2 (a) Norman, a public limited company, has three business segments which are currently reported in its financial
statements. Norman is an international hotel group which reports to management on the basis of region. It does
not currently report segmental information under IFRS8 ‘Operating Segments’. The results of the regional
segments for the year ended 31 May 2008 are as follows:
Region Revenue Segment results Segment Segment
External Internal profit/(loss) assets liabilities
$m $m $m $m $m
European 200 3 (10) 300 200
South East Asia 300 2 60 800 300
Other regions 500 5 105 2,000 1,400
There were no significant inter company balances in the segment assets and liabilities. The hotels are located in
capital cities in the various regions, and the company sets individual performance indicators for each hotel based
on its city location.
Required:
Discuss the principles in IFRS8 ‘Operating Segments’ for the determination of a company’s reportable
operating segments and how these principles would be applied for Norman plc using the information given
above. (11 marks)
(b) One of the hotels owned by Norman is a hotel complex which includes a theme park, a casino and a golf course,
as well as a hotel. The theme park, casino, and hotel were sold in the year ended 31 May 2008 to Conquest, a
public limited company, for $200 million but the sale agreement stated that Norman would continue to operate
and manage the three businesses for their remaining useful life of 15 years. The residual interest in the business
reverts back to Norman after the 15 year period. Norman would receive 75% of the net profit of the businesses
as operator fees and Conquest would receive the remaining 25%. Norman has guaranteed to Conquest that the
net minimum profit paid to Conquest would not be less than $15 million. (4 marks)
Norman has recently started issuing vouchers to customers when they stay in its hotels. The vouchers entitle the
customers to a $30 discount on a subsequent room booking within three months of their stay. Historical
experience has shown that only one in five vouchers are redeemed by the customer. At the company’s year end
of 31 May 2008, it is estimated that there are vouchers worth $20 million which are eligible for discount. The
income from room sales for the year is $300 million and Norman is unsure how to report the income from room
sales in the financial statements. (4 marks)
Norman has obtained a significant amount of grant income for the development of hotels in Europe. The grants
have been received from government bodies and relate to the size of the hotel which has been built by the grant
assistance. The intention of the grant income was to create jobs in areas where there was significant
unemployment. The grants received of $70 million will have to be repaid if the cost of building the hotels is less
than $500 million. (4 marks)
Appropriateness and quality of discussion (2 marks)
Required:
Discuss how the above income would be treated in the financial statements of Norman for the year ended
31 May 2008.
(25 marks)

2 (a) Upon adoption of IFRS8,‘Operating Segments’, the identification of Norman’s segments may or may not change depending
on how segments were identified previously. IFRS8 requires operating segments to be identified on the basis of internal reports
about the components of the entity that are regularly reviewed by the chief operating decision maker in order to allocate
resources to the segment and to assess its performance. Formerly companies identified business and geographical segments
using a risks and rates of return approach with one set of segments being classed as primary and the other as secondary.
IFRS8 states that a component of an entity that sells primarily or exclusively to other operating segments of the entity meets
the definition of an operating segment if the entity is managed that way. IFRS8 does not define segment revenue, segment
expense, segment result, segment assets, and segment liabilities but does require an explanation of how segment profit or
loss, segment assets, and segment liabilities are measured for each segment. This will give entities some discretion in
determining what is included in segment profit or loss but this will be limited by their internal reporting practices. The core
principle is that the entity should disclose information to enable users to evaluate the nature and financial effects of the types
of business activities in which it engages and the economic environments in which it operates.
IFRS8 ‘Operating Segments’ defines an operating segment as follows. An operating segment is a component of an entity:
– that engages in business activities from which it may earn revenues and incur expenses (including revenues and
expenses relating to transactions with other components of the same entity)
– whose operating results are reviewed regularly by the entity’s chief operating decision makers to make decisions about
resources to be allocated to the segment and assess its performance; and for which discrete financial information is
available
IFRS8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments
are operating segments that meet specified criteria:
– the reported revenue, from both external customers and intersegment sales or transfers, is 10% or more of the combined
revenue, internal and external, of all operating segments; or
– the absolute measure of its reported profit or loss is 10% or more of the greater, in absolute amount, of (i) the combined
reported profit of all operating segments that did not report a loss, and (ii) the combined reported loss of all operating
segments that reported a loss; or
– its assets are 10% or more of the combined assets of all operating segments.

If the total external revenue reported by operating segments constitutes less than 75% of the entity’s revenue, additional
operating segments must be identified as reportable segments (even if they do not meet the quantitative thresholds set out
above) until at least 75% of the entity’s revenue is included in reportable segments. There is no precise limit to the number
of segments that can be disclosed.
As the key performance indicators are set on a city by city basis, there may be information within the internal reports about
the components of the entity which has been disaggregated further. Also the company is likely to make decisions about the
allocation of resources and about the nature of performance on a city basis because of the individual key performance
indicators.
In the case of the existing segments, the European segment meets the criteria for a segment as its reported revenue from
external and inter segment sales ($203 million) is more than 10% of the combined revenue ($1,010 million). However, it
fails the profit/loss and assets tests. Its results are a loss of $10 million which is less than 10% of the greater of the reported
profit or reported loss which is $165 million. Similarly its segment assets of $300 million are less than 10% of the combined
segment assets ($3,100 million). The South East Asia segment passes all of the threshold tests. If the company changes its
business segments then the above tests will have to be reperformed. A further issue is that the current reported segments
constitute less than 75% of the company’s external revenue (50%), thus additional operating segments must be identified
until 75% of the entity’s revenue is included in reportable segments.
Norman may have to change the basis of reporting its operating segments. Although the group reports to management on the
basis of three geographical regions, it is likely that management will have information which has been further disaggregated
in order to make business decisions. Therefore, the internal reports of Norman will need to be examined before it is possible
to determine the nature of the operating segments.
(b) Property is sometimes sold with a degree of continuing involvement by the seller so that the risks and rewards of ownership
have not been transferred. The nature and extent of the buyer’s involvement will determine how the transaction is accounted
for. The substance of the transaction is determined by looking at the transaction as a whole and IAS18 ‘Revenue’ requires
this by stating that where two or more transactions are linked, they should be treated as a single transaction in order to
understand the commercial effect (IAS18 paragraph 13). In the case of the sale of the hotel, theme park and casino, Norman
should not recognise a sale as the company continues to enjoy substantially all of the risks and rewards of the businesses,
and still operates and manages them. Additionally the residual interest in the business reverts back to Norman. Also Norman
has guaranteed the income level for the purchaser as the minimum payment to Conquest will be $15 million a year. The
transaction is in substance a financing arrangement and the proceeds should be treated as a loan and the payment of profits
as interest.
The principles of IAS18 and IFRIC13 ‘Customer Loyalty Programmes’ require that revenue in respect of each separate
component of a transaction is measured at its fair value. Where vouchers are issued as part of a sales transaction and are
redeemable against future purchases, revenue should be reported at the amount of the consideration received/receivable less
the voucher’s fair value. In substance, the customer is purchasing both goods or services and a voucher. The fair value of the
voucher is determined by reference to the value to the holder and not the cost to the issuer. Factors to be taken into account
when estimating the fair value, would be the discount the customer obtains, the percentage of vouchers that would be
redeemed, and the time value of money. As only one in five vouchers are redeemed, then effectively the hotel has sold goods
worth ($300 + $4) million, i.e. $304 million for a consideration of $300 million. Thus allocating the discount between the
two elements would mean that (300 ÷ 304 x $300m) i.e. $296·1 million will be allocated to the room sales and the balance
of $3·9 million to the vouchers. The deferred portion of the proceeds is only recognised when the obligations are fulfilled.
The recognition of government grants is covered by IAS20 ‘Accounting for government grants and disclosure of government
assistance’. The accruals concept is used by the standard to match the grant received with the related costs. The relationship
between the grant and the related expenditure is the key to establishing the accounting treatment. Grants should not be
recognised until there is reasonable assurance that the company can comply with the conditions relating to their receipt and
the grant will be received. Provision should be made if it appears that the grant may have to be repaid.
There may be difficulties of matching costs and revenues when the terms of the grant do not specify precisely the expense
towards which the grant contributes. In this case the grant appears to relate to both the building of hotels and the creation of
employment. However, if the grant was related to revenue expenditure, then the terms would have been related to payroll or
a fixed amount per job created. Hence it would appear that the grant is capital based and should be matched against the
depreciation of the hotels by using a deferred income approach or deducting the grant from the carrying value of the asset
(IAS20). Additionally the grant is only to be repaid if the cost of the hotel is less than $500 million which itself would seem
to indicate that the grant is capital based. If the company feels that the cost will not reach $500 million, a provision should
be made for the estimated liability if the grant has been recognised.