Welcome to "Other Reporting Issues"!

Hello there! Welcome to one of the most practical chapters in your SBR journey. While most of your studies focus on how to calculate numbers, this chapter focuses on what else we need to tell the shareholders so they can truly understand those numbers. Think of it like this: if the Financial Statements are the "what" of a business, these reporting issues provide the "how" and "why."

In this section, we will look at how big companies break themselves down into smaller pieces (Segments), how they deal with "family and friends" (Related Parties), and how smaller companies get a bit of a break (IFRS for SMEs). Let’s dive in!


1. Operating Segments (IFRS 8)

Imagine you are looking at the accounts of a massive global company like Apple. If they just gave you one total profit figure, you wouldn’t know if they were making all their money from iPhones or if their MacBooks were actually losing money. IFRS 8 Operating Segments forces companies to "open the hood" and show us the performance of their different business parts.

The "Management Approach"

This is a key term you must remember! IFRS 8 uses a management approach. This means the segments reported to the public must be the same segments used internally by the Chief Operating Decision Maker (CODM) to make decisions.

Analogy: If a chef organizes their kitchen by "Desserts," "Main Courses," and "Starters" to manage their staff, then the restaurant's financial report should also be broken down by those same three categories.

What qualifies as an Operating Segment?

To be an operating segment, a component must:

  • Engage in business activities to earn revenues and incur expenses.
  • Have its results regularly reviewed by the CODM.
  • Have discrete (separate) financial information available.

The 10% Thresholds (Quantitative Tests)

Not every tiny department needs to be shown separately. A segment is reportable if it meets ANY one of these tests:

  1. Revenue test: Its total revenue (internal and external) is \( 10\% \) or more of the combined revenue of all segments.
  2. Profit/Loss test: Its absolute profit or loss is \( 10\% \) or more of the greater of (i) the combined profit of all profitable segments or (ii) the combined loss of all loss-making segments.
  3. Assets test: Its assets are \( 10\% \) or more of the combined assets of all segments.

The 75% Rule

Once you’ve picked your segments, check the total external revenue. If the segments you've identified cover less than \( 75\% \) of the total consolidated revenue, you must keep adding more segments until you hit that \( 75\% \) mark!

Quick Review: Segments are about seeing the business through the eyes of management. Use the 10% tests to find them and the 75% test to make sure you have enough of them.


IAS 24 is all about transparency. If a company does a deal with the CEO's brother, it might not be at a "fair" price. Investors need to know about these relationships because they can influence the company's profits and risks.

Who is a Related Party?

Don't worry if this list feels long; just think about who has power or influence. Related parties include:

  • People: Individuals who have control, joint control, or significant influence (like major shareholders) and Key Management Personnel (KMP) (Directors and the CEO).
  • Close Family: Spouses, children, or dependents of the people mentioned above.
  • Entities: Members of the same group (Parents and Subsidiaries), Associates, and Joint Ventures.

What needs to be disclosed?

If there have been transactions between related parties, the company must disclose:

  1. The nature of the relationship.
  2. The amount of the transactions.
  3. The outstanding balances (what is still owed).
  4. Any provision for doubtful debts related to those balances.

Common Mistake to Avoid: Students often think you only disclose transactions if they are "unfair." This is wrong! All related party transactions must be disclosed, even if they took place at normal market prices.

Key Takeaway: It’s not illegal to trade with related parties, but it must be shouted from the rooftops (disclosed) so shareholders can decide if it's okay.


3. IFRS for Small and Medium-sized Entities (SMEs)

Full IFRS is incredibly detailed and expensive to follow. For a small family-owned business, it's like using a sledgehammer to crack a nut. The IFRS for SMEs standard is a simplified version of full IFRS.

Why have a separate standard?

Users of SME accounts (usually just the bank and the tax man) have different needs than users of listed company accounts (global investors). The SME standard focuses on cash flows, liquidity, and solvency.

Key Simplifications in IFRS for SMEs:

Here are some "student-friendly" examples of how it’s easier:

  • Goodwill: Under full IFRS, we test it for impairment every year. Under IFRS for SMEs, we just amortize it over its useful life (usually 10 years).
  • Borrowing Costs: Under full IFRS (IAS 23), you must capitalize interest on building an asset. Under IFRS for SMEs, you just expense it to the P&L immediately. Simple!
  • Development Costs: Under full IFRS (IAS 38), you must capitalize them if criteria are met. Under IFRS for SMEs, they are expensed.
  • Disclosures: There are significantly fewer disclosure requirements (about 90% fewer!).

Did you know? An entity cannot use IFRS for SMEs if its shares are traded on a public stock exchange (Public Accountability). If you're "big enough" to be on the stock market, you're "big enough" to use full IFRS!


4. Management Commentary

While the numbers tell one story, the Management Commentary (often called the Operating and Financial Review) provides the "narrative." It’s not an IFRS Standard, but it’s an IFRS Practice Statement.

What should it include?

Management should use this space to discuss:

  • The nature of the business (What do we actually do?).
  • Management’s objectives and strategies (Where are we going?).
  • The entity's most significant resources, risks, and relationships.
  • Performance and prospects (How did we do, and what does the future look like?).

Memory Aid: Think of Management Commentary as the "Bridge" between the cold, hard numbers and the real-world strategy of the company.


Final Summary Checklist

Before you move on to practice questions, make sure you are comfortable with these three things:

  • Segments: Can I identify a reportable segment using the 10% tests? (Revenue, Profit, or Assets).
  • Related Parties: Can I spot a relationship (like a director's wife owning a supplier) and state what needs to be disclosed?
  • SMEs: Do I understand that the SME standard is about cost-benefit and simplification (e.g., amortizing goodwill)?

Don't worry if this seems like a lot of "rules" rather than "math." In the SBR exam, these topics are usually worth valuable discussion marks. Keep focusing on the why (transparency for the user) and you will do great!