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IFRS 8 – Operating Segments UFE Study Guide

Operating Segments (IFRS 8)
Last Updated: November 14, 2012

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This IFRS applies to the financial statements for entities whose debt or equity is publicly traded or is in the process of becoming public. This also applies to subsidiaries with parents that meet the above criteria. Segment information must be separately reported.

What is an operating segment?

A component of an entity which meets all these criteria:

  • Engages in activities which earn revenue or incur expenses including with other internal components. Start-up activities yet to earn revenue are included.
  • Whose operating results are regularly reviewed by chief decision makers (often CEO or COO) about resource allocation.
  • For which discrete financial information is available.

Not every division of an entity is necessarily a segment. A corporate HQ or some functional departments who do not earn revenue or only earn incidental revenue would not be considered segments.

Reportable Segments

Quantitative Thresholds

Separate information must be reported if the following thresholds are met:

  • reported revenue, including external sales and intersegment sales or transfers ≥ 10% of total internal and external revenue for all segments
  • absolute amount of profit or loss≥ 10% of
    • combined reported profit of all operating segments that did not report a loss; and
    • the combined reported loss of all operating segments that reported a loss.
  • Assets are ≥ 10% of the combined assets in all operating segments
  • If management believes that a segment which does not meet the above thresholds should still be reported then it is permitted.
  • For operating segments that do not meet the quantitative threshold, entities may combine them based on the aggregation criteria.

Aggregation Criteria

Segments may be aggregated if they exhibit similar long-term financial performance and have similar economic characteristics. Two or more similar segments may be aggregated if they have similar:

  • nature of the products and services
  • nature of the production processes
  • types or class of customers
  • distribution methods used
  • regulatory environment

Additional Information

  • If the total external revenue reported by all operating segments ≤ 75% of the entities revenue, additional operating segments shall be identified as reportable segments, even if above criteria are not met until at least 75% of all segment revenue is included in reportable segments.
  • Information about all other activities or segments shall be reported as ‘all other segments’
  • If a new operating segment is identified in the current period, comparatives must be provided, even if this wasn’t reported previously.
  • An entity should use judgment when reporting more than 10 segments as the information may become too detailed.

Disclosure Requirements

Fairly detailed disclosure required. Some high-level requirements:

  • Factors used to identify reportable segments
  • Types of products and services of each segment
  • Information about segment profit or loss (internal+external), assets/liabilities, income tax expense, amortization, interest revenue and expense, material non-cash items
  • Reconciliation of segment amounts to entity-wide amounts

Examples of Segments Needing Disclosure

  • Information about major product or service lines
  • Information about geographical areas
  • Information about major customers

ASPE Section 3031 – Inventories

Inventory (ASPE)
Last Updated: October 10, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!

Inventory is covered under

  • IFRS – IAS 2 (Inventories); and
  • ASPE – Section 3031 (Inventories)

This section applies to all inventories (for ASPE), except:

  • Contracts accounting for using the Percentage of Completion method
  • Financial instruments
  • Spare parts usually treated as inventory, but if major enough, can be classified as Property, Plant and Equipment.

See also notes on specific exclusions from measurement under Measurement of Inventories.



Inventories are assets:

  • Held for sale as part of the normal course of business (finished goods);
  • In the production process (unfinished goods)
  • Materials or supplies to be consumed in the production process/rendering services

Net realizable value = Selling price – Estimated cost of completion – Costs to make the sale

Fair Value = Selling price at an arms-length transaction on market

FV is the total revenue that the transaction will generate while NRV is the amount the entity expects to realize.

Measurement of Inventories

Inventory is measured at the lower of cost and net realizable value.

Cost = All costs to:

  • purchase,
  • convert
    • direct labour
    • systemic allocation of fixed/variable production overhead
  • bring the inventory to its present location and condition
    • import duties/taxes,
    • transport,
    • handling and other direct costs less any costs that are recoverable

Items that are excluded from inventory:

  • Abnormal wasted materials or labour
  • Storage costs unless these costs are necessary before a further production stage
  • Administrative overhead (not specific to inventory)
  • Selling costs

Interest costs are included when the inventory takes a substantial time to become finished and the entities policy is to capitalize interest costs.

Techniques for measuring costs

  • Standard Cost Method: Use normal levels of materials, labour, efficiency. Should be regularly reviewed for change in conditions.
  • Retail Method: Often used in retail industry. Reduce the sale value of the inventory by the appropriate percentage of gross margin.

Measurement Exclusions (This section does not apply)

  • For agricultural, forest and mineral products held by producers which are measured at net realizable value based on well-established practices in these industries.
  • Inventories held by commodity broker-traders who measure inventories at fair value less cost to sell. Changes in FV are recognized in net income in period of change.
  • Inventories of living animals and plants (biological assets) and the harvested product of the biological asset. However it does apply to assets processed after harvesting.

Cost Formulas

Must choose a specific method for inventories that have a similar nature.

  • Specified Identification: This method may be used when inventory is not interchangeable and can be specifically identified.
  • First-in, First-out: Inventory purchased first is considered sold first. Items remaining in inventory at period end were those purchased most recently.
  • Weighted Average: Each new item is assigned a weighted average cost based on the previous similar items at the beginning of the period and purchased during the period. Can be calculated on a periodic basis or as each shipment is received.

Net Realizable Value

Inventories may at times become obsolete or diminish in value and must be written down to net realizable value.

Evidence that a write down is necessary:

  • Damage to inventory
  • Obsolescence
  • Decline in selling prices

Inventories should be written down item by item but grouping is permitted for similar products with similar end purposes. It’s not permitted to write down inventories based on classification (finished goods, by geographic segment, etc.)

When the circumstances that existed which required the write down no longer exist, the write-down may be reversed back up to cost. The item is then valued at the lower of cost or revised net realizable value.


When inventories are sold, the carrying value of the inventory is recognized as an expense at the same time as the revenue is recognized.

When a write down is required, the write down is expensed in the period when the write down occurs. Reversals of write downs are also recorded in the period which they occur.


  • Accounting policies adopted to measure inventories including costing method.
  • Total carrying amount classified appropriately for the entity (i.e. merchandise, production supplies, materials, work in progress, finished goods, etc.)
  • The amount of inventory recognized as an expense during the period (cost of sales)

Achieving Depth in PMR – Accounting Discussion

Acheiving depth in PMR / Accounting on the UFE is an important skill to continually try to develop since it often means taking your RCs to Cs which is necessary to successfully pass the UFE. While the issues on the UFE will vary and a template approach is risky and cautioned against by The Board of Evaluators, today I’m offering a framework which is used for discussing PMR issues which could give you some thoughts on tackling accounting issues and achieving depth.

  1. Identify The Issue – First, it’s obviously important to identify the accounting issue and rank it high enough to discuss. This is usually because the simulation asks advice about this particular issue, they are accounting incorrectly in the simulation or some other case fact points you to discussing this issue.
  2. Was the Accounting Treatment Correct? – Ask and answer whether the accounting is correct. Support WHY with case facts. Give reasons based on The Handbook or if guidance is not provided then based on the conceptual framework/definitions.
  3. Are There Alternative Accounting Treatments? – If yes, present these alternatives with reference to The Handbook. Consider and discuss the impact on the Financial Statements, both Statement of Operations and Statement of Financial Position, and where possible, quantify the impact. Consider whether there is further information required. If no alternative treatments are available, use relevant GAAP to discuss the issue, again, consider the impact on both sides of the Financial Statements and quantify where possible. Consider whether further info is required.
  4. Recommend and Conclude – It is important to consider Financial Statement user needs or reporting objectives and to conclude on which accounting treatment is superior for users, or alternatively, only one may be allowed for areas where specific guidance is available.
  5. Consider Impact on Other Areas – Consider how this accounting may impact other areas in the case, this is where you’ll think above how this may be a pervasive issue and could impact assurance, purchasing of a business, going concern, and so forth.

Not every accounting issue will open itself up to a discussion in all of these areas but I think that if you keep these things in mind you’ll be able to have a rich discussion and achieve depth in a lot of accounting discussion.

Quants and Quantify where you can

The Board of Evaluators, mentioned in the 2011 UFE report, that they noticed a downward trend in quants on the UFE. Today I’ll offer some tips in some aspects of quantifying info in your responses as well as time management tips for the UFE. Keep in mind that this is not a thorough guide to quants.

Within your response

A quick way to add value to your UFE response, often in PMR, Tax, Finance and MDM topics is to quantify some element of the discussion where the fruit hangs low. By this, I don’t mean you should force yourself to always quantify something but often there is an easy opportunity to quantify the discussion. I also don’t mean you should do tons of little quant exhibits as often this quantifying can be done within the text itself and this also makes it much easier for markers to follow.

  • In PMR, when having accounting discussions, there is often easy opportunities to quantify the options you are discussing. When discussing an accounting policy choice you could quantify how choosing this policy would impact the financial statements. i.e. Company X can choose to account for revenue under the gross method which will result in sales of $X in 2011. Another option is for Company Y to use the net method for revenue accounting, this will result in $Y in sales. You could, in your conclusion, relate the policy choice to goals the company has with their financial statements. Often these kind of quick quants are easy to do and add that little extra value to your response that could take you from an RC to a C.
  • In Tax, it’s very easy and probably necessary in most cases to quantify the results of applying tax rules. When correcting a tax return or offering advice, when the information is there, always quantify the result. i.e. You cannot deduct principle payments on your mortgage but only the interest portion, therefore your expenses must be adjusted by $X and you will owe taxes of $Y plus interest. (If there are multiple changes save the final taxes owing until the end in one conclusion). Bonus: Always good to state at that point that they will need to file an amended tax return.
  • In Finance and MDM the scenarios vary a lot and these are two very quantitative areas so it’s difficult to offer general advice but again, look for easy opportunities to use case facts to add value through quants. Calculate that interest rate when the info is there for you or do that extra calculation of how much more money would be earned if retirement were put off for 10 years.
Bottom Line: When the info is there and it won’t take long, it’s a good idea to take the extra 30 seconds and add value to your discussion by quantifying.

Time Management on Quants

I spent the weekend reviewing and marking 2008, Day 3, Paper 1, “Financial Plan” or “Jim and Karen” which was a good example of a case that can trap you in the quant and also push you to go over your time limit for the case. Candidates that managed their time evenly knew when to drop the quant and move on to other issues therefore scoring (for example) RC across the four indicators earning themselves 12 points. Candidates which had trouble letting go of the quant tended to score one C (or often also two RCs) on the two Finance competencies and NC on the two tax competencies earning themselves 6 or 9 points. The two tax competency indicators were easier than the two finance ones so managing your time evenly would also have made scoring higher overall easier in my opinion.

That said, I will repeat my previous advice, use and outline and plan your time before you start typing. At this point you may still be developing your judgment as to how much time you should allocate to your quant but by UFE day you should be setting timelines and sticking to them. Remember, just because there is a quant, doesn’t make the indicator is more valuable in terms of scoring, each indicator is worth the same, so a rough rule of thumb might be to treat each indicator evenly in terms of time. Of course some are easier than others so use your judgment. There is no single formula to pass the UFE.

One more suggestion, many quants end up being too big with too many items. Think about material amounts and allocate your time to tackle fewer issues (the more material ones) and do them better instead of spreading yourself thin and tackling more issues less accurately.

Bottom Line: Manage your time on quants, spend more time on fewer issues so you do a more accurate quant.

Anyone have more suggestions?

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