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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC)   No 1606/2002 of the European Parliament and of the Council

Content

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Segment accounting policies

44. Segment information should be prepared in conformity with the accounting policies adopted for preparing and presenting the financial statements of the consolidated group or enterprise.

45. There is a presumption that the accounting policies that the directors and management of an enterprise have chosen to use, in preparing its consolidated or enterprise-wide financial statements, are those that the directors and management believe are the most appropriate for external reporting purposes. Since the purpose of segment information is to help users of financial statements better understand and make more informed judgements about the enterprise as a whole, this Standard requires the use, in preparing segment information, of the accounting policies that the directors and management have chosen. That does not mean, however, that the consolidated or enterprise accounting policies are to be applied to reportable segments as if the segments were separate stand-alone reporting entities. A detailed calculation done in applying a particular accounting policy at the enterprise-wide level may be allocated to segments if there is a reasonable basis for doing so. Pension calculations, for example, often are done for an enterprise as a whole, but the enterprise-wide figures may be allocated to segments based on salary and demographic data for the segments.

46. This Standard does not prohibit the disclosure of additional segment information that is prepared on a basis other than the accounting policies adopted for the consolidated or enterprise financial statements provided that (a) the information is reported internally to the board of directors and the chief executive officer for purposes of making decisions about allocating resources to the segment and assessing its performance and (b) the basis of measurement for this additional information is clearly described.

47. Assets that are jointly used by two or more segments should be allocated to segments if, and only if, their related revenues and expenses also are allocated to those segments.

48. The way in which asset, liability, revenue, and expense items are allocated to segments depends on such factors as the nature of those items, the activities conducted by the segment, and the relative autonomy of that segment. It is not possible or appropriate to specify a single basis of allocation that should be adopted by all enterprises. Nor is it appropriate to force allocation of enterprise asset, liability, revenue, and expense items that relate jointly to two or more segments, if the only basis for making those allocations is arbitrary or difficult to understand. At the same time, the definitions of segment revenue, segment expense, segment assets, and segment liabilities are interrelated, and the resulting allocations should be consistent. Therefore, jointly used assets are allocated to segments if, and only if, their related revenues and expenses also are allocated to those segments. For example, an asset is included in segment assets if, and only if, the related depreciation or amortisation is deducted in measuring segment result.

Disclosure

49. Paragraphs 50 to 67 specify the disclosures required for reportable segments for an enterprise's primary segment reporting format. Paragraphs 68 to 72 identify the disclosures required for an enterprise's secondary reporting format. Enterprises are encouraged to present all of the primary-segment disclosures identified in paragraphs 50 to 67 for each reportable secondary segment, although paragraphs 68 to 72 require considerably less disclosure on the secondary basis. Paragraphs 74 to 83 address several other segment disclosure matters. Appendix B to this Standard illustrates application of these disclosure standards.

Primary reporting format

50. The disclosure requirements in paragraphs 51 to 67 should be applied to each reportable segment based on an enterprise's primary reporting format.

51. An enterprise should disclose segment revenue for each reportable segment. Segment revenue from sales to external customers and segment revenue from transactions with other segments should be separately reported.

52. An entity shall disclose segment result for each reportable segment, presenting the result from continuing operations separately from the result from discontinued operations.

52A. An entity shall restate segment results in prior periods presented in the financial statements so that the disclosures required by paragraph 52 relating to discontinued operations relate to all operations that had been classified as discontinued at the balance sheet date of the latest period presented.

53. If an enterprise can compute segment net profit or loss or some other measure of segment profitability other than segment result without arbitrary allocations, reporting of such amount(s) is encouraged in addition to segment result, appropriately described. If that measure is prepared on a basis other than the accounting policies adopted for the consolidated or enterprise financial statements, the enterprise will include in its financial statements a clear description of the basis of measurement.^

54. An example of a measure of segment performance above segment result on the income statement is gross margin on sales. Examples of measures of segment performance below segment result on the income statement are profit or loss from ordinary activities (either before or after income taxes) and net profit or loss.

55. An enterprise should disclose the total carrying amount of segment assets for each reportable segment.

56. An enterprise should disclose segment liabilities for each reportable segment.

57. An enterprise should disclose the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets) for each reportable segment. While this sometimes is referred to as capital additions or capital expenditure, the measurement required by this principle should be on an accrual basis, not a cash basis.

58. An enterprise should disclose the total amount of expense included in segment result for depreciation and amortisation of segment assets for the period for each reportable segment.

59. An enterprise is encouraged, but not required to disclose the nature and amount of any items of segment revenue and segment expense that are of such size, nature, or incidence that their disclosure is relevant to explain the performance of each reportable segment for the period.

60. IAS 1 requires that when items of income and expense are material, their nature and amount shall be disclosed separately. IAS 1 offers a number of examples, including write-downs of inventories and property, plant, and equipment, provisions for restructurings, disposals of property, plant, and equipment and long-term investments, discontinuing operations, litigation settlements, and reversals of provisions. Paragraph 59 is not intended to change the classification of any such items or to change the measurement of such items. The disclosure encouraged by that paragraph, however, does change the level at which the significance of such items is evaluated for disclosure purposes from the entity level to the segment level.

61. An enterprise should disclose, for each reportable segment, the total amount of significant non-cash expenses, other than depreciation and amortisation for which separate disclosure is required by paragraph 58, that were included in segment expense and, therefore, deducted in measuring segment result.

62. IAS 7 requires that an enterprise present a cash flow statement that separately reports cash flows from operating, investing, and financing activities. IAS 7 notes that disclosing cash flow information for each reportable industry and geographical segment is relevant to understanding the enterprise's overall financial position, liquidity, and cash flows. IAS 7 encourages the disclosure of such information. This Standard also encourages the segment cash flow disclosures that are encouraged by IAS 7. Additionally, it encourages disclosure of significant non-cash revenues that were included in segment revenue and, therefore, added in measuring segment result.

63. An enterprise that provides the segment cash flow disclosures that are encouraged by IAS 7 need not also disclose depreciation and amortisation expense pursuant to paragraph 58 or non-cash expenses pursuant to paragraph 61.

64. An enterprise should disclose, for each reportable segment, the aggregate of the enterprise's share of the net profit or loss of associates, joint ventures, or other investments accounted for under the equity method if substantially all of those associates' operations are within that single segment.

65. While a single aggregate amount is disclosed pursuant to the preceding paragraph, each associate, joint venture, or other equity method investment is assessed individually to determine whether its operations are substantially all within a segment.

66. If an enterprise's aggregate share of the net profit or loss of associates, joint ventures, or other investments accounted for under the equity method is disclosed by reportable segment, the aggregate investments in those associates and joint ventures should also be disclosed by reportable segment.

67. An entity shall present a reconciliation between the information disclosed for reportable segments and the aggregated information in the consolidated or individual financial statements. In presenting the reconciliation, the entity shall reconcile segment revenue to entity revenue from external customers (including disclosure of the amount of entity revenue from external customers not included in any segment); segment result from continuing operations shall be reconciled to a comparable measure of entity operating profit or loss from continuing operations as well as to entity profit and loss from continuing operations; segment result from discontinued operations shall be reconciled to entity profit or loss from discontinued operations; segment assets shall be reconciled to enterprise liabilities

Secondary segment information

68. Paragraphs 50 to 67 identify the disclosure requirements to be applied to each reportable segment based on an enterprise's primary reporting format. Paragraphs 69 to 72 identify the disclosure requirements to be applied to each reportable segment based on an enterprise's secondary reporting format, as follows:

(a) if an enterprise's primary format is business segments, the required secondary-format disclosures are identified in paragraph 69;

(b) if an enterprise's primary format is geographical segments based on location of assets (where the enterprise's products are produced or where its service delivery operations are based), the required secondary-format disclosures are identified in paragraphs 70 and 71;

(c) if an enterprise's primary format is geographical segments based on the location of its customers (where its products are sold or services are rendered), the required secondary-format disclosures are identified in paragraphs 70 and 72.

69. If an enterprise's primary format for reporting segment information is business segments, it should also report the following information:

(a) segment revenue from external customers by geographical area based on the geographical location of its customers, for each geographical segment whose revenue from sales to external customers is 10 % or more of total enterprise revenue from sales to all external customers;

(b) the total carrying amount of segment assets by geographical location of assets, for each geographical segment whose segment assets are 10 % or more of the total assets of all geographical segments; and

(c) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets) by geographical location of assets, for each geographical segment whose segment assets are 10 % or more of the total assets of all geographical segments.

70. If an enterprise's primary format for reporting segment information is geographical segments (whether based on location of assets or location of customers), it should also report the following segment information for each business segment whose revenue from sales to external customers is 10 % or more of total enterprise revenue from sales to all external customers or whose segment assets are 10 % or more of the total assets of all business segments:

(a) segment revenue from external customers;

(b) the total carrying amount of segment assets; and

(c) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets).

71. If an enterprise's primary format for reporting segment information is geographical segments that are based on location of assets, and if the location of its customers is different from the location of its assets, then the enterprise should also report revenue from sales to external customers for each customer-based geographical segment whose revenue from sales to external customers is 10 % or more of total enterprise revenue from sales to all external customers.

72. If an enterprise's primary format for reporting segment information is geographical segments that are based on location of customers, and if the enterprise's assets are located in different geographical areas from its customers, then the enterprise should also report the following segment information for each asset-based geographical segment whose revenue from sales to external customers or segment assets are 10 % or more of related consolidated or total enterprise amounts:

(a) the total carrying amount of segment assets by geographical location of the assets; and

(b) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets) by location of the assets.

Illustrative segment disclosures

73. Appendix B to this Standard presents an illustration of the disclosures for primary and secondary reporting formats that are required by this Standard.

Other disclosure matters

74. If a business segment or geographical segment for which information is reported to the board of directors and chief executive officer is not a reportable segment because it earns a majority of its revenue from sales to other segments, but none the less its revenue from sales to external customers is 10 % or more of total enterprise revenue from sales to all external customers, the enterprise should disclose that fact and the amounts of revenue from (a) sales to external customers and (b) internal sales to other segments.

75. In measuring and reporting segment revenue from transactions with other segments, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements.

76. Changes in accounting policies adopted for segment reporting that have a material effect on segment information should be disclosed, and prior period segment information presented for comparative purposes should be restated unless it is impracticable to do so. Such disclosure should include a description of the nature of the change, the reasons for the change, the fact that comparative information has been restated or that it is impracticable to do so, and the financial effect of the change, if it is reasonably determinable. If an enterprise changes the identification of its segments and it does not restate prior period segment information on the new basis because it is impracticable to do so, then for the purpose of comparison the enterprise should report segment data for both the old and the new bases of segmentation in the year in which it changes the identification of its segments.

77. Changes in accounting policies applied by the entity are dealt with in IAS 8. IAS 8 requires that changes in accounting policy shall be made only if required by a Standard or Interpretation, or if the change will result in reliable and more relevant information about transactions, other events or conditions in the financial statements of the entity.

78. Changes in accounting policies applied at the entity level that affect segment information are dealt with in accordance with IAS 8. Unless a new Standard or Interpretation specifies otherwise, IAS 8 requires that:

(a) a change in accounting policy shall be applied retrospectively and prior period information restated unless it is impracticable to determine either the cumulative effect or the period-specific effects of the change;

(b) if retrospective application is not practicable for all periods presented, the new accounting policy shall be applied retrospectively from the earliest practicable date; and

(c) if it is impracticable to determine the cumulative effect of applying the new accounting policy at the start of the current period, the policy shall be applied prospectively from the earliest date practicable.

79. Some changes in accounting policies relate specifically to segment reporting. Examples include changes in identification of segments and changes in the basis for allocating revenues and expenses to segments. Such changes can have a significant impact on the segment information reported but will not change aggregate financial information reported for the enterprise. To enable users to understand the changes and to assess trends, prior period segment information that is included in the financial statements for comparative purposes is restated, if practicable, to reflect the new accounting policy.

80. Paragraph 75 requires that, for segment reporting purposes, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. If an enterprise changes the method that it actually uses to price inter-segment transfers, that is not a change in accounting policy for which prior period segment data should be restated pursuant to paragraph 76. However, paragraph 75 requires disclosure of the change.

81. An enterprise should indicate the types of products and services included in each reported business segment and indicate the composition of each reported geographical segment, both primary and secondary, if not otherwise disclosed in the financial statements or elsewhere in the financial report.

82. To assess the impact of such matters as shifts in demand, changes in the price of inputs or other factors of production, and the development of alternative products and processes on a business segment, it is necessary to know the activities encompassed by that segment. Similarly, to assess the impact of changes in the economic and political environment on the risks and rates of returns of a geographical segment, it is important to know the composition of that geographical segment.

83. Previously reported segments that no longer satisfy the quantitative thresholds are not reported separately. They may no longer satisfy those thresholds, for example, because of a decline in demand or a change in management strategy or because a part of the operations of the segment has been sold or combined with other segments. An explanation of the reasons why a previously reported segment is no longer reported may also be useful in confirming expectations regarding declining markets and changes in enterprise strategies.

Effective date

84. This International Accounting Standard becomes operative for financial statements covering periods beginning on or after 1 July 1998. Earlier application is encouraged. If an enterprise applies this Standard for financial statements covering periods beginning before 1 July 1998 instead of the original IAS 14, the enterprise should disclose that fact. If financial statements include comparative information for periods prior to the effective date or earlier voluntary adoption of this Standard, restatement of segment data included therein to conform to the provisions of this Standard is required unless it is not practicable to do so, in which case the enterprise should disclose that fact.

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