Segmental Reporting Problems

Introduction to Segmental reporting problems

Several problems come out while preparing segmental reports, not least of which is that of recognizing a segment. We have previously seen that the relevant IFRS recognizes operating segments as per to the internal monitoring and reporting procedures of the business. While this might be the very sensible course of action, comparisons among segments in other businesses may be not possible due to the dissimilar ways in which they are described.

Others problem may occur where there is a considerable amount of sales among operating segments. In which this takes place, the transfer price of the goods or services among segments can have a substantial influence on the reported profits of each segment.

The transfer price is the price on which sales are made among dissimilar segments of the business. A possible risk is that revenues and profits will be computed for each segment by the use of specific transfer pricing policies.

IFRS 8 identifies the influence of transfer pricing policies on segmental revenues and profit through stating that the basis for accounting for transactions among segments must be disclosed. A third difficulty is that some expenses and assets might relate to more than one operating segment and their allocation among segments may change between businesses. Once again, this might hinder comparisons of segmental profits and profitability among businesses.

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