorly performing segments and therefore it provides competitors to takeover bids. Unwanted attention from government and interest groups is drawn towards high profit segments due to segment reporting (p.845-846). 3. The requirements of the Australian Accounting Standard including the changes required when AASB 8: Operating Segments’ is adopted in 2009. According to Deegan (2007), changes required when AASB 8: Operating Segments is adopted in 2009 and requirements of the Australian Accounting Standard are as follows: Scope AASB 8 does not apply to not-for-profit entities in common with AASB 114 whereas AASB 114 applies to broad range of for-profit entities. Identification of segments AASB 114 provides information on a primary basis of segmentation and secondary basis of segmentation-business or geographical segmentation whereas separate identification of primary and secondary segments is not required under ‘new’ standard AASB 8. You can get expert help with your essays right now. Find out more... Operating segments would be identified by an organization on the basis of internal reports. These internal reports are reviewed by organization’s chief operating decision maker so as to make decisions about allocating resources to the segment and assessing their performance. On the other hand, AASB 114 requires identification of sets of segments based on related products and services; and geographical areas. Measurement of segment information In AASB 8, as per the definition of operating segment, it allows a component of an entity to sell either primarily or exclusively to other operating segments of an entity, if the entity is managed that way whereas AASB 114 requires entity to be identified as reportable entity if majority of its revenue is earned from sales to external customers. AASB 8 requires financial information about operating segments’ revenues, profits, assets and liabilities in order to provide measurements for chief operating decision maker for internal decision making. By comparison, AASB 114 limits segment information to be adopted as per accounting policies for preparing and presenting the external financial statements. AASB 8 does not require the detailed definitions of segment revenue, segment expense, segment result, segment assets and segment liabilities. In contrast, AASB 114 requires defining these terms relatively in detail. Disclosures AASB 8 requires reportable segments to provide a number of financial disclosures. In addition, it also requires the entity’s financial statements amounts to be corresponding to reconciliations of total reportable segment revenues, total profit or loss, total segment liabilities and total segment assets. AASB 8 requires all entity-wide disclosures which are related to the entity’s products and services, geographical information and information about major customers. Find more free essays like this one... We have a large reference library of essays that you can use as research materials to help with your own writing check out our free accounting essays. Share this resource with your friends... We hope you found this information in this free pdf useful. Please spread the word and tell your friends how this information has helped you with your studies and feel free to share this pdf with others, so it can help them too.
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The UK’s original provider of custom essays www.ukessays.com If you are using this resource in your work please remember to reference and cite the original work found here: http://www.ukessays.com/essays/accounting/financial-accounting-performance.php Above all, AASB 8 is more principles-based than AASB 114 being rules-based (p.846-864). According to Accounting Handbook (2007), a business segment or geographical segment is identified as a reportable segment if: (a) its revenue is earned from sales to external customers and if its revenue from sales to external customers and from transactions with other segments is 10 percent or more of the total revenue, external and internal, of all segments; or (b) segments profit or loss is 10 percent or more combining all the segments or (c) its assets are 10 percent or more of the combined assets of all operating segments (p.433). Part B 1. Evaluate the reasons provided by Qantas for not adopting early the new segment reporting accounting standards. Qantas did not adopt early the new segment reporting accounting standards because it is more principles-based than old one which is rules-based. Moreover, new segment reporting accounting standard requires identifying operating segments which are based on chief operating decision maker’s review of internal reports so that they can allocate resources to the segment and assess performance. This becomes more principles-based compared to former standard of identification of two sets of segments-that is business segments and geographical segments. In addition, Qantas’s costs will increase by appointing Chief operating decision maker for regular review of internal reports. This is also time-consuming. Furthermore, Qantas’ limited its reportable segments to those that earned a majority of their revenue from sales to external customers like UK, Europe, Japan, South-East Asia, North-East Asia, The Americas and Pacific and New Zealand. By adopting AASB 114, Segment reporting helps users of financial reports to understand Qantas’s past performance, its risks and returns; and it also helps to make judgements of Qantas as a whole. Find out how our expert essay writers can help you with your work... 2. What is the basis of Qantas’ ‘primary reporting format’? AASB 114 stated that: The dominant source and nature of an entity’s risks and returns shall govern whether its primary segment reporting format will be business segments or geographical segments. If the entity’s risks and rates of return are affected predominantly by differences in the products and service it produces, its primary format for reporting segment information shall be business segments, with secondary information reported geographically. Find more free essays like this one... We have a large reference library of essays that you can use as research materials to help with your own writing check out our free accounting essays. Share this resource with your friends... We hope you found this information in this free pdf useful. Please spread the word and tell your friends how this information has helped you with your studies and feel free to share this pdf with others, so it can help them too.
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For a reporting entity, it is requirement of AASB 114 to verify its ‘primary reporting format’, and this could be based either on business segmentation or geographical segmentation (Deegan, 2007, p.848-849). In the given case of Qantas, its ‘primary reporting format’ is business segments as its risks and returns are affected primarily by differences in the products and services its produces. 3. What is its ‘secondary reporting format’? ‘Secondary reporting format’ is automatically decided once ‘primary reporting segment’ is disclosed. In other words, secondary reporting format requires much less disclosure. If business segmentation is referred to be the primary reporting segment for segment disclosures then geographical segmentation becomes secondary reporting segment (Deegan, 2007, p. 848-849). As discussed above and in answer 2, ‘primary reporting segment’ of Qantas is business segment therefore geographical segment is its ‘secondary reporting format’. Moreover, a group or two or more countries is disclosed in Qantas’s report and therefore its ‘secondary reporting format’ is geographical segment. You can get expert help with your essays right now. Find out more... 4. Analyze the information provided under each format and explain how this information might be useful for investors seeking to assess the financial performance of the Qantas Group. By analyzing information in answer 2 and 3, that is Qantas’s business segment as ‘primary reporting segment’ and geographical segment as ‘secondary reporting format’, the information on risks and rates of return are affected by differences in products and services is available for investors to know financial reports. Therefore, investor gets information about Qantas, Jetstar, Qantas Holidays and Qantas Flight Catering-related and Australia, UK and Europe; Japan, South-East Asia, North-East Asia, The Americas and The Pacific, New Zealand and other geographical-related risks and returns. In addition, according to paragraph 27 of AASB 114, identifying segments as business segments or geographical segments is based on entity’s internal organizational and management structure. Therefore, if Qantas would have adopted new accounting standard, it would not have identified its organizational and management structure. Besides, Qantas organizational and internal reporting structure gives information of its source of geographical risks are results from the origin or destination of its sales. By adopting new standard, Qantas would not locate its geographical segments whether it is from location of its assets or its customers. Moreover, it helps in each segment’s past performance and also makes decisions on future allocation of resources. In case of Qantas, investors get idea about future allocation of resources in different segments as whether to invest in one of all four segments. They can decide if Qantas service has more assets and earns more revenue compared to other services or segments than they are likely to invest in Qantas service.
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The UK’s original provider of custom essays www.ukessays.com If you are using this resource in your work please remember to reference and cite the original work found here: http://www.ukessays.com/essays/accounting/financial-accounting-performance.php Furthermore, investors can get information on geographical segments as well. They can decide the performance by analysis of revenue by geographic region. In this case, Australia’s total revenue is greater than any other regions so investors like to invest in Australia. Find out how our expert essay writers can help you with your work... Also, business segment as primary reporting format gives information on revenue from sales to external customers if it is 10 percent or more of total revenue. Sales for inter-segment transfers are disclosed in financial report if primary reporting format is business segment. Therefore, on this basis investor gets idea on how much sales is done through inter-entity sales. Under AASB 114, it is required to indicate types of products or services in business segment and composition of each geographical segment. So in this regard any product’s information is analyzed and also its operations in different geographical area. 5. What additional information will Qantas be required to provide when it adopts Accounting Standard AASB 8? When Qantas adopts AASB 8 it requires following additional information under AASB 8: Operating Segments: AASB 8 applies to for-profit entities therefore Qantas needs debt and equity instruments in a public markets trading. Under AASB 8, Qantas will require explanation on segment’s profit and loss, assets and liabilities is required in order to measure each reportable segment. For the identification of segments under AASB 8, Qantas will first require Chief operating decision maker to regularly review the internal reports in order to allocate resources and assess performance. Furthermore, Qantas will also require information on revenues earned from reportable segment of each products or services. References Australian Accounting Standards Board (2007). AASB 8: Operating Segments. Retrieved on 10th September, 2008 from http://www.aasb.gov.au/admin/file/ content102/c3/AASB8_02-07.pdf Australian Accounting Standards Board (2007). AASB 114: Segment Reporting. Retrieved on 10th September, 2008 form http://www.aasb.gov.au/admin/file/ content102/c3/AASB114_07-04_COMPapr07_07-07.pdf
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