SOME PROVISIONS OF STATEMENT OF ACCOUNTING STANDARD 24: SEGMENT REPORTING
This statement applies to all entities that carry on different classes of businesses or operate in different geographical areas.
Identification of Business Segments
In determining business segments, a reporting entity would need to consider factors which include:
- Existing profit centres;
- The nature of the product or service;
- The nature of the production process;
- Markets and marketing methods; and
- The nature of the regulatory environment, for example, bank, insurance, oil and gas, publicutilities, etc.
Organizational groupings such as divisions, subsidiaries, or branches, are ordinarily created according to management requirements. Such groupings often correspond with the determinable segments of the entity, thus facilitating segment reporting. Where this is not the case, segment reporting may require reclassification of data.
It is relevant to consider the interrelationships among an entity’s activities. For example, it may be potentially misleading to report as separate business segment, parts of an entity’s activities that are significantly integrated or interdependent.
Identification of Geographical Segments
Operations of a reporting entity will only classify as operations of a geographical segment if they extend beyond facilitating export sales or services from the reporting entity’s domestic operations. If the product were substantially manufactured, assembled or acquired in the overseas county, the activities would be classified as geographical segment.
Factors that are usually considered in identifying geographical segments include:
(a) Similarity of economic and political conditions;
(b) Relationships between operations in different geographical areas;
(c) Proximity of operations;
(d) Special risks associated with operations in a particular areas;
(e) Exchange control regulations; and
(f) The underlying currency risks.
Determining Material Business and Geographical Segments
After entity has been divided into business and geographical segments, it is necessary to decide whether particular segments are material and so warrant separate reporting. The materiality of a segment to the entity as a whole, can be measured in terms of its revenue, results, or assets employed. A segment would be considered material if one or more of the following conditions apply:
(a) Its revenue is 10 percent or more of the total revenue of all segments; or
(b) Its segment result, whether profit or loss, is 10 percent or more of the combined result of all segments in profit or the combined result or all segments in loss, whichever is the greater in absolute amount; or
(c) Its assets are 10 percent or more of the total assets of all segments; or
(d) Where it is required by regulatory authorities.
To provide an adequate insight into the entity’s operations, it is necessary for the material segments to represent a substantial proportion of total operations.
This is deemed to be the case where the total revenue from sales of all material segments to the segments outside customers, constitutes 75 percent or more of the entity’s external revenue.
Where this materiality test has not been met, the entity should identify more segments, even if the additional segments do not meet the ten percent threshold as specified above.
If an entity has two or more classes of businesses, or operations in two or more geographical segments which differ substantially from each other, it should define its classes of businesses and geographical segments in its financial statements, and it shall report with respect to each class of business and geographical segment, the following financial information:
(a) Revenue or turnover, distinguishing between:
(i) revenue or turnover derived from external customers; and
(ii) revenue or turnover derived from other segments;
(b) Result, before accounting for taxation, minority interests and extraordinary items; and
(c) Net assets.
A business or geographical segment shall be identified as a reportable segment if a majority of its revenue is earned from sales to external customers and:
(a) Its revenue is earned from sales to external customers and from transactions with other segments is 10 percent or more of the total revenue, external or internal, of all segments; or
(b) Its segment result, whether profit or loss, is 10 percent or more of the combined result of all segments in profit or loss, is 10 percent or more of the combined result of all segments in profit or the combined result of all segments in loss, whichever is greater in absolute amount; or
(c) Its assets are 10 percent or more of the total assets of all segments
The total of the amounts disclosed by segments should agree with the related total in the entity’s financial statements. Otherwise, the reporting entity shall provide reconciliation between the two amounts.
Reconciling items shall be properly identified and adequately disclosed. Revenue from both external and internal sources shall be disclosed with the latter shown on the basis of internal transfer prices. Any change in the basis for such transfer prices shall also be disclosed.
Where inter-segment sales and transfers constitute a material part of the total revenue of the reportable segments, they shall be analyzed in segments and shown separately. The geographical analysis of inter-short-term investment or turnover shall be disclosed.
Polo Plc operates in five geographical segments and ten business segments. Data relating to the geographical segments for the year ended 31 December 200X9, are as follows:
Identify the reportable geographical segment in accordance with SAS 24.
The first step in determining a reportable segment is to identify the segments that earn majority of their revenue from sales to external customers.
Step 2 Apply the 10% Rule
The next step is to apply the 10% rule according to SAS 24.40
Segments that meet the 10% rule are Aba, Warri and Kano.
Step 3: apply the 75% rule
The total revenue of the three reportable segments based on step 2 is N22 million (6m +9m + 7m). this is only 68% of the total revenue. Calculate as follows: 22/32 x 100.
SAS 24.22 requires that it the proportion of reportable segments’ revenue is not up to 75%, more segments should be identified even though they do not meet the 10% rule.
Therefore, the reportable segments will include Gboko.
SOME PROVISIONS OF STATEMENT OF ACCOUNTING STANDARD 25: TELECOMMUNICATION
De- commissioning Costs
The present value of management’s best estimate (based on annual probability analysis) of the cost of de-commissioning and dismantling a site at the time of installation, shall be included in the cost of an item of property, plant and equipment.
Any subsequent change to this estimate shall be added to, or deducted from, the item’s cost. The carrying amount shall be added to, or deducted from, the item’s cost. The carrying amount shall then be subsequently depreciated over its remaining useful life.
Over the passage of time, the corresponding liability shall be adjusted for the time value of money. Such increases in the liability shall be recognised as an interest expense in the profit and loss account of each period. The liability shall also be adjusted to record the effects of any reinstatements/disposal and the corresponding payments/realization of de-commissioning costs.
The management of NEWTEL Ltd has estimated that a de-commissioning cost of N665,500 will be incurred at the end of three years in respect of a new equipment installed on 1st January 20X5. The management has further estimated that a discount rate of 10% will give the present value of the de-commissioning cost at 1 January 20X5.
You are required to:
(a) Compute the present value of the de-commissioning cost to be included in the property, plant and equipment of NEWTEL Ltd on 1 January 20X5.
(b) Compute the liability at the end of each year and changes in liability to be recognised as an interest expense in profit or loss are required by SAS 25.
(a) Given a discount rate of 10% and a three year period, the present value of N665,500 would be 1/(1.1)3 x N665,500 = 1/1.331 x 665,500 = N500,000
Therefore, N500,000 will be included in the cost of equipment of NEWTEL Ltd on 1 January 20X5 and the carrying amount of the equipment will be depreciated over its useful life as required by SAS 25.
(b) SAS 25 also requires that the reporting entity should recognise a corresponding liability which should be adjusted for the time value of money. The increases in liability should be recognised as interest expenses in the income statement for each period.
One way to easily obtain the liability at the end of the year and the increases in liability, is to unwind the interest as follows:
Observe that the liability increases with the passage of time. SAS 25 requires that the increases should be recognised as interest expense in the profit and loss account of each period. Thus, the amount to be recognised as interest expense each year would be: 20X5, N50,000; 20X6, N55,000 and 20X7, N60,500.
Commencement of Depreciation of Network Assets
Depreciation of network assets shall commence when an asset is available for use, irrespective of whether it is actually used or not.
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be separately depreciated.
An entity shall allocate the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciate them separately.
A significant part of an item of property, plant and equipment that has a useful life and depreciation methods that are the same as those of another significant part of that same item, shall be grouped in determining the depreciation charge.
To the extent that an entity depreciates separately some parts of an item of property, plant and equipment. It also shall depreciate separately the reminder of the item. The remainder consists of the parts of the item that are individually not significant.
If an entity has varying expectations of these parts, approximation techniques shall be applied to depreciate the remainder in a manner that faithfully represents the consumption pattern and/or useful life of the parts.
Stand-by equipment and strategic spares shall be depreciated over the expected useful life of similar equipment in use.
All peoples Network, a newly established telecommunication company in Nigeria, acquired special telecommunication equipment for N500 million on 1 January 20X7. The equipment has three major components, which for ease of reference, may be referred to as component A, component B, and component C.
The estimated useful life of the entire component is 20 years, but component A will need to be replaced after 5 years, component B after 7 years and component C after 10 years. The cost price of N500 million included N20 million, N42 million and N50 million, for components A, B, and C, respectively.
You are required to calculate the depreciation charge on the equipment for 20X7.
SAS 25 requires separate depreciation charge for each major component of an item of property, plant and equipment. Therefore, the depreciation charge on the equipment will be calculated as follows:
Subscriber Acquisition costs relate exclusively to an explicit contract, they may be capitalized if and only if:
(a) The operator controls by means of an enforceable contract, future economic benefits as a result of the costs incurred;
(b) It is probable that those future economic benefits will eventuate; and
(c) The costs are specific to the particular contract and can be measured reliably.
Subscriber acquisition costs, other than those dealt with above, shall be expensed as incurred.
Capitalized acquisition costs shall be amortized over the specific period of the contract. If a contract for which subscriber acquisition costs have been capitalized is terminated early, then the net book value of the intangible asset shall be regarded as impaired.
Amortization of Licence Fee
Amortization of license fee may commence from either the date of issuance of licence or date of commercial launch. However, the amortization period shall not exceed expiration date of the licence and shall be calculated on the straight line basis over the estimated period.
If the recoverable amount of an asset, such as licence fee, is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
An impairment loss shall be recognised immediately in the profit and loss account. After the recognition of an impairment loss, the amortization charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
A seller of a right to use capacity shall not report the transaction as sale of an asset, or of a component of a large asset, but as a rental income which is recognized on a straight line basis over the period of the Indefeasible Right to Use (IRU), unless:
(a) The purchaser’s right of use is exclusive and irrevocable;
(b) The asset component is specific and separable (such that the buyer’s exclusivity is guaranteed and the seller has not right to substitute other assets);
(c) The term of the contract is for a major part of the asset’s useful life;
(d) The attributable cost or carrying value can be measured reliably; and
(e) No significant risks, as indicated in paragraph 30, are retained by the seller.
Interconnection cost shall be calculated at the agreed regulated rate of the charges (gross) and recognised by the originating operator (who has an obligation to pay a terminating operator for terminating calls on its network) as incurred.
An entity that sells capacity on its network to another entity, shall recognise the revenue (gross) as earned. Similarly, an entity that purchases capacity on the network of another entity, shall recognise the cost (gross) as incurred. Where there is exchange of airtime for any transaction of a financial nature, but without inflow or outflow of cash, such exchange shall be governed by a written agreement and accounted for by the transacting parties.
Where the exchange or reciprocal transactions entered into for capacity is such that the transacting parties had no current need and where the subject of the transaction will otherwise be saleable, non-accounting recognition shall be given.
The revenue recognition criteria shall be applied separately to each transaction. However, in certain circumstances, where it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transition, the bundled products shall be properly itemised and revenue recognition criteria shall apply to them separately.
Where there is a discount on a bundled product, the discount shall be prorated and applied on all the elements of the bundled product’s cost.
(a) A Telecommunication Service Provider (TSP) has three products named handsets, sim pack and air time. The price per unit for each product is N5,000, N2,000, N500, respectively.
The Telecommunication Service Provider in preparation for its first year anniversary of commencement of its operations, decided to bundle these products and offered the new
product (i.e. bundled product) for N6,000.
(i) state how the discount offered the subscribers would be treated in the company’s books in line with the provisions of SAS 25.
(ii) apply the above principle to the discount.
(b) Tellfone ltd is a Telecommunication Activities Service Provider registered with both NCC and CAC. Included in its items of fixed assets are the following:
Stand-by equipments are:
The standby equipment were idle for the period as there was no breakdown of the asset in its four (4) years of operations. The company’s policy is to depreciate equipment at the following rates.
Masts, switching machine and transformer could be traded for N2 million, N0.5 million and N1 million, respectively after the expiration of the life span of the licence procured for 4 years.
Prepare the fixed assets schedule in line with the provisions of SAS 3 and SAS 25 to reflect impairment losses (if any).
(a) (i) Where there is a discount on a bundled product, the discount shall be pro-rated and applied on all the cost elements of the bundled products.
In addition to the disclosure requirements of other applicable statements of Accounting Standards, entities engaged in telecommunications activities shall also disclose the following:
(a) Description of how revenues from various types of telecommunications activities are recognised;
(b) A description of how deferred revenue is calculated;
(c) A description of how any expired deferred revenue is treated in the financial statements;
(d) A description of how subscriber acquisition costs are treated in the financial statements;
(e) A description of the amortization methods used for intangible assets (including license fees);
(f) Free airtime given and the movement thereof;
(g) Treatment of dismantling, removal and site restoration costs; and
(h) The method, assumptions, external valuers involved (professional details), policy o frequency, nature of indices used for probability analysis by management in arriving at the present value of the best estimate of decommissioning costs.
On 31 December 20X9,Power Plc, acquired 12 million shares of the 15 million shares of Sweet Plc for N30 million. On that date, the acquirer, Sweet Plc, had retained earnings amounting to N4 million and the fair value of its net assets was N19 million. You are required to calculate the goodwill on acquisition in accordance with SAS 26.
Calculate the proportion acquired.
proportion of interest acquired by powder Plc is 80% obtained as follows: 12 million shares divided by 15 million shares multiplied by 100.
Calculate the non-controlling interest (NCI).
Non-controlling interest in the equity of the acquire is calculated as follows:
Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date.
Such changes are measurement period adjustments in accordance with paragraphs 45 – 49 of SAS 26. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments.
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.
The dominant source and nature of risks and returns of an enterprise should govern whether its primary segment reporting format will be business segments or geographical segments. If the risks and returns of an enterprise are affected predominantly by differences in the products and services it produces, its primary format for reporting segment information should be business segments, with secondary information reported geographically.
Similarly, if the risks and returns of the enterprise are by the fact that it operates in different countries or other geographical areas, its primary format for reporting segment information should be geographical segments, with secondary information reported for groups of related products and services.