Many organization have diversified on products and services offered and thus exposing them to different market forces for each service and product. The requirements for every product and service are different as well as their profit/loss-making. Consequently, businesses operate in a variety of geographic locations with various business cycles and demographics. The frameworks for management reporting are also different among companies, and the identification of the various operating segments on a firm largely depends on the managementís methodologies of reviewing company performance and decision making. This paper will provide a comparison of segment reporting for two different companies, one from Hong Kong (Honbridge Holdings Ltd) and the other from Australia (Credit Corp Group Limited). †
Segment reporting is the recording of a firmís segments of operation or operating units in the financial statements. It is mainly of importance to public companies, but not privately-owned organizations. Its core function in a firm is to highlight to the investors or shareholders and creditors the financial position and results of a firmís key operating units. The results achieved from the reporting helps stockholders to evaluate the growth and sustainability of the firm as well as monitor the performance of the management. Additionally, it allows the company to detect fluctuations that have negative impacts on the overall figures for each segment. For instance, segment reporting will show the source of unexpected higher earnings in a business.
Difference between Operating and Reporting Segment
As indicated by the Hong Kong Financial Reporting Standard 8 (HKFRS8), an operating segment is a component of an organization with distinct financial information that entails earning revenue and incurring expenses, which are reviewed independently by an operating decision maker (Li, Roudaki, & Gan, 2013). Reportable segments, on the other hand, are operating segments whose external and internal revenues are more than 10% of the total operating segment revenues. They can as well be the segments whose losses or profits are more than 10% of the total combined profit or loss of the loss-making or profit-making operating segments. Consequently, they can be the operating segments with assets 10% more than the total assets from all the operating segments.
It is important to note that reportable segments should be more than 75% of the total revenue of a firm. In company comparison, the information provided by the operating and reportable segments does not give discretion to the management as they allow the investors and creditors to examine the operations of the organization through the eyes of the managing board.
Comparison of Segment Reports for the Two Companies
- Honbridge Holdings Ltd
The company manages its operating segments separately since they are composed of different products and resources that require differing resources. The identification of these operating segments and preparation of segment information are solely based on the financial information relayed to the management. Honbridge Holdings Limited has reported two operating segments in its annual report for the financial year ended 31st December 2018, with all the items from the segments included in the companyís consolidated financial statement. These are:
- Lithium battery production: The nature of this segment is predominantly based on the sale and production of lithium battery. As the only source of external revenue for the firm, this segment generated a total of HK$238.6 million in external revenue for the financial year of study, an increase of about 1,260% compared to the previous fiscal year. This segment further recorded a loss of HK$ 201,415,000, with reportable assets worth HK$1,479,125,000 and reportable liabilities totaling HK$1,010,514,000.
- Mineral resource trading and exploration: This segment mainly involves mineral resource exploration and research, and trading in steel and copper. Despite recording nil in external revenues, this segment made a profit of HK$2,148,687,000 with reportable assets worth HK$5,693,687,000 and reportable liabilities totaling HK$165,536,000.
The main geographical places of the companyís operations are Hong Kong, Peopleís Republic of China (PRC) and Brazil. Each segment of the companyís operations represents its strategic business segment that provides distinct services and products, especially in Brazil and PRC. Customer geographical location for the firm is based on where the goods and services offered are delivered while the company determines the geographical location of its non-current assets based on the aspects discussed below.
- The assets physical location. This is mainly applied for plant, property, equipment and the payments for prepaid land leases.
- Operational location. This mainly applies to the case of asset (both tangible and intangible assets) exploration and evaluation.
Revenue from external customers and the entityís non-current assets are each sub-divided into three geographical areas. PRC, Belgium and Sweden are the main sources of revenue from external customers with 233,752,000, 3,920,000, and 938,000 respectively. Hong Kong (389,000), PRC (628,816,000), and Brazil (5,685,279,000), on the other hand, provides the companyís source of non-current assets.
For the financial year ended December 2018, the company earned more than 92% of its revenue from two main customers. The total revenue it collected for the financial year was HK$131.761 and HK$88.661 million respectively (Honbridge Holdings Ltd., 2018).
- Credit Corp Group
Credit Corp group identified its operating segments in the financial year ended 30th June 2018 based on its internal report, which is used by its CEO and the chief operating decision maker for purposes of strategic decision making. The consolidated financial statement provided by the firm at the end of the fiscal year included all the items in the segment reporting (Credit Corp Group, 2018). The firm has three key operating segments;
- Debt Ledger Purchasing (Australia): The nature of this segment entails buying consumer debts at a discount from Australian credit providers, with the sole aim of recovering excess amounts during the collection period of the receivables to make profits. The total amount of external revenue earned by the entity from this segment was AUSD195, 670, 000.
- Debt Ledger Purchasing (U.S.A): Just like the Australian Debt Ledger Purchasing segment, this US segment also entails buying consumer debts at a discount from American credit providers, with similar intentions to the Australian segment above. This segment generated AUSD 23,972,000 from external revenues, which was the least amount earned from the three segments.
- Consumer Lending: This is the last segment for Credit Corp Group and deals with the provision of a variety of sustainable financial goods to consumers with insufficient credit. The company recorded AUSD 79,336,000 external revenue in this segment.
The company majorly operates in the Australian, U.S, and New Zealand geographical segmentation, with its headquarters being in Australia. It recorded 298,978,000 Australian dollars in external revenue for the fiscal year 2018, with total non-current assets of 285, 525,000 Australian dollars.
Its attempts to maximize profits from its overseas operations are greatly impacted by currency exchange fluctuations, especially the US dollar and New Zealand dollar causing fluctuation in the financial value of liabilities and assets, and thus hindering its effectiveness outside its country of origin. This is evident as can be observed from the total amount of revenue collected from the US segment.
Differences in Segment Reporting Practices between the two Nations
There are many similarities between the Australian and Hong Kong segment reporting practices. For instance, segments that reach the 75% threshold of the total revenue and 10% of the total assets and profit/loss are reported in segments in both nations.
Despite the similarities, the two nationsí segment accounting standards also have differences, which are illustrated below.
Australia uses the AASB 114 while Hong Kong HKFRS 8 accounting standard for segment reporting.
In Australia, segments that fail to meet the quantitative threshold are not reported separately while in Hong Kong reportable segments must meet the minimum quantitative threshold.
Credit Corp Group. (2018). Credit Corp Annual Report 2018. Retrieved from https://www.creditcorpgroup.com.au/media/1450/2018-annual-report.pdf
Honbridge Holdings Ltd. (2018). Honbridge Holdings Limited, Annual Report 2017. Retrieved from http://8137.hk/assets/Uploads/Honbridge-Annual-Report-2017-E.pdf
Li, Y., Roudaki, J., & Gan, C. (2013). The Usefulness Of Segment Reporting In Hong Kong Listed Firms: An Empirical Assessment Of Ifrs No. 8. Review of Applied Economics, 9(1076-2017-2371), 109-129.
Statements, M. F. Hong Kong Financial Reporting Standards.