Segment Disclosures in Financial Reports: Discussion and Analysis

Objectives and Requirements of Segmental Information

Title:  Segment disclosures are widely regarded as some of the most useful disclosures in financial reports because of the extent to which they disaggregate financial information into meaningful and often revealing groups. Discuss The project report (maximum 2,000 words, excluding the one to two-page summary requested) should address the following:

1.Discuss the objectives of segmental information and the requirements for the disclosure of segmental information in annual reports.             (20%)

2.Obtain the most recent annual reports for four FTSE 100 companies of your choice (note: you need to make sure the companies chosen to have more than one operational segment and thus have meaningful segment notes for analysis). Examine the segmental disclosures provided in the segment notes of the annual reports by the selected four companies and comment on the following:

The four companies are 
1)Hiscox
2)Phoenix
3)Royal Dutch shell
4)British petroleum

a)Based on extracts from the segment notes, 

discuss whether the companies are in compliance with the relevant accounting standard, and 1)Hiscox Company Given below is the quantitative threshold calculation of Hiscox Ltd business segments.

As per IFRS 8 operating segments are reportable only if they meet the quantitative threshold

Given below is the quantitative threshold calculation of Hiscox Ltd business segments.
All four business segments (Hiscox Retail, Hiscox London Market, Hiscox Re & ILS and Corporate centre) are reportable since they have met the 10% quantitative threshold. Although segments Hiscox Re & ILS and Corporate Centre have not met one of the size criteria (ie revenue) they are still reportable as according to the standard an operating segment is reportable if they meet one or more of the size criteria (met the profit criteria).

Note- External revenue has been used for calculation as the company does not have inter segments.
As the external revenue of all four segments is 100% of the total entity revenue the 75% threshold has been achieved.
Thus, from the above threshold calculations it indicates that  the segments reported by Hiscox Ltd are in compliance  with the accounting  standard.

The five segments are met with the 10% threshold and the external review is met with 75% threshold rule in IFRS 8. The unallocated group did not meet and the company also did not provide any discloser about the segments include in it. One thing to consider is the ReAssure segment which is shown less high in profit than the revenue by £ 262 million making it look suspicious as the did not provide a note on the matter.

Analysis of Segment Disclosures in Four FTSE 100 Companies

However, they have told that the ReAssure business report was for management purpose only. Also can be assumed that inter-segment transaction might be the due.
3)Royal Dutch Shell
Operating segments are only required to be reported under IFRS 8 if they reach a quantitative threshold.

All five business segments (Integrated Gas, Upstream, Oil Products, Chemicals and Corporate) are reportable since they have met the 10% quantitative threshold. Although the segments Chemicals and Corporate have not met one of the size criteria (i.e., revenue) they are still reportable as according to the standard an operating segment is reportable if they meet one or more of the size criteria (met the profit criteria).
The 75 % requirement has been met because the external revenue of all five segments is 100 % of the entity revenue.
As a result of the aforementioned threshold calculations, it appears that Royal Dutch Shell Plc's segments are in compliance with the accounting standard.

Based on the external revenue of the Four segments is 100% of the total entity revenue the 75% threshold has been achieved. Therefore, Business segments and geographical segments are compliance with accounting standard.

4)British Petroleum

Business segments

Based on the Quantitative thresholds defined in IFRS 8, all four segments (Upstream, downstream, Rosneft, corporate are reportable as they meet the 10% quantitative threshold. However Rosneft and corporate have not met one criteria (revenue) but they are still reportable as the other criteria (profit) has been met, moreover according to standard an business segment is reportable if they meet one or more criteria

As the external revenue of all four segments is 100% of the total entity revenue the 75% threshold has been achieved.

However, from the above threshold calculations it shows that the segments reported by British petroleum are in compliance with the accounting standard.

 Geographical Segments

However there are two geographical segments.  AS per IFRS 8 both geographical segments (US, NON-US) are reportable as they meet the 10% threshold criteria.

As the external revenue of the two segments is 100% of the total entity revenue the 75% threshold has been achieved. Therefore Business segments and geographical segments are compliance with accounting standard.

1. What the segmental disclosures indicate about the relative performance of the segments within each of those companies?

Requirements

Look at the performance based on profits and revenue. Highlight the profit making segments and explain the key areas ( relative performance) comment on each company which is the most profitable segments of each company and how it supports the nature of the company.