Segment financials example

Question

Can you please explain to me how to correctly set up segment P&L for the following example? We have two segments: "egg" and "processing". "Egg" produces 2 shell eggs with cost of $0.4 each and the sells them at $1 each - one to third parties and one to the "processing" segment. The processing segment then resells that egg at $1.1 in processed form (assume processing costs are zero). What will be the gross profit for each segment? How will internal sales look like?

Thank you!

Answer 1

Internally, "egg" would have a Gross Profit of $ 1.2 (0.6 x 2) & "processing" would have $ 0.1 gross profit since processing costs zero.

As far as the company is concerned total sales would be $ 2.1 (1+1.1) & gross profit would be $ 1.3 (2.1 - 0.8)

If "processing" was a subsidiary of "egg", consolidated sales & gross profit will be the same (ie $ 2.1 & $ 1.3) since you must eliminate in full intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full) as per IFRS 10.

Comments

Thanks for your reply, but shouldn't "procesing" have a gorss profit of $0.1, since it bought 1 egg at $1 and then basically resold at $1.1? Group gross profit, should be also be $1.3, it seems, as the group produced 2 eggs at a cost of $0.4 per egg and the sold one at $1 and another one at $1.1

Also, could you point me to the IFRS standard that governs the way gross profit is distributed among segments?

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Yes I forgot that $1 which is cost of sales of "processing". I just corrected my answer.

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As I know, no IFRS specifies the way a company should distribute gross profit. Transfer pricing policies within the divisions of a company is a matter of management preference.