Accounting Standard - 17

Segment Reporting

Presented by

Nitin Goyal

Objective of AS - 17

To establish principles for reporting financial information:

• About different types of products and services an enterprise produces, and

• The different geographical areas in which it operates.

Concept & Relevance of Segment Reporting

• Diversified companies produces different products / group of products & services, similarly there are enterprises which operates in different geographical areas

• These different products / group of products and different geographical areas are subject to different :• Rate of returns

• Growth opportunities

• Future prospects

• Risks

• This information is useful in assessment of risk and returns of a diversified / multi-locational enterprise.

Segment Information help user

• Better understanding of performance (i.e. profitability of the enterprise)

• Better assessment of risk and returns of a diversified / multi-location enterprise

• Make more informed judgment about the enterprise as a whole.

Applicability

Enterprise whose :

• Equity or Debt are list on a recognized stock exchange in India

• are in the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India.

• turnover for the accounting period exceeds Rs. 50 Crores.

Requirement of AS - 17

Identify business segment or geographical segment

Decide primary & secondary reporting format

Identify Reportable Segment based on “10% thresholds” criteria

Report segment information for reportable segment as per AS-17

If segment or part thereof satisfies the definition of discontinuing operation under AS 24, then AS-24 to be complied with

Business Segment is based on products & services it provides

Distinguishable Component (AS-24)

• Separate line ofbusiness

• Distinguishablecomponentoperationally andfinancially

Individual or group of related Product or

Service

• Nature of product orservices

• Nature of productionprocess

• Type of customers

• Methods of distribution

• Nature of regulatoryenvironment

Risk and returns are different

• Return refers to theprofitability of aproduct or service

• Risk is the variability ofreturn due to anyfactor.

Case Study

Q 1• A company manufactures two products – viz. cloth and

ready-made garments. Are the products different businesssegments or part of the same business segment?

Q 2

• A newspaper publishing company is publishing an EnglishNews paper & Hindi News paper. Are these productsdifferent business segment or part of same businesssegment?

Answers

A 1

• In the above 2 products, the production process and type or class ofcustomers are different, however, method of distribution and regulatoryenvironment are same. In this case, greater weightage may be assignedto production processes and type or class of customers and accordinglyshould be treated as separate segment.

A 2

• In this case products are similar as to the nature of product, productionprocess, method of distribution and regulatory environment. However,the customer differ. In this case one may assign greater weightage to thenature of product, production process, methods of distribution andregulatory environment. Accordingly, both the news papers – English &Hindi will be part of same business segment.

Geographical Segment is the area or location in which the products and services are manufactured or marketed

Distinguishable Component (AS-24)

• Separate area ofoperation

• Distinguishablecomponent operationallyand financially

Engaged in providing product or services within a

particular economic environment

• A single geographicalsegment should notinclude operations ineconomic environmentswith significantly differingrisks and returns.

Risk and Return differ from those components operating in other

economic environments

• Return refers to theprofitability of a productor service

• Risk is the variability ofreturn due to any factor.

Identification of Geographical Segment

a. Similarity of economic and political conditions

b. Relationship between operations in different geographical areas

c. Proximity of Operations

d. Special risks involved in operations in particular area

e. Exchange control regulations

f. Currency risks

Case Study

Q 1

•A Ltd. Which is incorporated in India andhas businesses in all the Indian Statestreats Jammu & Kashmir as a separategeographical segment because of risksinvolved due to terrorism and the rest ofIndia as a separate segment. Is this OK?

Answer

A 1

• Since the company operates in India and hence factors e & flisted before are not relevant. Factor d deals with specialrisk involved in operations in a particular area and hencecompany may have treated J&K as a separate segment inview of terrorism risk. If other regions of India are similarwith regards to factors a, b & c, it is appropriate to treatthem as one segment. The segmentation of the company isappropriate in accordance with factors given above.

Identification of Business and Geographical Segments for external reporting purposes:

Sr. No.

System of internal financial Reporting prevailing in the enterprise

How segments for external reporting purpose should be identified.

1 Internal organization and management structure of an enterprise and system of internal financial reporting to the Board of Director / CEO are based on individual products or services or based on geographical areas or both.

In this case, the business and geographical segment for external reporting purpose should be those organizational units for which information is reported to the Board of Directors / CEO for evaluating the units performance and for making divisions about future allocation of resources.

2 If internal organization and managementstructure and system of internal financial reporting are based on neither individual products or services nor on geographical areas.

The directors and management of the enterprise should determine its business and geographical segments for external reporting purposes based on the factors given above rather than on the basis of the enterprise’s system of internal financial reporting.

Identifying the Primary & Secondary Reporting format

Sr. No. Situation Business Segment Geographical Segment

1 Risk and returns of the enterprise are pre-dominantly affected by differences in the products or services that is produces.

Primary Reporting Format Secondary Reporting Format

2 Risk and returns of the enterprise are pre-dominantly affected by its operations in different countries or other geographical areas.

Secondary Reporting Format

Primary Reporting Format

3 Risk and returns are strongly affected by both as evidenced by a matrix approach to managing the company and reporting internally to BOD & CEO

Primary Reporting Format Secondary Reporting Format, alternativelymatrix presentation with full segment disclosures may be adopted.

Important Definitions

Enterprise Revenue

• Enterprise revenue is revenue from sale to external customers as reported in the statement of profit and loss.

Segment Revenue

• Segment revenue = portion of enterprise revenue that is directly attributable to a segment + relevant portion of enterprise revenue that can be allocated on a reasonable basis + revenue from intersegment. It does not include extraordinary items, interest or dividend income and gains on sales of investment or on extinguishment of debt.

Segment Expense

• It is exactly opposite of segment revenue and it further does not include income tax expense and general administrative expense, head office expense, and other expense that arise at the enterprise level and are related to enterprise as a whole.

Segment Result

• Segment Result = Segment Revenue – Segment Expense

Important Definitions Continued

Segment Assets

• Segment assets are those operating assets that are employed by a segment in its operating activities and are directly attributable to the segment or can be allocated on a reasonable basis.

• Interest or dividend, income tax assets, head office assets, depreciation or amortization, goodwill, revalued assets.

Segment Liabilities

• Segment liabilities are operating liabilities that result from the operating activities of a segment and are either directly attributable to the segment or can be allocated on a reasonable basis.

Segment A/c Policy

• Are the accounting policies adopted for preparing and presenting the financial statements of the enterprise.

• Those accounting policies that relate specifically to segment reporting, e.g. identification of segments, method of pricing inter-segment transfers, and basis for allocating revenues and expenses to segment.

Identification of Reportable Segments

Reportable segment are those which satisfy any of 10% criteria discussed below.

Those business segment or geographical segment designated by the management as reportable segments at their discretion.

Additional segment identified as reportable segment even if they do not meet 10% criteria, If the reportable segment constitute less than 75% of the total enterprise revenue

If the segment was identified as reportable segment in the proceeding period because it satisfied the 10% criteria.

10% criteria / 10% thresholds

• If the following works out to 10 or more, it is a reportable segment:• 10% revenue criteria:

Revenue of segment from sale to external customer +

inter segment sales *100 / Total Revenue of all segments ( incl. inter seg.)

• 10% of combined segments results criteria:Segment profit / loss * 100 / Combined profit of all segments in profits or combined loss of all segment in loss whichever is greater in absolute amount.

• 10% of total segment assets criteria:Segment assets * 100 / Total segment assets of all segments.

Primary Reporting FormatDisclosure Remarks

Segment Revenue Classified into external revenue and inter-segment revenue.

Segment Result If an enterprise can compute segment net profit / loss or some other measureof segment profitability other than segment result, without arbitraryallocations, reporting of such amounts in addition segment result isencouraged.

Segment Assets Total carrying amount of segment assets

Segment Liabilities Total amount of segment liabilities

Addition to Fixed Assets Total cost incurred during the period to acquire segment assets that are in thenature of tangible or intangible fixed assets

Depreciation and amortization and Non-cash expenditure

Total amount of deprecation / amortization and non cash expenditure includedin the expenses. This information need not be disclosed if enterprise providessegment cash flow.

Reconciliations Reconciliation of Segment revenue with enterprise revenueReconciliation of Segment result should be done with enterprise net profit/loss.Reconciliation of Segment assets with enterprise assetsReconciliation of Segment liabilities with enterprise liabilities

Other Disclosures

• Basis of Transfer Pricing : In measuring and reporting segment revenue, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements.

• Changes in Segment Accounting policies

• Composition of each reported business / geographical segment

Secondary Reporting formatIf primary Segment is Then Secondary

Segment will be Conditions and reporting by Secondary Segment

Business Segment

Geographical Segment – customer

Segment revenue from customer is to be reported for those segment whose external revenue is 10% or more of enterprise revenue.

Geographicalsegment – assets

Carrying amount of segment assets whose segment assets are 10% or more of total assets of all geographical segments. Addition of fixed assets should also be reported.

Geographical Segment - customer or assets

Business Segment Segment revenue from external Customer > 10% of enterprise revenue, Segment assets > 10% of total segment assets of all business segments. Segment revenue from external customers, carrying amount of assets and addition to fixed assets to be reported.

Geographical Segment – location

Geographicalsegment – assets

Carrying amount of segment assets whose segment assets are 10% or more of total assets of all geographical segments. Addition of fixed assets should also be reported.

Geographical Segment - assets

Geographical Segment – customer

Segment revenue from customer is to be reported for those segment whose external revenue is 10% or more of enterprise revenue.

Illustration for identification of Segment

Particulars A B C D E F G H Total

Segment Revenue

External Revenue 0 255 15 10 15 50 20 35 400

Inter-Segment Revenue 100 60 30 5 0 0 5 0 200

Segment Assets 15 47 5 11 3 5 5 9 100

Segment Results 5 -90 15 -5 8 -5 5 7 -60

Solution:

Total Revenue 100 315 45 15 15 50 20 35 600

% of Above 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8

% of Segment Assets 15 47 5 11 3 5 5 9

Combined result of all Profitable Segments

5 15 8 5 7 40

Combined Result of all Segments in Loss

-90 -5 -5 -100

% of Segment Result 5 90 15 5 8 5 5 7

Illustration for DisclosureParticulars Food

ProductsPlastic & Packaging

Health & Scientific

Others Total

Sales 5000 620 345 182 6147

Expenses 3585 400 222 200 4407

General Corporate Expenses 548

Income from Investment 126

Interest Expenses 63

Assets 7548 2000 700 682 10930

General Corporate Assets 832

Intersegment sales included above 60 84 18 5

Operating profit on Intersegment sales 33

Liabilities 6000 1800 500 400 8700

Unallocated Corporate Liabilities 500

Capital Expenditure 100 50 25 25 200

Depreciation 754 200 70 68 1092

Non Cash Expenses Other than Depreciation 100 75 25 25 225

Solution to IllustrationParticulars Food

ProductsPlastic & Packaging

Health & Scientific

Others Total

Sales 5000 620 345 182 6147

Expenses 3585 400 222 200 4407

Segment Result 1415 180 123 -18 1700

% of Revenue 81.34 10.08 5.61 2.96

Absolute amount of profit 1718

Absolute amount of loss -18

% of Segment result 82.36 10.47 7.15 1.04

% of Segment Assets 69.05 18.29 6.40 6.24

DisclosureParticulars Food Product Plastic &

PackagingOthers Elimination Total

Revenue

External Sales 4940 536 504 5980

Intersegment sales 60 84 23 -

Total Revenue 5000 620 527 (167) 5980

Results

Segment Results 1415 180 105 (33) 1667

Unallocated Corporate Expenses 548

Operating Profit 1119

Interest Expense (63)

Income from Investment 126

Tax Expense -

Profit from Ordinary activity 1182

Segment Assets 7548 2000 1382 10930

Unallocated Assets 832

Total Assets 11762

Continue….Particulars Food Product Plastic &

PackagingOthers Elimination Total

Segment Liabilities 6000 1800 900 8700

Unallocated Corporate Liabilities 500

Total Liabilities 9200

Addition to Fixed Assets 100 50 50 200

Depreciation 754 200 138 1092

Non Cash Expenses Other thanDepreciation

100 75 50 225

Thank You