Identifying reportable segments using the quantitative thresholds

An entity divides its business into 9 operating units for internal reporting purposes and presents information to the Chief Operating Decision Maker as follows:

Unit 1

Unit 2

Unit 3

Unit 4

Unit 5

Unit 6

Unit 7

Unit 8

Unit 9

Total

0

0

0

£0

0

Z000

0

i000

0

0

Revenue:

External

34,000

3,000

15,000

30,000

35,000

35,000

77,500

55,500

25,000

310,000

Internal

35,000

34,000

12,500

2,200

0

1,500

7,800

2,300

0

95,300

Total

69,000

37,000

27,500

32,200

35,000

36,500

85,300

57,800

25,000

405,300

Profit/(loss)

21,500

24,500

(4,500)

2,300

10,000

7,500

3,500

35,000

(21,250)

78,550

Assets

12,250

77,800

25,000

24,000

40,000

7,730

145,000

55,000

4,300

391,080

Assuming that none are eligible for aggregation under the qualitative aggregation criteria set out at 3.2.1 above, which units are required to be reported as operating segments in the entity”s financial statements?

Applying the above quantitative thresholds, Units 1, 2, 5, 7, 8 and 9 should be identified as reportable segments, as follows:

  • A Unit whose internal and external revenue is 10% or more of the total revenue of all segments is a reportable segment. On this criterion Unit 1 (17%), Unit 7 (21%) and Unit 8 (14%) are reportable segments.
  • A Unit is a reportable segment if its profit or loss, in absolute terms, is 10% or more of the greater of the combined profits of all profitable segments or the combined losses of all segments in loss. The combined profit of all profitable segments is £104.3m, which is greater than the total of £25.75m for segments in loss. On this basis, Unit 1 (21%), Unit 2 (23%), Unit 8 (34%) and the loss-making Unit 9 (20%) are reportable segments.
  • A Unit is also a reportable segment if the measure of assets reported to the chief operating decision maker is 10% or more of the total reported measure of assets of all segments. On this test, Unit 5 (10%) joins the list of reportable segments, with Unit 2 (20%), Unit 7 (37%) and Unit 8 (14%) having been already identified under other criteria.

Only those segments that have similar economic characteristics (demonstrated, for example, by similar long-term average gross margins) and are similar in all of the qualitative criteria set out at 3.2.1 above could be combined into a larger segment for reporting purposes.