(a) For enterprises that are engaged in different businesses with differing risks and opportunities, the usefulness of financial information concerning these enterprises is greatly enhanced if it is supplemented by information on individual business segments. It is recognised that there are two main approaches to segmental reporting.

The risk and returns’ approach where segments are identified on the basis of different ‘risks and returns arising from different lines of business and geographical areas, and the ‘managerial’ approach whereby segments are identified corresponding to the enterprises’ internal organisation structure.

Required

(i) Explain why the information content of financial statements is improved by the inclusion of segmental data on individual business segments. (5 marks)

(ii) Discuss the advantages and disadvantages of analysing segmental data using the

‘risk and returns’ approach (4 marks)

the ‘managerial’ approach. (3 marks)

(b) AZ, a public limited company, operates in the global marketplace.

(i) The major revenue-earning asset is a fleet of aircraft which are registered in the UK and its other main source of revenue comes from the sale of holidays. The directors are unsure as to how business segments are identified. (3 marks)

(ii) The company also owns a small aircraft manufacturing plant which supplies aircraft to its domestic airline and to third parties. The preferred method for determining transfer prices for these aircraft between the group companies is market price, but where the aircraft is of a specialised nature with no equivalent market price the companies fix the price by negotiation. (2 marks)

(iii) The company has incurred an exceptional loss on the sale of several aircraft to a foreign government. This loss occurred due to a fixed price contract signed several years ago for the sale of secondhand aircraft and resulted through the fluctuation of the exchange rates between the two countries. (3 marks)

(iv) During the year the company discontinued its holiday business due to competition in the sector. (2 marks)

(v) The company owns 40% of the ordinary shares of Eurocat Ltd, a specialist aircraft engine producer with operations in China and Russia. The investment is accounted for by the equity method and it is proposed to exclude the company’s results from segment assets and revenue. (3 marks)

Required Discuss the implications of each of the above points for the determination of the segmental information required to be prepared and disclosed under SSAP 25 Segmental Reporting and FRS 3 Reporting Financial Performance.

Please note that the mark allocation is shown after each paragraph in part (b).

ACCA, Financial Reporting Environment (UK Stream), June 1999 (25 marks)