The Requirements of AASB 8, Operating Segments - Case Study Example

Student’s Name Instructor’s Name Course Title Date The Requirements of AASB 8, Operating Segments Introduction The AASB 8 is an Australian equivalent of IFRS 8 which also relates to segment reporting and issued by the International Accounting Standards Board. The AASB 8, Operating Segments have varying effects on different entities. Unlisted and not-for-profit entities are exempted from the segment reporting requirements under this accounting standard (Harmer). Those entities within the AASB 8 scope are those that are listed as well as those in the process of being listed (Charteredaccountants). The accounting standard requires these entities to disclose segment information within the notes of their financial information. McAleese Group is an Australian transport and logistics company that run a comprehensive company-owned fleet that operates across the nation. It is a listed company which is involved in a number of business activities located in widely dispersed locations. As such, it falls under the scope of AASB 8. Role of Segment Disclosures in Financial Statements Big companies such as McAleese Group are further split into different segments dealing in different lines of businesses, with different sets of clients or in different geographic areas. For such companies, consolidated financial statements provide aggregated information by combining the results of the different subsidiaries thereby resulting in loss of information as far as each subsidiary or business segment is concerned. Barry, Epstein and Jermakowicz (920) are of the view that business enterprises have become increasingly complex. They point out that the need for consolidated financial reporting became apparent in the mid-1960 with the increased popularity of the conglomerate and the subsidiary form of businesses. Barry, Epstein and Jermakowicz (920) point out that while consolidated reporting became obviously necessary, it could not provide users with adequate information and insights to enable the making of informed economic decisions. Wahlen and Baginski (281) point out that presenting a company’s financial information as aggregate results hides potentially important differences in the profitability of the different product lines or geographic markets that a business operates in. They are of the view that segment disclosures in financial statements allow analysts to examine the profit margin, return on assets as well as asset turnover at a greater depth. Through segment reporting, analysts are able to predict the future profitability of the different segments. This, in turn, allows them to air their opinions about the current strategies an entity is using. Segment disclosure highlights the performance of the different parts of an organization, thereby allowing the business leaders to identify business areas that require more support (Harmer). Operating Segment and Reportable Segment Paragraph five of the AASB 8 explains what an operating segment is. It points out that an operating segment is a component of an organization which takes part in business activities from which it is able to earn revenues as well as record losses (Charteredaccountants). Additionally, the operating results of an operating segment should be accessed by an organization’s Chief operating decision maker for constant review and decision making regarding resource allocation. Another requirement that a component needs to meet to be acknowledged as an operating segment is that it should make discrete financial information available (Harmer). Paragraph five goes further to point out that an operating segment must not necessarily have already engaged in revenue generating activities, but it can also be taking part in business activities that are yet to generate revenue. Paragraph 9 of the AASB 8 points out that in general, each operating segment has a segment manager who reports to the CODM. On the other hand, a reportable segment is an operating segment that meets the threshold of reporting its individual financial information. This threshold is highlighted from paragraph11 of the AASB 8 up to paragraph 13. The 11th paragraph points out that an entity should exceed the quantitative threshold explained in the 13th paragraph. To be recognized as a reporting segment, an entity must record revenues that are 10% or more of all the combined organizational revenues. Additionally, the absolute level of its profits or losses capture in its financial statements should be 10% or more of the organization’s reported profits and losses. The final quantitative threshold as described in paragraph 13 is that an entity’s assets should be 10% or more of the total assets the organization owns. However, some segments, whose financial information management believes is important for users of financial information, may qualify as reportable segments even without meeting the quantitative threshold (par 13). McAleese Group has four reportable segments namely The Heavy Haulage & Lifting division, The Bulk Haulage division, The Oil & Gas division and The Specialized Transport division. The Heavy Haulage & Lifting division engages in a number of business activities with the main focus being on providing haulage and heavy lifting solutions. Bulk Haulage division is responsible for the provision of bulk commodities haulage while the Oil & Gas division deals in the transportation of liquid and gaseous fuel across the country. The Specialized Transport division engages in the transportation of relatively light loads described as “less than truckload consolidated freight.” The chief executive officer of McAleese Group is responsible for reviewing of each division’s internal management reports on a regular basis. The Concept of Chief Operating Decision Maker (CODM) According to the IFRS, the term “chief operating decision maker” refers to a function as opposed to a person holding a specific management position within an organization (PKF, 820). The CODM main function is to allocate resources within the organization and to analyze the performance of the different operating segments of an entity (PKF, 820). The function can be undertaken by different individuals or groups depending on the organizational structure of an entity. For most organizations, the chief operating decision maker role is played by the chief executive officer or the chief operating officer (Ernst & Young, 120). In other organizations, the responsibility usually falls on a group of executive directors. According to Ernst & Young (122) deciding who the CODM is can be quite difficult and that the judgment is required to ensure that the right individual or group of individuals is identified. For most companies in which the board of directors includes non-executive directors, it would be inappropriate to identify the board as the CODM. This is because the role of the non-executive board directors is limited to governance. They don’t partake in management decision making which largely involves the allocation of resources within an entity (PKF, 820). The role of the CODM as per the AASB 8 is highlighted in paragraph 7. The paragraph explains that the CODM is a function as opposed to a manager with a specific title. It goes ahead to highlight the function of the CODM pointing out that his role is “to allocate resources to and assess the performance of the operating segments of an entity (par 7).” The AASB 8 also acknowledges that the function of the CODM is not only limited to the CEO, but it can also be carried out by a group of executive directors as well as an organization’s chief operating officer. The CODM is often found at the senior most level of executive decision making in an organization (Ernst & Young, 120). This means that the CODM should be distinguished from higher levels of management because their primary role is an approval or oversight one. The CODM is usually provided information at a more aggregated level, with the segment managers having to report directly to them. The segment managers are often required to maintain constant contact with the CODM, during which they discuss important issues as far as each segment is concerned (Ernst & Young, 120). These issues include financial results, operating activities as well as plans and forecasts for each segment. At McAleese Group, the board of directors includes non-executive directors who do not take part in making of management decisions. The company is headed by Mark Rowsthorn, who is the managing director and chief executive officer. The chief executive officer of McAleese Group is responsible for reviewing of each division’s internal management reports on a regular basis. This means that Mark Rowsthorn is the CODM. He joined the company in 2011 from Asciano Limited, where he also held the position of managing director and CEO. He is quite experienced, having worked in the international as well as the Australian transport sector for over 30 years. Justification of McAleese Group’s Choice of Reportable Segments As pointed out earlier, an entity within an organization needs to meet a certain threshold for it to be qualified as a reportable segment. The 11th paragraph points out that an entity should exceed the quantitative threshold explained in the 13th paragraph. In this paper, the quantitative threshold is explained under the Operating segment and Reportable segment Subtopic. To justify the company’s choice of reportable segments, it would be important to compare the company’s overall revenues, profit/loss as well as assets to each of the division’s revenue, profit/loss and assets. For the year ended June 2015, McAleese Group reported combined revenues of $ 636,888,000. The company also reported a loss of $ 90,944,000 and assets worth $ 429,202,000. On the other hand, the revenue levels reported by the Heavy Haulage & Lifting division were $ 143, 922,000 (22.6% of the total). The division reported a $ 64, 169,000 (70.56%) loss and assets worth $ 152, 648,000 (35.57%). For the Bulk Haulage division, the revenues were $ 264,420,000 (41.52%) while the reported loss was $ 53,267,000 (58.57%). The assets in this division were $ 124,432,000 (28.99%). For the oil and gas division, recorded revenue was $ 146,036,000 (22.93%), reported losses were $ 58,844,000 (64.70%) and assets were $ 73,038,000 (17.02%). For specialized transport, revenues were $ 82, 465,000 (12.44%) while losses were $ 5,286,000 (5.81%). The division reported total assets worth $ 18,605,000 (4.33%). The calculations are indicated in appendix 1. Financial Analysis of the Reportable Segments Heavy Haulage & Lifting division Over the past three years, the revenues earned by this division have been on a steady decline. In 2013, the revenues were $ 253,405,000 and in 2014, the revenues declined to $ 143, 922,000. The latest financial statements indicate a further decline in revenues earned by the heavy haulage and lifting division to $ 143,922,000 for the year ended June 2015. This represents a 43.20% decline in revenues from 2013 (Appendix 2). Losses after tax have also increased by a significant margin compared to 2013 when reported losses after tax were $ 54,901,000. In 2013, the reported assets were $ 280, 919,000, but as of 2015, the assets had declined by 45.66% to $ 152,648,000 (Appendix 2). In 2013, the division made $ 253,405,000 in revenues, which was a 40% contribution to the total group revenue. In 2014, the revenue contribution was $ 186,548,000, representing 24.54% of the total revenue. In 2015, the percentage contribution by the heavy haulage division to the total group revenue was 22.60% at $ 143, 922,000. It is evident that the division’s contribution to the group’s revenue has been declining over the years, which is a worrying trend. Despite the declining revenues, there are still a number of opportunities that the company can capitalize on. Increased construction activities in rural towns are a great opportunity that the division can utilize to increase its revenues. There are also a number of mega projects proposed by the government as well as the private sector. Such projects are a great opportunity that the division can utilize to generate more revenue and expand the company’s influence across the country. The entry of new players into the industry means that the division is now under the threat of increased competition. Additionally, the economy has been stagnant for quite some time with both the government and the private sector engaging in very little construction activities. Bulk Haulage division This division has reported a significant rise in the amount of revenues. However, the amount of revenues earned for the year ending June 2015 were slightly lower than what the division recorded in the previous financial year. Compared to 2013, the revenues earned increased from $ 175,409,000 to $ 264,420,000 million, which is a 33.66% increase (Appendix 2). The division’s assets increased between 2013 and 2014, but declined by a significant margin in 2015. Compared to 2013, the reported assets as of June 2015 had declined by 21.15% (Appendix 2). In 2013, the revenues made by the bulk haulage division were $ 175, 409,000 representing 23.53% of the total revenue. In 2014, the percentage contribution by this division was 34.88% while in 2015, the division’s contribution to the overall group revenue was 41.52%. The bulk haulage division’s contribution to the total revenues has been increasing over the three years. In 2015, the division accounted for the highest portion of the company’s revenues. The division is under threat of increased competition. Many other players have entered the industry and eaten into the division’s market share. Apart from that, alternative means of transporting bulky goods such as railway and air are becoming cheaper by day. This has led to some clients preferring these means of transportation of bulk goods as opposed to the road. However, increased movement of goods in emerging and developing economies offers an opportunity for the division to expand into these markets. Oil and Gas Division The oil and gas division has been reporting a steady decline in revenues. In 2013, the reported revenues from this segment were $ 316,634,000 and in 2014, the segment reported revenues were $ 295, 408, 000. In June 2015, the revenues had declined to $ 146,036,000. Compared to 2013, this was a 53.88% decline in revenues (Appendix 2). The losses recorded by the division over the last three years have also been increasing. On the other hand, the division’s assets have also been declining, from $ 165,529,000 in 2013 to $ 73,038,000 for the year ended June 2015 The division’s contribution to the company’s revenues has also been declining over the three years. Despite accounting for the largest share of the company’s revenue in 2013 (42.45%), the division’s revenue accounted for only 38.85% and 22.93% of the company’s revenues in 2014 and 2015 respectively. The one great risk the division faces is the constantly declining international oil prices. As the prices decline, so does the revenues generated. However, many countries around the globe are discovering oil deposits, and this offers the company an opportunity to expand its presence into the international market. Specialized Transportation For this division, the available financial information is for the 2014 and 2015 financial years only. The division recorded an increase in revenues earned from $ 15,215,000 to $ 82, 465,000 in 2015. This was an 81.55% increase in revenues (Appendix 2). However, the segment’s division recorded a slight decline in assets as well as liabilities. In 2014, the division accounted for 1.73% of the company’s revenues. The division’s contribution increased to 12.95% in 2015, which is a significant improvement. The sector in which this division operates in is characterized by many players, meaning that the division faces the risk of stiff competition. However, increased interconnectedness between the different regions of Australia offers the division an opportunity to establish its presence in smaller towns too. Limitation of the analysis of the segments Analysis of the segments was limited by the fact that the information presented was just but a summary of the key financial statements. This made it impossible for certain comparisons such as cash flows and sales volume for each segment to be made. The analysis of the specialized transportation segment was limited by the fact that only the financial information for two years was available. The division became a reportable segment in 2014, and the available information is not enough to forecast its performance for the current and future financial periods. Work Cited AASB Standard. "AASB 8, Operating Segments". Federal Register of Legislative Instruments F2015L01606 (2015): n. pag. Web. 11 May 2016. Charteredaccountants,. "AASB 8 Operating Segments". Charteredaccountants.com.au. N.p., 2016. Web. 11 May 2016. Epstein, Barry Jay and Eva K Jermakowicz. Wiley IFRS. Hoboken, NJ: Wiley, 2010. Print. Ernst & Young., International GAAP 2012: Generally Accepted Accounting Practice Under International Financial Reporting Standards. John Wiley & Sons, 2012. Print. Harmer, Suzanne. "Revised Segment Reporting Standard." Television Education Network. N.p., 2016. Web. 11 May 2016. McALEESE GROUP., "Annual Report." (2015) PKF International., Wiley IFRS 2016: Interpretation And Application Of International Financial. John Wiley & Sons, 2016. Print. Wahlen, James M et al. Financial Reporting, Financial Statement Analysis, And Valuation. Mason, OH: South-Western Cengage Learning, 2010. Print. APPENDICES Appendix 1 Heavy lifting and Haulage division Revenue compared to overall group revenues 143,922/636,888 x 100 = 22.60% Loss 64,169/90,944 x 100 = 70.56% Assets 152,648/429.202 x 100 = 35.57% Bulk Haulage division Revenue 264,420/636,888 x 100 = 41.52% Loss 53,267/90,944 x 100 = 58.57% Assets 429,202/124,432 x 100 = 28.99% Oil and gas division Revenue 146,036/636,888 x 100 = 22.93% Loss 58,844/90,944 x 100 = 64.7% Assets 73,038/429,202 x 100 = 17.02% Special transportation Revenue 82,465/636,888 x 100 = 12.94% Loss 5286/90,944 x 100 = 5.81% Assets 18,605/429,202 x 100 = 4.33% Appendix 2 Heavy lifting and Haulage division Revenue between 2013 and 2014 (253,405,000 - 143,922,000)/ 253,405,000 x 100 = 43.20% Assets (280, 919,000- 152,648,000)/ 280, 919,000 x 100 = 45.66% Bulk Haulage division Revenue (264,420,000 - 175,409,000)/ 264,420,000 x 100 = 33.66% Assets (157,805,000 – 124,432,000)/157,805,000 x 100 = 21.15% Oil and gas division (316,634,000 - 146,036,000)/ 316,634,000 x 100 = 53.88% Specialized transportation (82, 465,000 - 15,215,000) 82, 465,000 x 100 = 81.55% Read More