The Australian Accounting Standards Board and Qantas Airlines Report

The Australian Accounting Standard AASB 8 relates to reporting about operating segments. It has superseded AASB 114 and is applicable to companies whose debts and/ or equities are publicly traded or to the companies that are required to file financial statements with a security commission. However non-listed entities may also adopt AASB 8. The effective date of its applicability is January 1, 2009.

The basic objective of this standard is to provide information to financial statements users about how an entity conducts its operating segments, particularly classifying those segments primarily as production or service rendering segments. There are also requirements under the standard of secondary classifications based on geographical areas, major customers, revenue, profits earned, and total assets under each reporting operational segment. This standard is akin to the international accounting standard ‘IFRS 8- Operating Segments’.

The important feature to note is with regard to consolidated accounts reporting. Where financial statements are comprised of consolidated as well as parent companies statements, in that case, the segment reporting as per this standard is required only in respect of consolidated financial statements, as consolidation statements are comprised of both parent and subsidiaries’ statements information.

The reporting segment has been defined by this standard as a segment that is involved in the business activities of the entity and earns revenue for the entity and incurs expenditure for earning such revenue. The operating segment is important as its operating results are regularly reviewed by the entity’s decision-makers. Further financial information of such a segment should be discretely available with the entity.

The standard also requires that ‘Notes to the financial statements’ must carry information about an operating segment only if the following conditions are complied with:

• When 10% or more of the revenue from all segments is contributed by such operating segments, or
• When 10% or more of total profit or loss from all operating segments is contributed such operating segment, or
• Such segment has more than 10% of the total assets of all operating segments.

The other conditions of applicability of AASB 8 are that all operating segments combined together must contribute at least 75% of the total revenue of the entity. Also, two or more operating segments may be aggregated if they have common characteristics like the nature of products and services, the nature of production services, customers, distribution methods, and the nature of regulatory environments.

The following segment information along total figure of the entity is required to be disclosed in respect of each reportable segment:

• Factors determining reportable segments,
• Type of products and services
• Profit or loss
• Total assets
• Interest revenue and interest expenses.
• Other items like liabilities

The basic advantage of such segment disclosure is that there will be a substantial increase in entities reporting under AASB 8 as compared to ‘non-reporting entities’. The unlisted companies have also been provided a relaxation in the sense that those companies that have already been providing segment information may continue to do so on the applicability of AASB 8 to listed companies, but ‘the options include voluntary reporting of segment information in accordance with AASB 8, or in accordance with AASB 114, which will be superseded for annual reporting periods commencing January 2009. The comparative information must be presented on a consistent basis, with the disclosure requirements adopted for the current reporting period.'(John Ngiam, September 2007)¹

AASB 8 will effectively put an impact on the identification of segments as well as over the measurement and disclosure of information relating to that segment. A detailed and systematized information will be presented about segments. Notes to the financial statements will look more illustrative and informational decorative.

Segmental information sought by AASB 8 can be termed as a ‘management approach’, as it will help the management of entities itself in bringing the required improvements when comparative data about segments will reflect limitations and weaknesses of individual segments.

It is felt that ‘AASB 8 will apply to a narrower range of entities than are presently required to comply with AASB 114′(Regulation Impact Statement AASB 8)². The standard is not applicable to the subsidiaries of listed companies. This is a drawback in the sense that one constituent of the group will be reporting differently than the other, thus providing the same users of financial statements non-comparative information.

One of the major weaknesses is that AASB 8 has not defined the concepts like segment revenue, segment expense, segment assets, segment liabilities, segment result, and others that are going to be disclosed under segment reporting. That means the financial statement users will have to look elsewhere to have illustrative knowledge about these concepts. The standard is not exhaustive from the point of view of illustrative to users of financial statement information.

Apparently, it may look like changes to bring in convergence with IFRSs, like the introduction of AASB 8, is to going to bring in drastic environmental changes in financial information distribution. But it is not like that. The information required by AASB 8 was already being disseminated among financial statement users by earlier standards and regulations. There is more hype that has been created about the applicability of AASB 8 but content-wise the information is the same and not very exhaustive as it is believed.

Also ‘these new and revised accounting standards do not contain any significant changes to the existing accounting requirements for local Governments, departments and the whole of Government’ (Inform, Issue2, April 2008)³; and this is a matter of great concern as governments are the largest users of financial information published in the financial statements by the entities.

It is also believed that the scope of AASB is very narrow in its applicability. Unlisted companies are completely exempted from their application. That does not mean that unlisted entities do not work under segments or users of financial statements of unlisted entities do not require segmental information. The standard possesses a lackluster approach in improving the illustrative contents of financial statements.

The apparent reason of Qantas for not adopting early the new segment reporting accounting standard reflects from the statement in its annual report 2007, which states that ‘The segmentation of Qantas Group is progressively being implemented to deliver a broad range of benefits to the business.’ (Qantas Annual Report 2007, page 125)⁴ The reason provided does not contain logic because of the following reasons:

• The information required under SSAB 8 is already with the Qantas at the time of preparation of the financial statement.
• Secondly, the main beneficiaries from such information into the note of financial statements of the company are financial statement users and not the business of the company.

According there is no relevance to the reasons provided by the company for not early adopting the requirements of the standard AASB 8.

The primary format of segment reporting of Qantas is not based on the different types of operational activities of the airline. Instead, the segments are designed under the nomenclature of Qantas, Jetstar, Qantas Holidays, and Qantas Flights (that is further segmented into types of services rendered as Catering, Eliminations and Consolidated sections) under which the business is being carried on.

Basically, it has not segmented reporting format under the type of operational services being rendered by the airline. Segmenting under such nomenclature is a confusing classification. The format does not adhere to the requirements of AASB 8. As per the standard, the reporting segments are the operating segment of the entity that has more than 75% of shares in total revenue or profits or total assets under different segments of the entity. Further AASB 8 requires operational reporting segments to be involved in business activities. Segmenting under the titles of ‘Qantas’ and ‘Jetstar’ etc does not state or reflect in any way the business activities conducted by the airline.

‘Qantas’ is the name of the airline and the complete financial statements are showing the financial activities of ‘Qantas’ for the fiscal period. Then what information exactly ‘Qantas’ segment is carrying in the notes to the financial statement of ‘Qantas’? It only provides the impression that the nomenclature of the segment has not been done by the type of business or services rendered under that segment. The classification of segments is certainly not as per AASB 8.

Secondary reporting format of Qantas comprises of reporting of different primary segments, as stated earlier, on basis of revenue earned, profits declared, total assets, and total liabilities by each primary segment. Total segment-wise revenue has been further classified as external segment and inter-segment revenue. AASB 8 requires revenue-wise classification if the segment earns 10% or more of revenue, whereas Qantas has even classified segments even when it is less than 10%.

For example, the inter-segment revenue of Jetstar is less than 10% of even total segmental revenue. Similarly, classifications on the basis of profits, total assets, and total liabilities do not adhere to the requirement of a standard that require reporting when the absolute amount of profit or loss is 10% or greater of the total profits of all profit-making operational segments or total loss of all loss-making segments. When primary classification is faulty and is not on the basis of business activity involved, how can the secondary classification be as per norms? The same is the case of secondary classification on basis of liabilities and assets.

Even the classification of property, plant, and equipment is separately reported than the classification as per total assets. Such detailed secondary classification has not been envisaged by the standards as extra and unnecessary details only add to the confusion for the users of financial statements. Notes are required to clarify the information provided in the main financial statements, and the standard demands the secondary information to be provided in the notes to financial statements. Qantas has not taken care of such basics during segmental reporting.

Analysis of segmental information in the notes to Qantas financial statements suggests that Qantas has tried to provide a very exhaustive detail and in the process lost the track to be followed as per AASB 8. However, the segmental information, both primary as well secondary, provide by Qantas will be useful for investors in a number of ways. First, the information about the revenue contribution of each segment will highlight the segments that are important in resulting in profits available for shareholders.

Investors will come to know the strategic segments of the company. Secondly, information about segment-wise assets holdings will enlighten the investors about the source of future profitability that is so important for the return on investments to be made in Qantas. Thirdly, through the information about segmental liabilities, the investors will be able to have an idea about the fixed nature of payment required for servicing the debts.

Finally, the total segment revenue chart carries the information about finance income and cost to be borne by the company. This will show the effect of existing indebtedness on the profits of Qantas. Though the classification of geographical data is not as per operating segments it certainly conveys the idea as to areas where the company is extending its future operations and making the investments accordingly.

Addition information required to be provided by Qantas on the adoption of AASB 8 will be as under:

• Segment reclassification is required as per operations. It must be noted that identified all reportable operating segments must contribute 75% of the Qantas total revenue. In other words, AASB 8 requires only selective segment-wise information.
• Also, segment-wise information is required only of those operating segments whose internal and external revenue or, absolute profit or loss or, total assets should be in excess of 10% or more of total revenue, 10% or more of greater of all profit/ loss-making segments, and 10% or more of total assets of operating segments respectively.
• Segment-wise information is also required with regard to the nature of products and services being rendered, methods used to provide products and services to customers, type and class of customers being served under each segment, and the nature of regulatory environments of each segment.

As Qantas has not yet fully adopted the requirements of the standard AASB 8, it is hoped that all information shall be provided as per the format envisaged by AASB 8 on Qantas full adoption of the standard after the effective date of January 2009.

1. John Ngiam, CPA Australia Knowledge Bank, 2007. Web.
2. Regulation Impact Statement AASB 8 Operating Segments, Para 4.3, 2007. Web.
3. Inform, News & Views, Issue 2, 2008, page 3. Web.
4. Qantas Annual Report 2007, Notes to financial statement, page 125. Web.