Model Solution

The reporting of the business segments in the financial statements should change. Currently the financial
statements show two business segments, one based on machinery and one based on investment and
insurance. The management accounts are analyzed into four different areas: leasing, sales, investment,
and insurance. Management’s decisions will presumably be based on the financial information in the
management accounts. Therefore, for reporting purposes, the management of Rossendale should look to a
lower level of management information than the one currently disclosed. Thus four business segments
should be disclosed. The main reason for this is that the different areas may not necessarily be subject to
the same risks and uncertainties. Machinery leasing and sales will have different risks attached to them,
and investment and insurance will also have different risks. Also, investment and insurance are likely to
be regulated by different laws within the jurisdiction.

IFRS-8 states that a segment is reportable if most of its income is earned from sales to external
customers and

a) Its revenue from sales for external customers and to other customers is 10% or more of the total
revenue; or
b) The segment result in profit or loss is 10% or more of the combined result of the segments in terms of
total profit or total loss of the individual segments; or
c) Its assets are 10% or more of the total assets of all segments.

In this instance, the investment segment does not earn most of its revenue from sales to external
customers. Its internal sales are $130 million and its external sales are $120 million. However, the
investment segment does pass all of the other 10% threshold tests. Its total revenue is greater than 10% of
the total revenue of the group, its segment results are greater than 10% of the combined result of all
segments, and its segment assets are greater than 10% of the total segment assets of the group. However,
if this segment is not reported, then the total external revenue attributable to reportable segments falls
below the 75% level set by IFRS-8 for the reporting of consolidated revenue by segment. The total
revenue earned from external customers is $470 million. Of this, the investment segment contributes $120
million. Without the investment segment, total revenue reported would be 74.4% of the total revenue
from sales to external customers. Thus, an additional segment must be disclosed—this will be the
investment segment.

It is possible that a lower level of reporting within the entity might identify another business segment. For
example, within the investment segment, there may be another segment that can be identified that may
then push the external revenue reported above the 75% threshold. Machinery sales pass the external
revenue test but fails the 10% threshold test regarding segment results and segment assets.

The total loss in the segments is $4 million plus $53 million, or $57 million. Total profit of the segments
is $32 million plus $80 million, or $112 million. The sales division losses are $4 million, which is less
than 10% of either of those amounts. Similarly with segment assets, the total segment assets are $526
million and the machinery sales assets are $24 million, thus falling below the 10% threshold level. Thus
on two accounts Rossendale fails the tests in IFRS-8. However, an entity can disclose a business segment
separately even though it does not meet the threshold criteria as long as the information is reported
internally and the segment is a distinguishable component of the entity providing goods and services that
are subject to different risks and rewards. Thus the machinery sales division could be reported separately
even though it is relatively small and fails the threshold tests. All of the other segments pass the 10%
threshold tests.