“segment reporting in a foundry”

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“SEGMENT REPORTING IN A

FOUNDRY”

“SEGMENT REPORTING IN A FOUNDRY”

SAAB MARFIN MBA

Executive Summary

TITLE

Segment Reporting in a Foundry (Alucast Foundries Belgaum Pvt. Ltd.)

NEED FOR THE STUDY

Many enterprises provide groups of products and services or operate in

geographical areas that are subject to differing rates of profitability, opportunities

for growth, future prospects, and risks. Information about different types of

products and services of an enterprise - often called segment information - is

relevant to assessing the risks and returns of a diversified and/or multi-location

enterprise but may not be determinable from the aggregated data. Therefore,

reporting of segment information is widely regarded as necessary for meeting the

needs of users of financial statements.

OBJECTIVES OF THE STUDY

To study the foundry (Alucast Foundries Belgaum Pvt. Ltd.)

To study and understand AS 17 and its applicability to a foundry

To segment P&L account as per AS17

To calculate profitability of each segment

SCOPE OF THE STUDY

The study is confined to Alucast Foundries Belgaum Pvt. Ltd. It is a study

describing the Segment Reporting system, wherein the profit and losses generated

by every segment would be studies to provide a detailed segment report in order

to understand which of the product categories is actually doing well.

SAMPLE DESIGN


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The study of the Segment reporting technique with regards to Alucast Foundries

Pvt. Ltd. is based on Secondary data. The secondary data is taken from published

material.

METHODOLOGY

Calculate investment, cost and revenue for major product categories

Identify segments in the set up

Calculate profitability on each of the segments

Conclude

- Which of the product categories is actually doing well and which is not

- If segment reporting is beneficial for such organizations as Alucast

LIMITATIONS

1. The time allotted to undergo the concurrent project was not sufficient to study

all the aspects of the organization.

2. There is no compulsion to maintain the books of accounts with regards to

costing records according to the law for small scale industries, therefore the

study got limited to available raw information.

3. The Accounting Standard 17 is not mandatory for the organization hence data

regarding different segments got limited to the available information.

4. The quantity details obtained are approximated values as the accurate quantity

details at different stages are difficult to asses without the maintenance of

records at every stage of the process of casting.

5. The study done in the project is purely for academic purpose only.

RESULTS


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As per the PAT values in the segment report the first segment Ventilated Disc

appears to be performing better than the other two segments. Alucast needs to do

some analysis on the Flywheel segment in order to see that all the segments are

performing as per their plans.

SUGGESTIONS

Segment reporting system should be installed in the day to day accounting of

companies irrespective of whether it is mandatory or not.

FUTURE SCOPE

THE SYSTEM OF SEGMENT REPORTING HAS BEEN EXPERIMENTED

ON ONLY ONE OF THE LOCATIONS OF ALUCAST INDUSTRIES. THE

STUDY MAY BE CONTINUED TO INCLUDE ALL THE GEOGRAPHIC

SEGMENTS

INDEX

CHAPTER PARTICULARSPAGE

NO.

Acknowledgement

Executive Summary

I A brief history of metal forming 1

II Foundry Industry 3

III Company Profile 4IntroductionShare holdersEsteemed customersRegistered office and worksPlant and Machinery usedHours and environmentSkills and personal qualities


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IV Process flow for the production of casting 8CastingSand CastingDesignPattern makingMould makingMachine mouldingHand mouldingCore makingMelting and pouringPouringShot blasting, fettling and painting

V Cost Accounting 17IntroductionScope of cost accountingObjectives of cost accountingAdvantages of cost accountingLimitations of cost accountingTraditional costing todayJob Costing

VI Accounting Standard and Financial Statements 27IntroductionObjectives of Accounting StandardsAdvantages of Accounting StandardsDisadvantages of Accounting StandardsObjectives and funtions of the Accounting Standards BoardRationale of Accounting StandardsInternational harmonization of Accounting StandardsAccounting Standards setting in IndiaComposition of Accounting Standards BoardThe Accounting Standards setting process

Present status of Accounting Standards in India in harmonization with the International Accounting StandardsCompliance with Accounting Standards Objective of Financial StatementsFinancial Position, Performance and Cash


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Notes and Supplementary SchedulesElements of Financial StatementsFinancial PositionAssetsLaibilitiesEquityPerformanceIncomeExpensesCapital maintenance adjustmentsRecognition of the elements of financial statementsThe probability of future economic benefitsReliability of measurementRecognition of AssetsRecognition of LiabilitiesRecognition of IncomeRecognition of Expenses

VII Accounting Standard (AS-17) 50Segment ReportObjectivesScopeDefinitionIdentifying reportable segmentsBusiness and Geographical SegmentsReportable SegmentsSegment accounting policyDisclosurePrimary reporting formatSecondary segment informationIllustrative segment disclosures (Other Disclosures)Illustrative I (Determination of Reportable Segments)Illustrative II (Segment Report)Illustrative III (Summary of Required Disclosure)A diagrammatic representation of segment reporting

VIII Calculations and Segment Report 85Cost SheetCalculation of Profit after Tax


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Segment Report

IX Conclusion 88

References and Bibliography 89

CHAPTER I

A Brief History of Metal Forming

The earliest human being inhabited the earth over 100,000 years ago.

Archaeological studies have revealed that he had already discovered the

phenomenon of fire and learnt to use it for his own benefit. Surprisingly it took

him another 95 thousand years before he discovered how to use fire to extract

metal from the earth’s crust and put it to use. Initially metals were used for

adornment – combs, necklaces and bracelets for example, which were made from

gold and silver, the easiest of metals to extract from their ores. Then he

discovered the more common and useful copper, which he learned to harden by

alloying it with other metals to form bronze. The Greeks and the Romans in the

centuries immediately before Christ became the first true masters of the art of

casting metal; their beautiful bronze sculptures, coins, ornaments and utensils are

the legacies we continue to admire. Last of all came iron, the most common metal

but the most difficult to work, Unlike the other metals whose relatively low

melting points allowed them to be cast in moulds, iron had to be forged, that is

heated to make it soft and then beaten into the necessary shapes. It was to be

several hundred years before the discovery of a method of attaining temperatures

sufficiently high to keep iron molten long enough to cast into shapes.

Nevertheless the Iron Age was truly the beginning of history. When man learned

to shape this metal he began to transform life. For the first time he had made

himself materials that could perform miracles in providing tools, utensils and

weapons and, in the distant future, machines.

In 1709 Abraham Darby developed coke at Coalbrookdale, very often regarded as

the birthplace of the industrial revolution. In fact if it were not for coal and the


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skill of iron casting it may not have been a revolution – just a prolonged

evolution. It was the coke used to smelt iron that gave the great inventors the

material from which they could make their machines, the most revolutionary

being the steam engine developed by James Watt in the 1760’s. In 1780 the world

saw its first iron bridge made from cast material; then over the turn of the century

the great iron works really came into their own as steam was harnessed to power

iron locomotives and ships. Thousands of miles of cast iron railways were laid

and scores of iron bridges were built across rivers and straits. Steel, which had

been made in relatively small amounts since 1733 when Benjamin Huntsman

developed his crucible process, suddenly became freely available when Sir Henry

Bessemer invented his famous converter in 1855 which made large scale

production possible.

Electric motors, motor cars, diesel engines, underground railways, photography,

the wireless, the computer; all appeared in this most inventive of centuries, On the

domestic front vacuum cleaners, water closets, bicycles and scores of other

products were invented. And the men of metal contributed their skills to them all.

The twentieth century opened up with the first successful powered flight and the

introduction of the mass production of motor cars. Techniques of metal casting

changed to cater for the enormous demands of these new industries and more so

when, within a few years, both modes of transport were being used in the first all-

metal war between 1914 and 1918. Aluminium, introduced to the metal industry

in 1909, provided the strong lightweight material that was to satisfy man’s long

time universal yearning to fly. Ultimately its derivatives opened up the very

heavens for him. Space exploration commenced in the 1950’s, man landed on the

moon in 1969 and countless satellites and space probes were projected into the

universe. Once again the art of metal molding came into its own as an essential

part of the aerospace industry.

Today the casting industry contributes to information technology, food

production, telecommunications, nuclear power and world finance. It can be

confidently predicted that as the human race continues its progress, whatever new

materials are utilized, the casting industry will be there to serve it. Whoever enters


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the metal casting business today will doubtless help to take it into its seventh

millennium as possibly man’s oldest and most essential skill.

CHAPTER II

Foundry Industry

Since the days of the first horseless carriage, engineers have relied upon the

metal-casting process to power, control and stabilize their ever-demanding

vehicles. The automobile depends on castings, from the engine to the brakes. It

also presents a platform for casting design to shine.

The ability of fluid to assume the shape of its container is exploited by casting

processes, which involve melting and pouring liquid metal into a sand or metal

mould and allowing it to solidify, yielding a shape close to that of the desired

product. Metal casting continues to be the preferred process for intricate shapes of

any size and weight with varying wall thickness and internal features. The flow of

molten metal in the mould and subsequent solidification affect casting quality.

This can be controlled by appropriate design of the mould, including the cavities

corresponding to the casting, gating channels and feeders.

The Indian Foundry Industry occupies a special place in shaping the country’s

economy. India is currently among the 10 largest producers of ferrous and non-

ferrous castings and has over 6500 foundries in the small, medium, and large

scale sectors. Approximately 90% are in the small scale. India exports annually

above Rs.700/- crores worth of castings to countries like USA, U.K., Canada,

Germany etc.

The future holds great promise for the metal casting industry. New advances have

allowed the industry to employ materials such as aluminum, magnesium,

titanium, zinc, advanced copper- based, and advanced ferrous alloys to produce

thin wall, high-strength castings with higher precision castings and more complex

shapes. But to remain competitive and maintain a viable domestic industry,


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challenges must be overcome in industry recognition, casting design, processing

efficiency, and employment attractiveness.

CHAPTER III

Company Profile

INTRODUCTION

Alucast Foundries Belgaum Pvt. Ltd. Established in 1996. Alucast Foundries is

the major driving force behind the smooth and trouble free wheeling of the

country’s passenger cars. One of the largest and specialized manufacturers of

brake discs for passenger cars. Alucast Foundries specializes in the high precision

product. The Brake discs are of the solid and ventilated type and are supplied in

either fully finished or semi-finished forms. The proved technology for porosity

free castings has been put to use, along with less than 5% Ferrite control and

absence of carbides. Advanced CNC machines provide a fine finish to all

castings. Fly Wheels and Pressure Plates for Clutches, ranging from 4 to 40 kgs.

in weight, are the other major products in this category. Alucast Foundries

supplies different grades of brake discs viz. fG 250, GH 190, GGG25 stc.

This specialized field of casting has, off late, become a routine- part and parcel –

of the product range of Alucast foundries. With the best technology and expert

manpower, a wide range of products in the category have been instrumental in the

smooth operations of many a core sector. Alucast Foundries maintain a

modularity of more than 85 % well formed nodules and controlled proportions of

Pearite and Ferrite in the available matrix, are the basic of this flawless quality

castings.

Various grades such as 400/12, 400/15, 450/15, 500/7, 600/3 and 700/2 are among

the casting manufactured. A wide product range pertaining to international

standards is a silent feature of Alucast Foundries. Hubs, End Collars and other


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castings for Earth moving machinery, adhering to DIN, BS, IS and ASTM have

been making their mark in the domestic as well as the overseas markets.

Area covered: 4 acres; Built up area: 30,000 sq. feet

Power consumption: 650 kilo watts

Installed capacity: 3000 MT

Working capital: 1,20,00,000; Export credit: 80,00,000

ISO: July 2000; ISO Technical Specification certificate: September 2004

Total share holding: 52,00,000

SHARE HOLDERS

1. Mr. Sanjay Bichu (MD)

2. Mrs. Purnima Bichu (DIR)

3. Mr. V.G. Kulkarni (DIR)

4. Mr. Gopal Bichu

5. Mrs. Sudha B. Bichu

6. Dr. Mrs. Hema Kulkarni

7. Mr. Nikhil Kulkarni

ESTEEMED CUSTOMERS

Kalyani Brakes Ltd.

BCSIL, Jalagaon

Axletech, UK

ITM

L&T Komatsu

NGEF

ILJIN Automotive Pvt. Ltd.

REGISTERED OFFICE AND WORKS

Office: Works:

B/16 KSSIDC Ind. Estate, 664/2 Waghwade Road,

Angol Belgaum Village Mache, Belgaum


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India – 590008 India – 590014

Phone No.: 2440967, 5202029 Phone No.: 2411491

Fax No. : 2441098

Email : [email protected]

PLANT AND MACHINERY USED

Sand mixer & Muller

Molding machine

Sand cooler

Conveyer

Core making machine & core oven

Cupola

Spectrometer (Alloy Testing meter)

Induction furnace

Automatic pouring machine

Shot blasting

CNC lathe

HOURS AND ENVIRONMENT

Foundry process operators usually work 48 hours a week, often on a shift system,

which can include evenings and weekends. Overtime is likely to be available.

Foundries are not the dirty, dusty places they used to be and most have fume and

dust extractors. However, the furnace area is hot, and some processes still cause a

certain amount of dust. The use of lifting equipment has taken some of the hard

physical effort out of the work. Foundries can be dangerous places, and foundry

process operatives wear safety clothing including overalls, safety shoes, hard hats,

eye shields, earplugs and gloves.


mailto:[email protected]

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SKILLS AND PERSONAL QUALITIES

Foundry process operators need

to be good with their hands

good hand-to-eye co-ordination

a steady hand to carry out delicate work

good communication skills

the ability to work under supervision

to work well as part of a team

a flexible attitude to do a range of different jobs

a serious attitude to safety issues

good physical fitness.


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CHAPTER IV

Process flow for the production of casting

CASTING

Casting is a method for creating one or more copies of an original piece of

sculptural (three-dimensional) artwork. Casting is a manufacturing process, in

which we pour molten metal in the pre-made mould; mould may be of sand or of

metal, and let it be solidified. After solidification and removal of the mould the

metal takes the desired shape. Four main elements are required in the process of

casting pattern, mold, cores, and the part. The pattern, the original template from

which the mold is prepared, creates a corresponding cavity in the casting material.

Cores are used to produce tunnels or holes in the finished mold, and the part is the

final output of the process.

SAND CASTING

Sand casting, which in a general sense involves the forming of a casting mold

with sand, includes conventional sand casting and evaporative pattern (lost-foam)

casting. In sand casting, re-usable, permanent patterns are used to make the sand

moulds. The preparation and the bonding of this sand mould are the critical step

and very often are the rate-controlling step of this process. Two main routes are

used for bonding the sand moulds:


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The "green sand" consists of mixtures of sand, clay and moisture.

The "dry sand" consists of sand and synthetic binders cured thermally or

chemically.

In conventional sand casting, the mold is formed around a pattern by ramming

sand, mixed with the proper bonding agent, onto the pattern. Then the pattern is

removed, leaving a cavity in the shape of the casting to be made. If the casting is

to have internal cavities or undercuts, sand cores are used to make them. Molten

metal is poured into the mold, and after it has solidified the mold is broken to

remove the casting. In making molds and cores, various agents can be used for

bonding the sand. The agent most often used is a mixture of clay and water.

Casting quality is determined to a large extent by foundry technique. Proper

metal-handling practice is necessary for obtaining sound castings. Complex

castings with varying wall thickness will be sound only if proper techniques are

used.

DESIGN

The first production step for all castings takes place in the design office where

ideas are converted into manufacturing drawings which guide the production team

to create the solid metal end products. Designers need a wealth of information

before they reach for their set squares. The specified shape and size of the final

product is obviously needed but with metal casting the designers needs to know

what stresses and conditions the products will have to withstand so that the

correct metal can be chosen. They will need to know how many castings are

needed. All these factors dictate which molding techniques to choose.

PATTERN MAKING

Once the customer and the rest of the production team have approved the design,

a pattern or model is made. This can be produced in wood, metal or plastic or

from a combination of all three. Patterns must be precise in their shape and finish,

for any mistakes are reproduced in the moulds which are made from them and

from which the final castings are formed. They must be made to allow for the


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shrinkage of the metal when it cools and they can include channels to allow metal

to flow into the casting shape. From the initial pattern a prototype or production

sample is usually made with which the customer can experiment to ensure that the

final casting will be exactly as required.

MOULD MAKING

The next manufacturing step is moulding in which the pattern is packed in a

moulding material, usually some type of sand, and then removed to leave the right

shape for the casting. Moulds can be made by hand, or machine. In one casting

process the mould is made from a heat resistant metal. Moulds are usually made

in at least two parts and for very large castings they may even start out as large

holes dug into the sand floor of the foundry. Different types of sand are used for

moulding with additives like water and clay and various chemicals, depending on

the size of the mould and the types of metal that are being cast. One important

feature of the mould is the running system which is a network of small channels

that leads the molten metal down into the casting shape. The shapes and sizes of

these channels have to be carefully calculated to ensure that the molten metal does

not solidify before it gets to the casting shape and to make sure that it does not

flow too fast when it could wear away the mould. Many castings are designed to

have cavities in them – engine blocks, for example. These voids, which have to be

as accurate as the outer moulds, are made by forming their shape in moulding

material. The shapes, or cores as they are known, are placed in the mould and

after the molten metal has solidified, the core material is removed leaving a

precisely shaped cavity behind.

For mould preparation as per production plan a mixture of sand charge which

contains system sand, new sand, bentonite, CL4 and dextrin is collected in the

bucket. The bucket is raised and the sand is unloaded into the muller. Sand is

mixed for two minutes in dry condition with 5-15 liters of water in the muller.


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Next the sand is mixed for three minutes in wet condition. After this process is

completed the sand sample is measured and once the sample is qualified as per the

required standards the mixture is dropped into the hopper.

MACHINE MOULDING

To make green sand moulds on the machine.

1. Take inspected pattern and moulding pins from pattern shop

2. Fit pattern on machine with moulding pins and clean the pattern with diesel

spray and plumbago powder.

3. Place first box on match plate and sieve on it. Take some initial system sand

and sieve it through sieve. Remove sieve.

4. Fill the half box with system sand and jolt. Place the spruce cup on position

(for top box moulding only).

5. Do jolting and ram the sand with pneumatic hand rammer.

6. Fill full box with sand and jolt. Squeeze the sand and do simultaneous

jolting.

7. Remove spruce cup from top box and do random venting.

8. Lift the box with lifting rods and remove it from machine with electrical

hoist.

9. Before keeping bottom box on pallet, clean pallets thoroughly. Clean the

bottom box mould with air. Place the stained core as specified and cores for

cored items.

10. Make proper venting for top box, clean it with air and close the box.

11. Insert the closing pins into box bushes.

12. Mark the box with heat number and serial number with chalk. Move the box

for pouring.


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HAND MOULDING

To make green sand moulds and CO2 sand moulds manually.

a) Green sand hand moulding

1. Take inspected pattern, propagating system for loose patterns and moulding

pins from pattern shop.

2. Select proper sized boxes and moulding pins.

3. Place pattern on ground and box on it. Clean the pattern with air and apply

diesel and plumbago powder.

4. Cover the patter with green sand mix upto 30-40 mm approximately an

dram it properly.

5. Cover this sand with baking sand and ram it properly till box fills

completely.

6. Make proper venting and scrape the surface to remove access sand if any.

7. Repeat the procedure for top box moulding. For loose pattern moulding turn

the bottom box moulded with pattern and then mould the top box on it.

8. Remove pattern from mould.

9. Close the boxes for pouring.

b) CO2 sand moulding

1. Take inspected pattern, propagating system for loose patterns and moulding

pins from pattern shop.

2. Select proper sized boxes and moulding pins.

3. Place pattern on ground and box on it. Clean the pattern with air and apply

diesel and plumbago powder.


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4. Cover the patter with green sand mix upto 30-40 mm approximately and

dram it properly.

5. Cover this sand with baking sand and ram it properly till box fills

completely.

6. Make proper venting and scrape the surface to remove access sand if any.

7. Pass CO2 gas through the vents for half minute approximately per vent.

8. Repeat the procedure for top box moulding. For loose pattern moulding, turn

the bottom box moulded with pattern and then mould the top box on it.

9. Remove pattern from mould.

10. Paint the moulds with spirit paint by spraying.

11. Heat the moulds with diesel or LPG burners.

12. After cooling close the boxes.

CORE MAKING

Good core making begins with high quality core sand preparation. The

preparation of cores from sand mixer consists of the following procedure

Preparation of sand mix for core making on compax machine:

Take 20 kgs. of dry sand of AFS number 50-55. Add 0.2 to 0.25 kg of Resin and

mix manually for 2-3 minutes. Add 0.2 to 0.25 kg. of binder and mix manually for

3-4 minutes. Feed the sand into hopper.

Preparation of sand mix for oil and CO2 core making:

Oil sand core: Take 140 kgs. of new sand of AFS number 60-65 in sand muller.

Add 4.5 to 5 liters of core oil and mix it for 6 minutes. Add 4.5 to 5 kgs. of

dextrin. 2.5 to 3 kgs. of Bentonite and mix for 6 minutes. Add 0.5 to 1.5 liters of

water in sand and mix for 3 minutes.

CO2 sand core: Take 140 kgs. of dry sand of AFS number 50-55. Add 10 kgs. of

sodium silicate and mix it for 12 minutes.

Preparation of cold box cores on compax machine:

Take the inspected core boxes from pattern shop. Install the core box on the

machine with proper fittings. Operate the cycle from control panel. Take out the


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core from the machine. The core hardness should be 5% with scratch hardness

tester, within 75 to 95.

To prepare CO2 and oil sand cores from sand mix:

a) Oil sand core:

1. Take the inspected core box from pattern shop.

2. Take the sand mix.

3. Fill core box with sand mix and ram with wooden rammer.

4. After ramming scrap the excess sand from top surface.

5. Make the proper venting in core.

6. Remove the core from core box and keep them batch wise.

7. Heat the cores batch wise in oven to remove moisture.

8. Paint the cores with spirit paint if applicable.

b) CO2 sand core:

1. Take the inspected core box from pattern shop.

2. Take the sand mix.

3. Fill core box with sand mix and ram with wooden rammer.

4. After ramming scrap the excess sand from top surface.

5. Make the proper venting in core.

6. Pass the CO2 gas from the vents for half minute per vent.

7. Remove the core from core box and keep them batch wise.

8. Paint the cores with spirit paint by spray painting.

9. Heat the cores with the help of diesel/ LPG burner.

MELTING and POURING

To operate the furnace for MELTING metal:

1. Switch on the power supply to the furnace.

2. Take the furnace charge as per the charge sheet and melt it in furnace.

3. Slowly increase the power supply to full rating. Add the alloys into furnace

as per charge sheet for alloy addition add CI boring about 25-30 kgs. if

available.

4. Spread slag power over molten metal surface and remove slag.


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5. Pour the sample in CE cup for checking C and Si %.

6. Pour one sample in die for spectrometer analysis

7. Pour one chill before inoculation and another after inoculation.

8. Spread slag powder over molten metal surface and remove slag.

9. Mg. treatment for SG iron: add 5.5 kgs. of FeSiMg and 2-3 kgs. CRC

punching at the bottom of treatment ladle. Place cover and clamp it. Pour the

metal.

POURING

There are two ways of pouring metal. Manually pouring and poring with the help

of ladle. To prepare ladle for pouring scrap clean the ladle completely. Take

silicate 10 kgs., sand 140 kgs. and Bentonite 1 kg. Apply thin layer of sodium

silicate from inside ladle. Make the lining of sand approximately 25 mm. with flat

wooden rammer. Make spout of 25-30 mm on one side. Make spout mouth at the

bottom 40-50 mm in length, 15-20 mm in width. Spray sprit paint on lining. Heat

the ladle with diesel or LPG burner to remove moisture.

SHOT BLASTING, FETTLING & PAINTING:

Shot blasting: Load the castings on hanger 300 to 350 kgs. push the hanger inside

the machine and close the door tightly. Start the machine and timer. After time is

over, pull the hanger out from the machine. Remove castings and hand over to

fettling.

Fettling: Remove all the excess material from castings by chipping and grinding.

Painting: Apply rust preventive polymer paint to the non-machining areas of the

casting.

In today's competitive market, you can't afford to miss the savings and

technical advantages from reclamation.

Modern foundries demand optimized control over molding sand preparation in

order to minimize costs and maximize the performance of the molding sand


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preparation system. Tightly controlled sand properties allow for low-defect, high-

quality mold and casting production. For optimal performance, molding sand

control must begin long before final mulling. Molding sand at shakeout can have

wide variations in temperature, moisture content, and physical properties. Hot

sand leads to casting scrap, mixing inefficiency, material handling and

environmental problems. Precise control over final sand preparation demands

that between shakeout and final mulling, the return sand is lowered in temperature

and homogenized.

Sand is the largest foundry process waste, typically constituting about 70% of

total waste volume. Fortunately, most foundry sands are reclaimable and can be

effectively reused.

The basic reasons for reclaiming sand

It's Cost Saving: The costs of molding and core sand continue to increase

significantly and cut into foundry profitability. To lower the cost of producing a

casting foundries desire to reduce total sand cost which includes the purchase

cost, delivery cost, unloading, storing, handling and disposal costs including, in

some instances, ever more expensive landfill fees.

It's Environmentally Responsible: Environmentally, it's becoming increasingly

more difficult to dispose of great quantities of waste sand into a landfill.

It Has Technical Advantages: Technically, reclamation is of interest because

many foundries report that better castings can be made at lower costs, from

reclaimed sand


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CHAPTER V

Cost Accounting

INTRODUCTION

Cost Accounting is the classifying, recording and appropriate allocation of

expenditure for the determination of the costs of products or services, and for the

presentation of suitably arranged data for purposes of control and guidance of

management. It includes the ascertainment of the cost of every order, job,

contract, process, service or unit as may be appropriate. It deals with the cost of

production, selling and distribution, it is the provision of such analysis and

classification of expenditure as will enable the total cost of any particular unit of

production or service to be ascertained with reasonable degree of accuracy and at

the same time to disclose exactly how such total cost is executed so as to control

and reduce its cost.

Thus, Cost Accounting relates to the collection, classification, ascertainment of

cost and its accounting and control relating to the various elements of cost. It

establishes budgets and standard costs and actual cost of operations, processes,

departments or products and the analysis of variances, profitability and social use

of funds.

Cost Accounting is the application of costing and cost accounting principles,

methods and techniques to the science, art and practice of cost control and the

ascertainment of profitability. It includes the presentation of information derived


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there from for purposes of managerial decision-making. Thus ‘Cost Accountancy

is the science, art and practice of a cost accountant’. It is a science because it is a

body of systematic knowledge having certain principles which a cost accountant

should posses for proper discharge of his responsibilities. It is an art as it requires

the ability and skill with which a cost accountant is able to apply the principles of

cost accountancy to various managerial problems. Practice includes the

continuous efforts of a cost account in the field of cost accountancy. Such efforts

also include the presentation of information for the purpose of managerial

decision-making and keeping statistical records.

SCOPE OF COST ACCOUNTING

1. Cost Ascertainment: It deals with the collection and analysis of expenses,

the measurement of production of the different products at the different

stages of manufacture and the linking up of production with the expenses.

2. Cost Accounting: It is the process of accounting for cost which begins with

recording of expenditure and ends with the preparation of statistical data. It

is a formal mechanism by means of which costs of products and services are

ascertained and controlled.

3. Cost Control: Cost Control is the guidance and regulation by executive

action of the costs of operating and undertaking. It aims at guiding the actual

towards the line of targets; regulates the actuals if they deviate or vary from

the targets; this guidance and regulation is done by an executive action.

OBJECTIVES OF COST ACCOUNTING

The Objectives of cost accounting are ascertainment of cost, fixation of

selling price, proper recording and presentation of cost data to the management

for measuring efficiency and for cost control. The aim is to know the methods by

which expenditure on materials, wages and overhead is recorded, classified and

allocated so that the cost of products and services may be accurately ascertained;

these costs may be related to sales and profitability may be determined.


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a. To ascertain the cost per unit of the different products manufactured by a

business concern.

b. To provide a correct analysis of cost both by processes or operations and by

different elements of cost.

c. To disclose sources of wastage whether of material, time or expense or in

the use of machinery, equipment and tools and to prepare such reports which

may be necessary to control such wastage.

d. To provide requisite data and serve as a guide to price fixing of products

manufactured or services rendered.

e. To ascertain the profitability of each of the products and advise the

management as to how these profits can be maximized.

f. To exercise effective control of stocks of raw materials, work-in-progress,

consumable stores and finished goods in order to minimize the capital

locked up in these stocks.

g. To reveal sources of economy by installing and implementing a system of

cost control for materials, labor and overheads.

h. To advise management on future expansion policies and proposed capital

projects.

i. To prevent and interpret data for management planning, decision-making

and control.

j. To help in the preparation of budgets and implementation of budgetary

control.

k. To organize an effective information system so that different levels of

management may get the required information at the right time in right form

for carrying out their individual responsibilities in an effective manner.

l. To guide management in the formulation and implementation of incentive

bonus plans based on productivity and cost savings.

m. To supply useful data to the management to take various financial decisions

such as introduction of new products, replacement of labor by machine etc.

n. To help in supervising the working of punched card accounting or data-

processing through computers.


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o. To organize the internal audit system to ensure effective working of

different departments.

p. To organize cost reduction programs with the help of different-departmental

managers.

q. To provide specialized services of cost audit in order to prevent the errors

and frauds and to facilitate prompt and reliable information to the

management.

r. To find out costing profit or loss by identifying with revenues the cost of

those products or services by selling which the revenues have resulted.

ADVANTAGES OF COST ACCOUNTING

1. Helps in optimum utilization of men, material and machine.

2. Identifies the areas requiring corrective actions.

3. Helps management in formulation of policies.

4. Presents a tailor-made solution for the problem.

5. Helps management in making short-term decisions by use of techniques

like marginal costing, etc.

6. Provides useful data for final accounts by giving cost of closing stock of

raw-materials, work-in-progress and finished products.

7. Provides a data base for reference by government, wage tribunals and

trade unions.

8. Helps in formation of cost centers and responsibility centers to exercise

control

9. Helps to face increasing difficulties in setting prices and improving

efficiency.

10. Facilitates use of specialized techniques like cost reduction, value

analysis, operations research and management by exception.

11. Threads its way through every phase of business and influences the make-

up of the entire enterprises with regards to its products, its market and its

methods of operation.


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12. Focuses attention on the profitability of each product and service unlike

financial accounting, which presents profitability for company as a whole.

LIMITATIONS OF COST ACCOUNTING

The limitations of cost accounting system are -

1. It is not an exact science and involves inherent element of judgement.

2. Cost varies with purpose. Therefore, cost collected for one purpose will not

be suitable for another purpose.

3. Cost accounting presents the base for taking the best decision. It does not

give outright the solutions of the problems.

4. Most of the cost accounting techniques are based on some pre-assumed

notions.

5. The area most vulnerable to criticism is coat accounting is arbitary

apportionment of common costs.

6. Different views are held by different cost accountants about the items to be

included in cost.

Can cost professionals overcome cost accounting limitations?

The answer can be Yes and No depending upon what you are looking for.

The job of a cost professional is to dovetail cost accounting information to suit

management objective. There may be so many factors detailed above which can

limit quality of his information. However this does not mean that cost accounting

and cost professional fail in their objective to provide accurate cost estimation.

The role of cost professional is to identify, collect, measure, analyze,

prepare and interpret cost accounting information intended for specific use by the

management. There are so many different tools available in cost accounting,


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which over the period have helped industry to perform in a better way and base

their decisions on information generated by the cost professionals. It is the

selection of right mix of tools and experience which can be instrumental in

reducing impact of the limitations and optimize effectiveness of the cost

accounting in general and a cost professional in particular.

TRADITIONAL COSTING TODAY

Despite the fact that it is over 75 years old, most companies still use

standard cost systems both to value inventory for financial statement purposes and

for many other management purposes as well. While it has some advantages for

financial statement purposes (simplicity, consistency, well understood by

auditors), it is, at best, meaningless and, at worst, misleading as a tool to assist in

making effective management decisions. It’s because the business case for which

it is being used today is not the business case for which it was designed. Standard

cost accounting was designed for a company that had:

1) Homogeneous products,

2) Large direct costs compared to indirect costs,

3) Limited ability to collect data and

4) Low "below the line" costs.

Today’s company typically has:

1) A wide variety and complexity of products and services,

2) High overhead costs compared to direct labor,

3) An overabundance of data and

4) Substantial non product costs that can dramatically affect true product,

distribution channel and customer profitability.

The typical manufacturing company is still arbitrarily attaching overhead to

products using Direct Labor as the driver. They are often allocating the largest

cost (overhead) based on the smallest (direct labor). Because of product variety


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and product line complexity, one homogeneous overhead rate is no longer an

appropriate average.

Finally, today, we have high tech, high speed data collection and reporting tools.

With the proper system, gathering and manipulation of data in multiple complex

ways is no longer an issue. With these tools at the disposal of a business

organization, why still use a cost accounting system that was developed over 70

years ago? With the advent of certified financial statements, accounting systems

became more structured to comply with the demands of external stakeholders

(e.g. shareholders, governments, lenders, etc.) and the purpose of cost accounting

systems changed along with the rest of accounting. The primary purpose of cost

accounting in the financial accounting system today is to value inventory for

financial statement purposes, not, as it was in 1924, a tool to aid in sound business

decisions.

JOB-ORDER COSTING

Job-order costing is used when different types of products, jobs, or batches are

produced, typically over a rather short period of time. In a job-order costing

system, direct materials costs and direct labor costs are usually "traced" directly to

jobs. Overhead is applied to jobs using a predetermined rate. Actual overhead

costs are not "traced" to jobs. Examples of industries in which job-order costing is

used include special order printing, shipbuilding, construction, hospitals,

professional services such as law firms, and movie studios. Each job has its own

job cost sheet on which are recorded the costs that have been charged to the job.

The job cost sheet will have some code or descriptive data to identify the

particular job and will contain spaces to collect costs of materials, labor, and

overhead. When a job is started, materials that will be required to complete the

job are withdrawn from the storeroom. The document that authorizes these

withdrawals and that specifies the types and amounts of materials withdrawn is

called the materials requisition form. The materials requisition form identifies the

job to which the materials are to be charged. Care must be taken when charging

materials to distinguish between direct and indirect materials. Labor costs are


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recorded on a document called a time ticket or a time sheet. Each employee

records the amount of time he or she spends on each job and each task on a time

ticket. The time spent on a particular job is considered direct labor and its cost is

"traced" to that job. The cost of time spent on other tasks, not traceable to any

particular job, is usually considered part of manufacturing overhead.

Manufacturing overhead includes all of those costs incurred in the manufacturing

process which are not "traced" to a particular job. In practice, manufacturing

overhead usually consists of all manufacturing costs other than direct materials

and direct labor. Since manufacturing overhead costs are not traced to jobs, they

must be allocated to jobs if absorption costing is used.

Overview of Cost Flows

The basic flow of costs in a job-order system begins by recording the costs of

material, labor, and manufacturing overhead.

a. Direct material and direct labor costs are debited to the Work in Process

account. Any indirect material or indirect labor costs are debited to the

Manufacturing Overhead control account, along with any other actual

manufacturing overhead costs incurred during the period. Manufacturing

overhead is applied to Work in Process using the predetermined rate. The

offsetting credit entry is to the Manufacturing Overhead control account.

b. The cost of finished units is credited to Work in Process and debited to the

Finished Goods inventory account.

c. When units are sold, their costs are credited to Finished Goods and debited to

Cost of Good Sold.

The Manufacturing Overhead Control Account

Manufacturing Overhead is a temporary control account.

a. As stated above, actual overhead costs are recorded on the debit side of the

Manufacturing Overhead control account. Overhead costs applied to Work in

Process using predetermined rates are recorded on the credit side of the

account.


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b. Any discrepancy between overhead costs incurred and overhead costs applied

shows up as a balance in the Manufacturing Overhead control account at the

end of the period. A debit balance is called under applied overhead and a credit

balance is called over applied overhead.

Under- and over applied Overhead

Since the predetermined overhead rate is based entirely on estimated data, there

will almost always be a difference between the actual amount of overhead cost

incurred and the amount of overhead cost that is applied to the Work In Process

account. This difference is termed under applied or over applied overhead, and as

discussed above, can be determined by the ending balance in the Manufacturing

Overhead control account. An under applied balance occurs when more overhead

cost is actually incurred than is applied to the Work In Process account. An over

applied balance results from applying more overhead to Work In Process than is

actually incurred.

1. Cause of under- and over applied overhead. When a predetermined overhead

rate is used, it is implicitly assumed that the overhead cost is variable with (i.e.,

proportional to) the allocation base. For example, if the predetermined overhead

rate is $20 per direct labor-hour, it is implicitly assumed that the actual overhead

costs will increase by $20 for each additional direct labor-hour that is incurred. If,

however, some of the overhead is fixed with respect to the allocation base, this

will not happen and there will be a discrepancy between the actual total amount of

the overhead and the overhead that is applied using the $20 rate. In addition, the

actual total overhead can differ from the estimated total overhead because of poor

controls over overhead spending or because of inability to accurately forecast

overhead costs.


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2. Disposition of under- and over applied Overhead. Two approaches to

dealing with an under- or over applied overhead balance in the accounts are

illustrated in the text.

a. The simplest approach is to close out the under- or over applied overhead to

Cost of Goods Sold. This is the method that is used in most of the exercises

and problems because it is easiest for students to understand and master.

b. The second approach is to allocate the under- or over applied balance to Cost of

Goods Sold and to the Work in Process and Finished Goods inventory

accounts. The basis of allocation is the amount of overhead applied during the

period in the ending balance of each of these accounts. This method is

equivalent to waiting until the end of the period to allocate the actual overhead

costs based on the actual amount of the allocation base incurred.

3. The Effect of under- and over applied Overhead on Net Income.

a. If overhead is under applied, less overhead has been applied to inventory than

has actually been incurred. Enough overhead must be applied retroactively to

Cost of Goods Sold (and perhaps ending inventories) to eliminate this

discrepancy. Since Cost of Goods Sold is increased, under applied overhead

reduces net income.

b. If overhead is over applied, more overhead has been applied to inventory than

has actually been incurred. Enough overhead must be removed retroactively

from Cost of Goods Sold (and perhaps ending inventories) to eliminate this

discrepancy. Since Cost of Goods Sold is decreased, over applied overhead

increases net income.


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CHAPTER VI

Accounting Standard and Financial Statements

INTRODCUTION

Accounting Standards are written documents, policy documents issued by expert

accounting body or Government or other regulatories body covering the aspects

of recognition, measurement, treatment, presentation and disclosure of accounting

transaction in the financial statement. Accounting Standards in India are issued by

the Institute of Chartered Accountants of India (ICAI).

OBJECTIVES OF ACCONTING STANDARDS

Objective of Accounting Standards is to standardize the diverse accounting

policies and practices with the view to eliminate to the extent possible the non

comparability of financial statements and add the reliability to the financial

statements.

ADVANTAGES OF ACCOUNTING STANDARDS

Standards reduce to a reasonable extent or eliminate altogether confusion

variation in the accounting treatments used to prepare the financial statements.

There are certain areas where important information is not required by law to

be disclosed, standards may call for disclosure beyond that required by law.


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It facilitates comparison of financial statements of different companies

situated at different places.

DISADVANTAGES OF ACCONTING STANDARDS

There may be a trend towards rigidity and away from flexibility in applying

Accounting Standards.

Differences in Accounting Standards are bound to be because of differences in

the traditions and legal system from one country to another.

Accounting Standards cannot override the law. The standards are required to

be framed within the ambit of prevailing statute even though it is not an

acceptable standard.

OBJECTIVES AND FUNCTIONS OF THE ACCONTING STANDARDS

BOARD

1. The following are the objectives of the Accounting Standards Board

a. To conceive of and suggest areas in which Accounting Standards need to

be developed

b. To formulate Accounting Standards with a view to assisting the Council of

the ICAI in evolving and establishing Accounting Standards in India

c. To examine how far the relevant International Accounting

Standard/International Financial Reporting Standard (see paragraph 3

below) can be adapted while formulating the Accounting Standard and to

adapt the same


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d. To review, at regular intervals, the Accounting Standards from the point of

view of acceptance or changed conditions, and, if necessary, revise the

same

e. To provide, from time to time, interpretations and guidance on Accounting

Standards

f. To carry out such other functions relating to Accounting Standards

2. The main function of the ASB is to formulate Accounting Standards so that

such standards may be established by the ICAI in India. While formulating the

Accounting Standards, the ASB will take into consideration the applicable

laws, customs, usages and business environment prevailing in India.

3. The ICAI, being a full-fledged member of the International Federation of

Accountants (IFAC), is expected, inter alia, to actively promote the

International Accounting Standards Board’s (IASB) pronouncements in the

country with a view to facilitate global harmonization of accounting

standards. Accordingly, while formulating the Accounting Standards, the ASB

will give due consideration to International Accounting Standards (IASs)

issued by the International Accounting Standards Committee (predecessor

body to IASB) or International Financial Reporting Standards (IFRSs) issued

by the IASB, as the case may be, and try to integrate them, to the extent

possible, in the light of the conditions and practices prevailing in India.

4. The Accounting Standards are issued under the authority of the Council of the

ICAI. The ASB has also been entrusted with the responsibility of propagating

the Accounting Standards and of persuading the concerned parties to adopt

them in the preparation and presentation of financial statements. The ASB will

provide interpretations and guidance on issues arising from Accounting

Standards. The ASB will also review the Accounting Standards at periodical

intervals and, if necessary, revise the same.

RATIONALE OF ACCONTING STANDARDS

Accounting Standards are formulated with a view to harmonize different

accounting policies and practices in use in a country. The objective of Accounting


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Standards is, therefore, to reduce the accounting alternatives in the preparation of

financial statements within the bounds of rationality, thereby ensuring

comparability of financial statements of different enterprises with a view to

provide meaningful information to various users of financial statements to enable

them to make informed economic decisions.

INTERNATIONAL HARMONIZTION OF ACCONTING STANDARDS

Recognizing the need for international harmonization of accounting standards, in

1973, the International Accounting Standards Committee (IASC) was established.

The IASC has been restructured as International Accounting Standards Board

(IASB). The objectives of IASC include promotion of the International

Accounting Standards for worldwide acceptance and observance so that the

accounting standards in different countries are harmonized. In recent years, need

for international harmonization of Accounting Standards followed in different

countries has grown considerably as the cross-border transfers of capital are

becoming increasingly common.

ACCONTING STANDARDS SETTING IN INDIA

The Institute of Chartered Accountants of India (ICAI) being a member body of

the then IASC, constituted the Accounting Standards Board (ASB) on 21st April,

1977, with a view to harmonize the diverse accounting policies and practices in

use in India. After the avowed adoption of liberalization and globalization as the

corner stones of Indian economic policies in early ‘90s, the Accounting Standards

have increasingly assumed importance. While formulating accounting standards,

the ASB takes into consideration the applicable laws, customs, usages and

business environment prevailing in the country.

The ASB also gives due consideration to International Financial Reporting

Standards/ International Accounting Standards issued by IASB and tries to

integrate them, to the extent possible, in the light of conditions and practices


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prevailing in India. Although the Accounting Standards Board is a body

constituted by the Council of the Institute of Chartered Accountants of India, it is

independent in the formulation of accounting standards since in case the Council

considers it necessary that certain modifications be made in the draft accounting

standards formulated by the ASB, it can only be done in consultation with the

ASB.

COMPOSITION OF ACCONTING STANDARDS BOARD

The composition of the ASB is broad-based with a view to ensuring participation

of all interest-groups in the standard-setting process. These interest groups include

industry, representatives of various departments of government and regulatory

authorities, financial institutions and academic and professional bodies. Industry

is represented on the ASB by their apex level associations, viz., Associated

Chambers of Commerce (ASSOCHAM), Federation of Indian Chambers of

Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). As

regards government departments and regulatory authorities, Reserve Bank of

India, Ministry of Company Affairs, Central Board of Direct Taxes, Comptroller

& Auditor General of India, Controller General of Accounts, Securities and

Exchange Board of India and Central Board of Excise and Customs are

represented on the ASB. Besides these interest-groups, representatives of

academic and professional institutions such as Universities, Indian Institutes of

Management, Institute of Cost and Works Accountants of India and Institute of

Company Secretaries of India are also represented on the ASB. Apart from these

interest-groups, members of the Central Council of ICAI are also on the ASB.

THE ACCOUNTING STANDARDS SETTING PROCESS

The accounting standard setting, by its very nature, involves reaching an optimal

balance of the requirements of financial information for various interest groups

having a stake in financial reporting. With a view to reach consensus, to the extent

possible, as to the requirements of the relevant interest-groups and thereby


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bringing about general acceptance of the Accounting Standards among such

groups, considerable research, consultations and discussions with the

representatives of the relevant interest-groups at different stages of standard

formulation becomes necessary. The standard-setting procedure of the ASB, as

briefly outlined below, is designed in such a way so as to ensure such consultation

and discussions:

Identification of the broad areas by the ASB for formulating the Accounting

Standards.

Constitution of the study groups by the ASB for preparing the preliminary

drafts of the proposed Accounting Standards.

Consideration of the preliminary draft prepared by the study group by the

ASB and revision, if any, of the draft on the basis of deliberations at the ASB.

Circulation of the draft, so revised, among the Council members of the ICAI

and 12 specified outside bodies such as Standing Conference of Public

Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian

Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller

and Auditor General of India (C& AG), and Ministry of Company Affairs, for

comments.

Meeting with the representatives of specified outside bodies to ascertain their

views on the draft of the proposed Accounting Standard.

Finalization of the Exposure Draft of the proposed Accounting Standard on

the basis of comments received and discussion with the representatives of

specified outside bodies.

Issuance of the Exposure Draft inviting public comments.

Consideration of the comments received on the Exposure Draft and

finalization of the draft Accounting Standard by the ASB for submission to the

Council of the ICAI for its consideration and approval for issuance.

Consideration of the draft Accounting Standard by the Council of the

Institute, and if found necessary, modification of the draft in consultation with

the ASB.


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The Accounting Standard, so finalized, is issued under the authority of the

Council.

PRESENT STATUS OF ACCONTING STANDARDS IN INDIA IN

HARMONIZATION WITH THE INTERNATIONAL ACCONTING

STANDARDS

So far, 29 Indian Accounting Standards on the following subjects have been

issued by the Institute:

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after the Balance Sheet Date

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development (withdrawn pursuant to the

issuance of AS 26)

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 Accounting for Retirement Benefits in the Financial Statements of

Employers (recently revised and titled as Employee Benefits)

AS 16 Borrowing Costs


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AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings per Share

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income

AS 23 Accounting for Investments in Associates in Consolidated Financial

Statements

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement

AS 31 Financial Instruments: Presentation

AS 32 Financial Instruments: Disclosures

COMPLIANCE WITH ACCONTING STANDARDS

Accounting Standards issued by the ICAI had got legal recognition through

insertion of sections 211(3A), (3B) and (3C) in the Companies Act, 1956, which

may be prescribed by the Central Government in consultation with the National

Advisory Committee on Accounting Standards. Recent development in this regard

is Accounting Standards 1to 7 and 9 to 29 as recommended by the ICAI, have

been prescribed by Ministry of Company Affairs, Government of India vide its

notification dated December, 7, 2006, in the Gazette of India. This notification

provides that every company and its auditor(s) shall comply with the notified

Accounting Standards. The Securities and Exchange Board of India (SEBI)

through the listing agreement requires that listed companies shall mandatorily

comply with all the Accounting Standards issued by ICAI from time to time.


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Also, the Insurance Regulatory and Development Authority (IRDA) requires

insurance companies to follow the Accounting Standards issued by the ICAI.

Apart from the corporate bodies, the Council of the Institute of Chartered

Accountants of India has made various accounting standards mandatory in respect

of certain non-corporate entities such as partnership firms, sole-proprietary

concerns/individuals, societies registered under the Societies Registration Act,

trusts, associations of persons, and Hindu Undivided Families, where financial

statements of such entities are statutorily required to be audited, for example,

under Section 44AB of the Income-tax, 1961. The Council has cast a duty on its

members to examine compliance with the Accounting Standards in the financial

statements covered by their audit in the event of any deviations therefrom, to

make adequate disclosures in their audit reports so that the users of the financial

statements may be aware of such deviations.

OBJECTIVES OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial

position, performance and cash flows of an enterprise that is useful to a wide

range of users in making economic decisions.

Financial statements prepared for this purpose meet the common needs of most

users. However, financial statements do not provide all the information that users

may need to make economic decisions since (a) they largely portray the financial

effects of past events, and (b) do not necessarily provide non-financial

information.

Financial statements also show the results of the stewardship of management, or

the accountability of management for the resources entrusted to it. Those users

who wish to assess the stewardship or accountability of management do so in

order that they may make economic decisions; these decisions may include, for

example, whether to hold or sell their investment in the enterprise or whether to

reappoint or replace the management.

FINANCIAL POSITION, PERFORMANCE AND CASH


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The economic decisions that are taken by users of financial statements require an

evaluation of the ability of an enterprise to generate cash and cash equivalents and

of the timing and certainty of their generation. This ability ultimately determines,

for example, the capacity of an enterprise to pay its employees and suppliers,

meet interest payments, repay loans, and make distributions to its owners. Users

are better able to evaluate this ability to generate cash and cash equivalents if they

are provided with information that focuses on the financial position, performance

and cash flows of an enterprise.

The financial position of an enterprise is affected by the economic resources it

controls, its financial structure, its liquidity and solvency, and its capacity to adapt

to changes in the environment in which it operates.

Information about the economic resources controlled by the enterprise and its

capacity in the past to alter these resources is useful in predicting the ability of the

enterprise to generate cash and cash equivalents in the future. Information about

financial structure is useful in predicting future borrowing needs and how future

profits and cash flows will be distributed among those with an interest in the

enterprise; it is also useful in predicting how successful the enterprise is likely to

be in raising further finance. Information about liquidity and solvency is useful in

predicting the ability of the enterprise to meet its financial commitments as they

fall due. Liquidity refers to the availability of cash in the near future to meet

financial commitments over this period. Solvency refers to the availability of cash

over the longer term to meet financial commitments as they fall due.

Information about the performance of an enterprise, in particular its profitability,

is required in order to assess potential changes in the economic resources that it is

likely to control in the future. Information about variability of performance is

important in this respect. Information about performance is useful in predicting

the capacity of the enterprise to generate cash flows from its existing resource

base. It is also useful in forming judgments about the effectiveness with which the

enterprise might employ additional resources.

Information concerning cash flows of an enterprise is useful in order to evaluate

its investing, financing and operating activities during the reporting period. This


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information is useful in providing the users with a basis to assess the ability of the

enterprise to generate cash and cash equivalents and the needs of the enterprise to

utilize those cash flows.

Information about financial position is primarily provided in a balance sheet.

Information about performance is primarily provided in a statement of profit and

loss. Information about cash flows is provided in the financial statements by

means of a cash flow statement.

The component parts of the financial statements are interrelated because they

reflect different aspects of the same transactions or other events. Although each

statement provides information that is different from the others, none is likely to

serve only a single purpose nor to provide all the information necessary for

particular needs of users.

Notes and Supplementary Schedules

The financial statements also contain notes and supplementary schedules and

other information. For example, they may contain additional information that is

relevant to the needs of users about the items in the balance sheet and statement of

profit and loss. They may include disclosures about the risks and uncertainties

affecting the enterprise and any resources and obligations not recognized in the

balance sheet (such as mineral reserves). Information about business and

geographical segments and the effect of changing prices on the enterprise may

also be provided in the form of supplementary information.

ELEMENTS OF FINANCIAL STATEMENTS

Financial statements portray the financial effects of transactions and other events

by grouping them into broad classes according to their economic characteristics.

These broad classes are termed the elements of financial statements. The elements

directly related to the measurement of financial position in the balance sheet are

assets, liabilities and equity. The elements directly related to the measurement of

performance in the statement of profit and loss are income and expenses. The cash

flow statement usually reflects elements of statement of profit and loss and


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changes in balance sheet elements; accordingly, this Framework identifies no

elements that are unique to this statement.

The presentation of these elements in the balance sheet and the statement of profit

and loss involves a process of sub-classification. For example, assets and

liabilities may be classified by their nature or function in the business of the

enterprise in order to display information in the manner most useful to users for

purposes of making economic decisions.

FINANCIAL POSITION

The elements directly related to the measurement of financial position are assets,

liabilities and equity. These are defined as follows:

(a) An asset is a resource controlled by the enterprise as a result of past events

from which future economic benefits are expected to flow to the enterprise.

(b) A liability is a present obligation of the enterprise arising from past events, the

settlement of which is expected to result in an outflow from the enterprise of

resources embodying economic benefits.

(c) Equity is the residual interest in the assets of the enterprise after deducting all

its liabilities.

The definitions of an asset and a liability identify their essential features but do

not attempt to specify the criteria that need to be met before they are recognized

in the balance sheet. Thus, the definitions embrace items that are not recognized

as assets or liabilities in the balance sheet because they do not satisfy the criteria

for recognition.

In particular, the expectation that future economic benefits will flow to or from an

enterprise must be sufficiently certain to meet the probability criterion before an

asset or liability is recognized.

In assessing whether an item meets the definition of an asset, liability or equity,

consideration needs to be given to its underlying substance and economic reality

and not merely its legal form. Thus, for example, in the case of hire purchase, the

substance and economic reality are that the hire purchaser acquires the economic

benefits of the use of the asset in return for entering into an obligation to pay for


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that right an amount approximating to the fair value of the asset and the related

finance charge. Hence, the hire purchase gives rise to items that satisfy the

definition of an asset and a liability and are recognized as such in the hire

purchaser’s balance sheet.

ASSETS

The future economic benefit embodied in an asset is the potential to contribute,

directly or indirectly, to the flow of cash and cash equivalents to the enterprise.

The potential may be a productive one that is part of the operating activities of the

enterprise. It may also take the form of convertibility into cash or cash equivalents

or a capability to reduce cash outflows, such as when an alternative

manufacturing process lowers the costs of production.

An enterprise usually employs its assets to produce goods or services capable of

satisfying the wants or needs of customers; because these goods or services can

satisfy these wants or needs, customers are prepared to pay for them and hence

contribute to the cash flows of the enterprise. Cash itself renders a service to the

enterprise because of its command over other resources.

The future economic benefits embodied in an asset may flow to the enterprise in a

number of ways. For example, an asset may be:

(a) used singly or in combination with other assets in the production of goods or

services to be sold by the enterprise;

(b) exchanged for other assets;

(c) used to settle a liability; or

(d) distributed to the owners of the enterprise.

Many assets, for example, plant and machinery, have a physical form. However,

physical form is not essential to the existence of an asset; hence patents and

copyrights, for example, are assets if future economic benefits are expected to

flow from them and if they are controlled by the enterprise.

Many assets, for example, receivables and property, are associated with legal

rights, including the right of ownership. In determining the existence of an asset,

the right of ownership is not essential; thus, for example, an item held under a hire


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purchase is an asset of the hire purchaser since the hire purchaser controls the

benefits which are expected to flow from the item. Although the capacity of an

enterprise to control benefits is usually the result of legal rights, an item may

nonetheless satisfy the definition of an asset even when there is no legal control.

For example, know-how obtained from a development activity may meet the

definition of an asset when, by keeping that know- how secret, an enterprise

controls the benefits that are expected to flow from it.

The assets of an enterprise result from past transactions or other past events.

Enterprises normally obtain assets by purchasing or producing them, but other

transactions or events may also generate assets; examples include land received

by an enterprise from government as part of a programme to encourage economic

growth in an area and the discovery of mineral deposits. Transactions or other

events expected to occur in the future do not in themselves give rise to assets;

hence, for example, an intention to purchase inventory does not, of itself, meet the

definition of an asset.

There is a close association between incurring expenditure and obtaining assets

but the two do not necessarily coincide. Hence, when an enterprise incurs

expenditure, this may provide evidence that future economic benefits were sought

but is not conclusive proof that an item satisfying the definition of an asset has

been obtained. Similarly, the absence of a related expenditure does not preclude

an item from satisfying the definition of an asset and thus becoming a candidate

for recognition in the balance sheet.

LIABILITIES

An essential characteristic of a liability is that the enterprise has a present

obligation. An obligation is a duty or responsibility to act or perform in a certain

way. Obligations may be legally enforceable as a consequence of a binding

contract or statutory requirement. This is normally the case, for example, with

amounts payable for goods and services received. Obligations also arise, however,

from normal business practice, custom and a desire to maintain good business

relations or act in an equitable manner. If, for example, an enterprise decides as a


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matter of policy to rectify faults in its products even when these become apparent

after the warranty period has expired, the amounts that are expected to be

expended in respect of goods already sold are liabilities.

A distinction needs to be drawn between a present obligation and a future

commitment. A decision by the management of an enterprise to acquire assets in

the future does not, of itself, give rise to a present obligation. An obligation

normally arises only when the asset is delivered or the enterprise enters into an

irrevocable agreement to acquire the asset. In the latter case, the irrevocable

nature of the agreement means that the economic consequences of failing to

honour the obligation, for example, because of the existence of a substantial

penalty, leave the enterprise with little, if any, discretion to avoid the outflow of

resources to another party.

The settlement of a present obligation usually involves the enterprise giving up

resources embodying economic benefits in order to satisfy the claim of the other

party. Settlement of a present obligation may occur in a number of ways, for

example, by:

(a) payment of cash;

(b) transfer of other assets;

(c) provision of services;

(d) replacement of that obligation with another obligation; or

(e) conversion of the obligation to equity.

An obligation may also be extinguished by other means, such as a creditor

waiving or forfeiting its rights.

Liabilities result from past transactions or other past events. Thus, for example,

the acquisition of goods and the use of services give rise to trade creditors (unless

paid for in advance or on delivery) and the receipt of a bank loan results in an

obligation to repay the loan. An enterprise may also recognize future rebates

based on annual purchases by customers as liabilities; in this case, the sale of the

goods in the past is the transaction that gives rise to the liability.

Some liabilities can be measured only by using a substantial degree of estimation.

Such liabilities are commonly described as ‘provisions’. Examples include


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provisions for payments to be made under existing warranties and provisions to

cover pension obligations.

EQUITY

Although equity is defined in paragraph 49 as a residual, it may be subclassified

in the balance sheet. For example, funds contributed by owners, reserves

representing appropriations of retained earnings, unappropriated retained earnings

and reserves representing capital maintenance adjustments may be shown

separately. Such classifications can be relevant to the decision making needs of

the users of financial statements when they indicate legal or other restrictions on

the ability of the enterprise to distribute or otherwise apply its equity. They may

also reflect the fact that parties with ownership interests in an enterprise have

differing rights in relation to the receipt of dividends or the repayment of capital.

The creation of reserves is sometimes required by law in order to give the

enterprise and its creditors an added measure of protection from the effects of

losses. Reserves may also be created when tax laws grant exemptions from, or

reductions in, taxation liabilities if transfers to such reserves are made. The

existence and size of such reserves is information that can be relevant to the

decision-making needs of users. Transfers to such reserves are appropriations of

retained earnings rather than expenses.

The amount at which equity is shown in the balance sheet is dependent on the

measurement of assets and liabilities. Normally, the aggregate amount of equity

only by coincidence corresponds with the aggregate market value of the shares of

the enterprise or the sum that could be raised by disposing of either the net assets

on a piecemeal basis or the enterprise as a whole on a going concern basis.

Commercial, industrial and business activities are often undertaken by means of

enterprises such as sole proprietorships, partnerships and trusts and various types

of government business undertakings. The legal and regulatory framework for

such enterprises is often different from that applicable to corporate enterprises.


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For example, unlike corporate enterprises, in the case of such enterprises, there

may be few, if any, restrictions on the distribution to owners or other beneficiaries

of amounts included in equity. Nevertheless, the definition of equity and the other

aspects of this Framework that deal with equity are appropriate for such

enterprises.

PERFORMANCE

Profit is frequently used as a measure of performance or as the basis for other

measures, such as return on investment or earnings per share. The elements

directly related to the measurement of profit are income and expenses. The

recognition and measurement of income and expenses, and hence profit, depends

in part on the concepts of capital and capital maintenance used by the enterprise in

preparing its financial statements. These concepts are discussed in paragraphs 101

to 109.

Income and expenses are defined as follows:

(a) Income is increase in economic benefits during the accounting period in the

form of inflows or enhancements of assets or decreases of liabilities that result in

increases in equity, other than those relating to contributions from equity

participants.

(b) Expenses are decreases in economic benefits during the accounting period in

the form of outflows or depletions of assets or incurrences of liabilities that result

in decreases in equity, other than those relating to distributions to equity

participants.

The definitions of income and expenses identify their essential features but do not

attempt to specify the criteria that need to be met before they are recognized in the

statement of profit and loss.

Income and expenses may be presented in the statement of profit and loss in

different ways so as to provide information that is relevant for economic decision-

making. For example, it is a common practice to distinguish between those items

of income and expenses that arise in the course of the ordinary activities of the

enterprise and those that do not. This distinction is made on the basis that the

source of an item is relevant in evaluating the ability of the enterprise to generate


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cash and cash equivalents in the future. When distinguishing between items in this

way, consideration needs to be given to the nature of the enterprise and its

operations. Items that arise from the ordinary activities of one enterprise may be

extraordinary in respect of another.

Distinguishing between items of income and expense and combining them in

different ways also permits several measures of enterprise performance to be

displayed. These have differing degrees of inclusiveness.

For example, the statement of profit and loss could display gross margin, profit

from ordinary activities before taxation, profit from ordinary activities after

taxation, and net profit.

INCOME

The definition of income encompasses both revenue and gains. Revenue arises in

the course of the ordinary activities of an enterprise and is referred to by a variety

of different names including sales, fees, interest, dividends, royalties and rent.

Gains represent other items that meet the definition of income and may, or may

not, arise in the course of the ordinary activities of an enterprise. Gains represent

increases in economic benefits and as such are no different in nature from

revenue. Hence, they are not regarded as a separate element in this Framework.

The definition of income includes unrealized gains. Gains also include, for

example, those arising on the disposal of fixed assets. When gains are recognized

in the statement of profit and loss, they are usually displayed separately because

knowledge of them is useful for the purpose of making economic decisions.

Various kinds of assets may be received or enhanced by income; examples

include cash, receivables and goods and services received in exchange for goods

and services supplied. Income may also result in the settlement of liabilities. For

example, an enterprise may provide goods and services to a lender in settlement

of an obligation to repay an outstanding loan.

EXPENSES


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The definition of expenses encompasses those expenses that arise in the course of

the ordinary activities of the enterprise, as well as losses. Expenses that arise in

the course of the ordinary activities of the enterprise include, for example, cost of

goods sold, wages, and depreciation. They take the form of an outflow or

depletion of assets or enhancement of liabilities.

Losses represent other items that meet the definition of expenses and may, or may

not, arise in the course of the ordinary activities of the enterprise. Losses represent

decreases in economic benefits and as such they are no different in nature from

other expenses. Hence, they are not regarded as a separate element in this

Framework.

Losses include, for example, those resulting from disasters such as fire and flood,

as well as those arising on the disposal of fixed assets. The definition of expenses

also includes unrealized losses. When losses are recognized in the statement of

profit and loss, they are usually displayed separately because knowledge of them

is useful for the purpose of making economic decisions.

CAPITAL MAINTENANCE ADJUSTMENTS

The revaluation or restatement of assets and liabilities gives rise to increases or

decreases in equity. While these increases or decreases meet the definition of

income and expenses, they are not included in the statement of profit and loss

under certain concepts of capital maintenance. Instead, these items are included in

equity as capital maintenance adjustments or revaluation reserves.

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or statement of

profit and loss an item that meets the definition of an element and satisfies the

criteria for recognition set out. It involves the depiction of the item in words and

by a monetary amount and the inclusion of that amount in the totals of balance

sheet or statement of profit and loss. Items that satisfy the recognition criteria

should be recognized in the balance sheet or statement of profit and loss. The


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failure to recognize such items is not rectified by disclosure of the accounting

policies used nor by notes or explanatory material.

An item that meets the definition of an element should be recognized if:

(a) it is probable that any future economic benefit associated with the item will

flow to or from the enterprise; and

(b) the item has a cost or value that can be measured with reliability.

In assessing whether an item meets these criteria and therefore qualifies for

recognition in the financial statements, regard needs to be given to the materiality

considerations. The interrelationship between the elements means that an item

that meets the definition and recognition criteria for a particular element, for

example, an asset, automatically requires the recognition of another element, for

example, income or a liability.

THE PROBABILITY OF FUTURE ECONOMIC BENEFITS

The concept of probability is used in the recognition criteria to refer to the degree

of uncertainty that the future economic benefits associated with the item will flow

to or from the enterprise. The concept is in keeping with the uncertainty that

characterizes the environment in which an enterprise operates. Assessments of the

degree of uncertainty attaching to the flow of future economic benefits are made

on the basis of the evidence available when the financial statements are prepared.

For example, when it is probable that a receivable will be realized, it is then

justifiable, in the absence of any evidence to the contrary, to recognize the

receivable as an asset. For a large population of receivables, however, some

degree of non-payment is normally considered probable; hence, an expense

representing the expected reduction in economic benefits is recognized.

RELIABILITY OF MEASUREMENT

The second criterion for the recognition of an item is that it possesses a cost or

value that can be measured with reliability. In many cases, cost or value must be

estimated; the use of reasonable estimates is an essential part of the preparation of

financial statements and does not undermine their reliability. When, however, a


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reasonable estimate cannot be made, the item is not recognized in the balance

sheet or statement of profit and loss. For example, the damages payable in a

lawsuit may meet the definitions of a liability and an expense as well as the

probability criterion for recognition; however, if it is not possible to measure the

claim reliably, it should not be recognized as a liability or as an expense. An item

that, at a particular point in time, fails to meet the recognition criteria may qualify

for recognition at a later date as a result of subsequent circumstances or events.

An item that possesses the essential characteristics of an element but fails to meet

the criteria for recognition may nonetheless warrant disclosure in the notes,

explanatory material or supplementary schedules. This is appropriate when

knowledge of the item is considered to be relevant to the evaluation of the

financial position, performance and cash flows of an enterprise by the users of

financial statements. Thus, in the example given, the existence of the claim would

need to be disclosed in the notes, explanatory material or supplementary

schedules.

RECOGNITION OF ASSETS

An asset is recognized in the balance sheet when it is probable that the future

economic benefits associated with it will flow to the enterprise and the asset has a

cost or value that can be measured reliably.

An asset is not recognized in the balance sheet when expenditure has been

incurred for which it is considered improbable that economic benefits will flow to

the enterprise beyond the current accounting period. Instead, such a transaction

results in the recognition of an expense in the statement of profit and loss. This

treatment does not imply either that the intention of management in incurring

expenditure was other than to generate future economic benefits for the enterprise

or that management was misguided.

The only implication is that the degree of certainty that economic benefits will

flow to the enterprise beyond the current accounting period is insufficient to

warrant the recognition of an asset.


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RECOGNITION OF LIABILITIES

A liability is recognized in the balance sheet when it is probable that an outflow

of resources embodying economic benefits will result from the settlement of a

present obligation and the amount at which the settlement will take place can be

measured reliably. In practice, obligations under contracts that are equally

proportionately unperformed (for example, liabilities for inventory ordered but

not yet received) are generally not recognized as liabilities in the financial

statements. However, such obligations may meet the definition of liabilities and,

provided the recognition criteria are met in the particular circumstances, may

qualify for recognition. In such circumstances, recognition of liabilities entails

recognition of related assets or expenses.

RECOGNITION OF INCOME

Income is recognized in the statement of profit and loss when an increase in future

economic benefits related to an increase in an asset or a decrease of a liability has

arisen that can be measured reliably. This means, in effect, that recognition of

income occurs simultaneously with the recognition of increases in assets or

decreases in liabilities (for example, the net increase in assets arising on a sale of

goods or services or the decrease in liabilities arising from the waiver of a debt

payable).

The procedures normally adopted in practice for recognizing income, for

example, the requirement that revenue should be earned, are applications of the

recognition criteria in this Framework. Such procedures are generally directed at

restricting the recognition as income to those items that can be measured reliably

and have a sufficient degree of certainty.

RECOGNITION OF EXPENSES

Expenses are recognized in the statement of profit and loss when a decrease in

future economic benefits related to a decrease in an asset or an increase of a

liability has arisen that can be measured reliably. This means, in effect, that

recognition of expenses occurs simultaneously with the recognition of an increase


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of liabilities or a decrease in assets (for example, the accrual of employees’

salaries or the depreciation of plant and machinery).

Many expenses are recognized in the statement of profit and loss on the basis of a

direct association between the costs incurred and the earning of specific items of

income. This process, commonly referred to as the matching of costs with

revenues, involves the simultaneous or combined recognition of revenues and

expenses that result directly and jointly from the same transactions or other

events; for example, the various components of expense making up the cost of

goods sold are recognized at the same time as the income derived from the sale of

the goods. However, the application of the matching concept under this

Framework does not allow the recognition of items in the balance sheet which do

not meet the definition of assets or liabilities.

When economic benefits are expected to arise over several accounting periods

and the association with income can only be broadly or indirectly determined,

expenses are recognized in the statement of profit and loss on the basis of

systematic and rational allocation procedures. This is often necessary in

recognizing the expenses associated with the using up of assets such as plant and

machinery, goodwill, patents and trademarks; in such cases, the expense is

referred to as depreciation or amortization. These allocation procedures are

intended to recognize expenses in the accounting periods in which the economic

benefits associated with these items are consumed or expire.

An expense is recognized immediately in the statement of profit and loss when

expenditure produces no future economic benefits. An expense is also recognized

to the extent that future economic benefits from expenditure do not qualify, or

cease to qualify, for recognition in the balance sheet as an asset.

An expense is recognized in the statement of profit and loss in those cases also

where a liability is incurred without the recognition of an asset, for example, in

the case of a liability under a product warranty.


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CHAPTER VII

Accounting Standard (AS-17)

SEGMENT REPORT

Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Council of the

Institute of Chartered Accountants of India, comes into effect in respect of

accounting periods commencing on or after 1.4.2001.

This Standard is mandatory in nature in respect of accounting periods

commencing on or after 1-4-2004 for the enterprises which fall in any one or

more of the following categories, at any time during the accounting period:

(i) Enterprises whose equity or debt securities are listed whether in India or

outside India.

(ii) Enterprises which are in the process of listing their equity or debt securities as

evidenced by the board of directors’ resolution in this regard.

1 Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a

detailed discussion on the implications of the mandatory status of an

accounting standard.

3 AS 17 was originally made mandatory in respect of accounting periods

commencing on or after 1-4-2001 for the following enterprises:

(i) Enterprises whose equity or debt securities are listed on a recognized stock

exchange in India, and enterprises that are in the process of issuing equity or


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debt securities that will be listed on a recognized stock exchange in India as

evidenced by the board of directors’ resolution in this regard.

(ii) All other commercial, industrial and business reporting enterprises, whose

turnover for the accounting period exceeds Rs. 50 crores.

(iii) Banks including co-operative banks.

(iv) Financial institutions.

(v) Enterprises carrying on insurance business.

(vi) All commercial, industrial and business reporting enterprises, whose turnover

for the immediately preceding accounting period on the basis of audited

financial statements exceeds Rs. 50 crore. Turnover does not include ‘other

income’.

(vii) All commercial, industrial and business reporting enterprises having

borrowings, including public deposits, in excess of Rs. 10 crore at any time

during the accounting period.

(viii) Holding and subsidiary enterprises of any one of the above at any time

during the accounting period.

The enterprises which do not fall in any of the above categories are not required

to apply this Standard.

Where an enterprise has been covered in any one or more of the above categories

and subsequently, ceases to be so covered, the enterprise will not qualify for

exemption from application of this Standard, until the enterprise ceases to be

covered in any of the above categories for two consecutive years.

Where an enterprise has previously qualified for exemption from application of

this Standard (being not covered by any of the above categories) but no longer

qualifies for exemption in the current accounting period, this Standard becomes

applicable from the current period. However, the corresponding previous period

figures need not be disclosed.

An enterprise, which, pursuant to the above provisions, does not disclose segment

information, should disclose the fact.

The following is the text of the Accounting Standard.


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OBJECTIVES

The objective of this Statement is to establish principles for reporting financial

information, about the different types of products and services an enterprise

produces and the different geographical areas in which it operates. Such

information helps users of financial statements:

(a) better understand the performance of the enterprise;

(b) better assess the risks and returns of the enterprise; and

(c) make more informed judgments about the enterprise as a whole.

Many enterprises provide groups of products and services or operate in

geographical areas that are subject to differing rates of profitability, opportunities

for growth, future prospects, and risks. Information about different types of

products and services of an enterprise and its operations in different geographical

areas - often called segment information - is relevant to assessing the risks and

returns of a diversified or multi-locational enterprise but may not be determinable

from the aggregated data. Therefore, reporting of segment information is widely

regarded as necessary for meeting the needs of users of financial statements.

SCOPE

1. This Statement should be applied in presenting general purpose financial

statements.

2. The requirements of this Statement are also applicable in case of consolidated

financial statements.

3. An enterprise should comply with the requirements of this Statement fully and

not selectively.


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4. If a single financial report contains both consolidated financial statements and

the separate financial statements of the parent, segment information need be

presented only on the basis of the consolidated financial statements. In the

context of reporting of segment information in consolidated financial

statements, the references in this Statement to any financial statement items

should construed to be the relevant item as appearing in the consolidated

financial statements.

DEFINITION

The following terms are used in this Statement with the meanings specified:

A business segment is a distinguishable component of an enterprise that is

engaged in providing an individual product or service or a group of related

products or services and that is subject to risks and returns that are different from

those of other business segments. Factors that should be considered in

determining whether products or services are related include:

(a) the nature of the products or services;

(b) the nature of the production processes;

(c) the type or class of customers for the products or services;

(d) the methods used to distribute the products or provide the services; and

(e) if applicable, the nature of the regulatory environment, for example, banking,

insurance, or public utilities.

A geographical segment is a distinguishable component of an enterprise that is

engaged in providing products or services within a particular economic

environment and that is subject to risks and returns that are different from those of

components operating in other economic environments. Factors that should be

considered in identifying geographical segments include:

(a) similarity of economic and political conditions;

(b) relationships between operations in different geographical areas;

(c) proximity of operations;

(d) special risks associated with operations in a particular area;

(e) exchange control regulations; and


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(f) the underlying currency risks.

A reportable segment is a business segment or a geographical segment identified

on the basis of foregoing definitions for which segment information is required to

be disclosed by this Statement.

Enterprise revenue is revenue from sales to external customers as reported in the

statement of profit and loss.

Segment revenue is the aggregate of

(i) the portion of enterprise revenue that is directly attributable to a segment,

(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable

basis to a segment, and

(iii) revenue from transactions with other segments of the enterprise.

Segment revenue does not include:

(a) extraordinary items as defined in AS 5, Net Profit or Loss for the Period, Prior

Period Items and Changes in Accounting Policies;

(b) interest or dividend income, including interest earned on advances or loans to

other segments unless the operations of the segment are primarily of a financial

nature; and

(c) gains on sales of investments or on extinguishment of debt unless the

operations of the segment are primarily of a financial nature.

Segment expense is the aggregate of

(i) the expense resulting from the operating activities of a segment that is directly

attributable to the segment, and

(ii) the relevant portion of enterprise expense that can be allocated on a reasonable

basis to the segment, including expense relating to transactions with other

segments of the enterprise.


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Segment expense does not include:

(a) extraordinary items as defined in AS 5, Net Profit or Loss for the Period, Prior

Period Items and Changes in Accounting Policies;

(b) interest expense, including interest incurred on advances or loans from other

segments, unless the operations of the segment are primarily of a financial

nature;

(c) losses on sales of investments or losses on extinguishment of debt unless the

operations of the segment are primarily of a financial nature;

(d) income tax expense; and

(e) general administrative expenses, head-office expenses, and other expenses that

arise at the enterprise level and relate to the enterprise as a whole. However,

costs are sometimes incurred at the enterprise level on behalf of a segment.

Such costs are part of segment expense if they relate to the operating activities

of the segment and if they can be directly attributed or allocated to the segment

on a reasonable basis.

Segment result is segment revenue less segment expense.

Segment assets are those operating assets that are employed by a segment in its

operating activities and that either are directly attributable to the segment or can

be allocated to the segment on a reasonable basis.

If the segment result of a segment includes interest or dividend income, its

segment assets include the related receivables, loans, investments, or other

interest or dividend generating assets. Segment assets do not include income tax

assets. Segment assets are determined after deducting related allowances/

provisions that are reported as direct offsets in the balance sheet of the enterprise.

Segment liabilities are those operating liabilities that result from the operating

activities of a segment and that either are directly attributable to the segment or

can be allocated to the segment on a reasonable basis.


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If the segment result of a segment includes interest expense, its segment liabilities

include the related interest-bearing liabilities. Segment liabilities do not include

income tax liabilities.

Segment accounting policies are the accounting policies adopted for preparing

and presenting the financial statements of the enterprise as well as those

accounting policies that relate specifically to segment reporting.

A single business segment does not include products and services with

significantly differing risks and returns. While there may be dissimilarities with

respect to one or several of the factors listed in the definition of business segment,

the products and services included in a single business segment are expected to be

similar with respect to a majority of the factors. Similarly, a single geographical

segment does not include operations in economic environments with significantly

differing risks and returns. A geographical segment may be a single country, a

group of two or more countries, or a region within a country. The risks and

returns of an enterprise are influenced both by the geographical location of its

operations (where its products are produced or where its service rendering

activities are based) and also by the location of its customers (where its products

are sold or services are rendered). The definition allows geographical segments to

be based on either:

(a) the location of production or service facilities and other assets of an enterprise;

or

(b) the location of its customers.

The organizational and internal reporting structure of an enterprise will normally

provide evidence of whether its dominant source of geographical risks results

from the location of its assets (the origin of its sales) or the location of its

customers (the destination of its sales). Accordingly, an enterprise looks to this

structure to determine whether its geographical segments should be based on the

location of its assets or on the location of its customers.

Determining the composition of a business or geographical segment involves a

certain amount of judgment. In making that judgment, enterprise management


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takes into account the objective of reporting financial information by segment as

set forth in this Statement and the qualitative characteristics of financial

statements as identified in the Framework for the Preparation and Presentation of

Financial Statements issued by the Institute of Chartered Accountants of India.

The qualitative characteristics include the relevance, reliability, and comparability

over time of financial information that is reported about the different groups of

products and services of an enterprise and about its operations in particular

geographical areas, and the usefulness of that information for assessing the risks

and returns of the enterprise as a whole.

The predominant sources of risks affect how most enterprises are organized and

managed. Therefore, the organizational structure of an enterprise and its internal

financial reporting system are normally the basis for identifying its segments.

The definitions of segment revenue, segment expense, segment assets and

segment liabilities include amounts of such items that are directly attributable to a

segment and amounts of such items that can be allocated to a segment on a

reasonable basis. An enterprise looks to its internal financial reporting system as

the starting point for identifying those items that can be directly attributed, or

reasonably allocated, to segments. There is thus a presumption that amounts that

have been identified with segments for internal financial reporting purposes are

directly attributable or reasonably allocable to segments for the purpose of

measuring the segment revenue, segment expense, segment assets, and segment

liabilities of reportable segments.

In some cases, however, a revenue, expense, asset or liability may have been

allocated to segments for internal financial reporting purposes on a basis that is

understood by enterprise management but that could be deemed arbitrary in the

perception of external users of financial statements. Such an allocation would not

constitute a reasonable basis under the definitions of segment revenue, segment

expense, segment assets, and segment liabilities in this Statement. Conversely, an

enterprise may choose not to allocate some item of revenue, expense, asset or

liability for internal financial reporting purposes, even though a reasonable basis

for doing so exists. Such an item is allocated pursuant to the definitions of


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segment revenue, segment expense, segment assets, and segment liabilities in this

Statement.

Examples of segment assets include current assets that are used in the operating

activities of the segment and tangible and intangible fixed assets. If a particular

item of depreciation or amortization is included in segment expense, the related

asset is also included in segment assets. Segment assets do not include assets used

for general enterprise or head-office purposes. Segment assets include operating

assets shared by two or more segments if a reasonable basis for allocation exists.

Segment assets include goodwill that is directly attributable to a segment or that

can be allocated to a segment on a reasonable basis, and segment expense

includes related amortization of goodwill. If segment assets have been revalued

subsequent to acquisition, then the measurement of segment assets reflects those

revaluations.

Examples of segment liabilities include trade and other payables, accrued

liabilities, customer advances, product warranty provisions, and other claims

relating to the provision of goods and services. Segment liabilities do not include

borrowings and other liabilities that are incurred for financing rather than

operating purposes. The liabilities of segments whose operations are not primarily

of a financial nature do not include borrowings and similar liabilities because

segment result represents an operating, rather than a net of- financing, profit or

loss. Further, because debt is often issued at the head office level on an enterprise-

wide basis, it is often not possible to directly attribute, or reasonably allocate, the

interest-bearing liabilities to segments.

Segment revenue, segment expense, segment assets and segment liabilities are

determined before intra-enterprise balances and intra-enterprise transactions are

eliminated as part of the process of preparation of enterprise financial statements,

except to the extent that such intra-enterprise balances and transactions are within

a single segment.

While the accounting policies used in preparing and presenting the financial

statements of the enterprise as a whole are also the fundamental segment

accounting policies, segment accounting policies include, in addition, policies that


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relate specifically to segment reporting, such as identification of segments,

method of pricing inter-segment transfers, and basis for allocating revenues and

expenses to segments.

IDENTIFYING REPORTABLE SEGMENTS

Primary and Secondary Segment Reporting Formats

The dominant source and nature of risks and returns of an enterprise should

govern whether its primary segment reporting format will be business segments or

geographical segments. If the risks and returns of an enterprise are affected

predominantly by differences in the products and services it produces, its primary

format for reporting segment information should be business segments, with

secondary information reported geographically. Similarly, if the risks and returns

of the enterprise are affected predominantly by the fact that it operates in different

countries or other geographical areas, its primary format for reporting segment

information should be geographical segments, with secondary information

reported for groups of related products and services.

Internal organization and management structure of an enterprise and its system of

internal financial reporting to the board of directors and the chief executive officer

should normally be the basis for identifying the predominant source and nature of

risks and differing rates of return facing the enterprise and, therefore, for

determining which reporting format is primary and which is secondary, except as

provided in subparagraphs (a) and (b) below:

(a) if risks and returns of an enterprise are strongly affected both by differences in

the products and services it produces and by differences in the geographical areas

in which it operates, as evidenced by a ‘matrix approach’ to managing the

company and to reporting internally to the board of directors and the chief

executive officer, then the enterprise should use business segments as its primary


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segment reporting format and geographical segments as its secondary reporting

format; and

(b) if internal organizational and management structure of an enterprise and its

system of internal financial reporting to the board of directors and the chief

executive officer are based neither on individual products or services or groups of

related products/services nor on geographical areas, the directors and management

of the enterprise should determine whether the risks and returns of the enterprise

are related more to the products and services it produces or to the geographical

areas in which it operates and should, accordingly, choose business segments or

geographical segments as the primary segment reporting format of the enterprise,

with the other as its secondary reporting format.

For most enterprises, the predominant source of risks and returns determines how

the enterprise is organized and managed. Organizational and management

structure of an enterprise and its internal financial reporting system normally

provide the best evidence of the predominant source of risks and returns of the

enterprise for the purpose of its segment reporting. Therefore, except in rare

circumstances, an enterprise will report segment information in its financial

statements on the same basis as it reports internally to top management. Its

predominant source of risks and returns becomes its primary segment reporting

format. Its secondary source of risks and returns becomes its secondary segment

reporting format.

A ‘matrix presentation’ — both business segments and geographical segments as

primary segment reporting formats with full segment disclosures on each basis --

will often provide useful information if risks and returns of an enterprise are

strongly affected both by differences in the products and services it produces and

by differences in the geographical areas in which it operates. This Statement does

not require, but does not prohibit, a ‘matrix presentation’.

In some cases, organization and internal reporting of an enterprise may have

developed along lines unrelated to both the types of products and services it

produces, and the geographical areas in which it operates. In such cases, the

internally reported segment data will not meet the objective of this Statement.


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Accordingly, it requires the directors and management of the enterprise to

determine whether the risks and returns of the enterprise are more product/service

driven or geographically driven and to accordingly choose business segments or

geographical segments as the primary basis of segment reporting. The objective is

to achieve a reasonable degree of comparability with other enterprises, enhance

understandability of the resulting information, and meet the needs of investors,

creditors, and others for information about product/service-related and

geographically related risks and returns.

BUSINESS AND GEOGRAPHICAL SEGMENTS

Business and geographical segments of an enterprise for external reporting

purposes should be those organizational units for which information is reported to

the board of directors and to the chief executive officer for the purpose of

evaluating the unit’s performance and for making decisions about future

allocations of resources.

If internal organizational and management structure of an enterprise and its

system of internal financial reporting to the board of directors and the chief

executive officer are based neither on individual products or services or groups of

related products/services nor on geographical areas, it requires that the directors

and management of the enterprise should choose either business segments or

geographical segments as the primary segment reporting format of the enterprise

based on their assessment of which reflects the primary source of the risks and

returns of the enterprise, with the other as its secondary reporting format. In that

case, the directors and management of the enterprise should determine its business

segments and geographical segments for external reporting purposes based on the

factors in the definitions of this Statement, rather than on the basis of its system of

internal financial reporting to the board of directors and chief executive officer,

consistent with the following:

(a) if one or more of the segments reported internally to the directors and

management is a business segment or a geographical segment based on the factors

in the definitions, but others are not, sub-paragraph (b) below should be applied

only to those internal segments that do not meet the definitions (that is, an


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internally reported segment that meets the definition should not be further

segmented);

(b) for those segments reported internally to the directors and management that do

not satisfy the definitions, management of the enterprise should look to the next

lower level of internal segmentation that reports information along product and

service lines or geographical lines, as appropriate under the definitions; and

(c) if such an internally reported lower-level segment meets the definition of

business segment or geographical segment based on the factors, the criteria for

identifying reportable segments should be applied to that segment.

Under this Statement, most enterprises will identify their business and

geographical segments as the organizational units for which information is

reported to the board of the directors (particularly the non-executive directors, if

any) and to the chief executive officer (the senior operating decision maker,

which in some cases may be a group of several people) for the purpose of

evaluating each unit’s performance and for making decisions about future

allocations of resources. Even if an enterprise must apply this because its internal

segments are not along product/service or geographical lines, it will consider the

next lower level of internal segmentation that reports information along product

and service lines or geographical lines rather than construct segments solely for

external reporting purposes. This approach of looking to organizational and

management structure of an enterprise and its internal financial reporting system

to identify the business and geographical segments of the enterprise for external

reporting purposes is sometimes called the ‘management approach’, and the

organizational components for which information is reported internally are

sometimes called ‘operating segments’.

REPORTABLE SEGMENTS

A business segment or geographical segment should be identified as a reportable

segment if:


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(a) its revenue from sales to external customers and from transactions with other

segments is 10 per cent or more of the total revenue, external and internal, of

all segments; or

(b) its segment result, whether profit or loss, is 10 per cent or more of –

(i) the combined result of all segments in profit, or

(ii) the combined result of all segments in loss, whichever is greater in absolute

amount; or

(c) its segment assets are 10 per cent or more of the total assets of all segments.

A business segment or a geographical segment which is not a reportable segment

may be designated as a reportable segment despite its size at the discretion of the

management of the enterprise. If that segment is not designated as a reportable

segment, it should be included as an unallocated reconciling item.

If total external revenue attributable to reportable segments constitutes less than

75 per cent of the total enterprise revenue, additional segments should be

identified as reportable segments, even if they do not meet the 10 per cent

thresholds, until at least 75 per cent of total enterprise revenue is included in

reportable segments.

The 10 per cent thresholds in this Statement are not intended to be a guide for

determining materiality for any aspect of financial reporting other than identifying

reportable business and geographical segments.

Illustration I to this Statement presents an illustration of the determination of

reportable segments.

A segment identified as a reportable segment in the immediately preceding period

because it satisfied the relevant 10 per cent thresholds should continue to be a

reportable segment for the current period notwithstanding that its revenue, result,

and assets all no longer meet the 10 per cent thresholds.

If a segment is identified as a reportable segment in the current period because it

satisfies the relevant 10 per cent thresholds, preceding period segment data that is

presented for comparative purposes should, unless it is impracticable to do so, be


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restated to reflect the newly reportable segment as a separate segment, even if that

segment did not satisfy the 10 per cent thresholds in the preceding period.

SEGMENT ACCOUNTING POLICIES

Segment information should be prepared in conformity with the accounting

policies adopted for preparing and presenting the financial statements of the

enterprise as a whole.

There is a presumption that the accounting policies that the directors and

management of an enterprise have chosen to use in preparing the financial

statements of the enterprise as a whole are those that the directors and

management believe are the most appropriate for external reporting purposes.

Since the purpose of segment information is to help users of financial statements

better understand and make more informed judgments about the enterprise as a

whole, this Statement requires the use, in preparing segment information, of the

accounting policies adopted for preparing and presenting the financial statements

of the enterprise as a whole. That does not mean, however, that the enterprise

accounting policies are to be applied to reportable segments as if the segments

were separate stand-alone reporting entities. A detailed calculation done in

applying a particular accounting policy at the enterprise-wide level may be

allocated to segments if there is a reasonable basis for doing so. Pension

calculations, for example, often are done for an enterprise as a whole, but the

enterprise-wide figures may be allocated to segments based on salary and

demographic data for the segments.


SAAB MARFIN MBA

This Statement does not prohibit the disclosure of additional segment information

that is prepared on a basis other than the accounting policies adopted for the

enterprise financial statements provided that

(a) the information is reported internally to the board of directors and the chief

executive officer for purposes of making decisions about allocating resources to

the segment and assessing its performance and

(b) the basis of measurement for this additional information is clearly described.

Assets and liabilities that relate jointly to two or more segments should be

allocated to segments if, and only if, their related revenues and expenses also are

allocated to those segments.

The way in which asset, liability, revenue, and expense items are allocated to

segments depends on such factors as the nature of those items, the activities

conducted by the segment, and the relative autonomy of that segment. It is not

possible or appropriate to specify a single basis of allocation that should be

adopted by all enterprises; nor is it appropriate to force allocation of enterprise

asset, liability, revenue, and expense items that relate jointly to two or more

segments, if the only basis for making those allocations is arbitrary. At the same

time, the definitions of segment revenue, segment expense, segment assets, and

segment liabilities are interrelated, and the resulting allocations should be

consistent. Therefore, jointly used assets and liabilities are allocated to segments

if, and only if, their related revenues and expenses also are allocated to those

segments. For example, an asset is included in segment assets if, and only if, the

related depreciation or amortization is included in segment expense.

DISCLOSURE

The previous paragraphs specify the disclosures required for reportable segments

for primary segment reporting format of an enterprise. They identify the

disclosures required for secondary reporting format of an enterprise. Enterprises

are encouraged to make all of the primary-segment disclosures identified for each

reportable secondary segment although they require considerably less disclosure

on the secondary basis. The above paragraphs address several other segment


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disclosure matters. Illustration II to this Statement illustrates the application of

these disclosure standards.

PRIMARY REPORTING FORMAT

The disclosure requirements should be applied to each reportable segment based

on primary reporting format of an enterprise.

An enterprise should disclose the following for each reportable segment:

(a) segment revenue, classified into segment revenue from sales to external

customers and segment revenue from transactions with other segments;

(b) segment result;

(c) total carrying amount of segment assets;

(d) total amount of segment liabilities;

(e) total cost incurred during the period to acquire segment assets that are

expected to be used during more than one period (tangible and intangible

fixed assets);

(f) total amount of expense included in the segment result for depreciation and

amortization in respect of segment assets for the period; and

(g) total amount of significant non-cash expenses, other than depreciation and

amortization in respect of segment assets, that were included in segment

expense and, therefore, deducted in measuring segment result.

It requires an enterprise to report segment result. If an enterprise can compute

segment net profit or loss or some other measure of segment profitability other

than segment result, without arbitrary allocations, reporting of such amount(s) in

addition to segment result is encouraged. If that measure is prepared on a basis

other than the accounting policies adopted for the financial statements of the

enterprise, the enterprise will include in its financial statements a clear description

of the basis of measurement.

An example of a measure of segment performance above segment result in the

statement of profit and loss is gross margin on sales. Examples of measures of

segment performance below segment result in the statement of profit and loss are


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profit or loss from ordinary activities (either before or after income taxes) and net

profit or loss.

Accounting Standard 5, ‘Net Profit or Loss for the Period, Prior Period Items and

Changes in Accounting Policies’ requires that “when items of income and

expense within profit or loss from ordinary activities are of such size, nature or

incidence that their disclosure is relevant to explain the performance of the

enterprise for the period, the nature and amount of such items should be disclosed

separately”. Examples of such items include write downs of inventories,

provisions for restructuring, disposals of fixed assets and long-term investments,

legislative changes having retrospective application, litigation settlements, and

reversal of provisions. An enterprise is encouraged, but not required, to disclose

the nature and amount of any items of segment revenue and segment expense that

are of such size, nature, or incidence that their disclosure is relevant to explain the

performance of the segment for the period. Such disclosure is not intended to

change the classification of any such items of revenue or expense from ordinary

to extraordinary or to change the measurement of such items. The disclosure,

however, does change the level at which the significance of such items is

evaluated for disclosure purposes from the enterprise level to the segment level.

An enterprise that reports the amount of cash flows arising from operating,

investing and financing activities of a segment need not disclose depreciation and

amortization expense and non-cash expenses of such segment.

AS 3, Cash Flow Statements recommends that an enterprise present a cash flow

statement that separately reports cash flows from operating, investing and

financing activities. Disclosure of information regarding operating, investing and

financing cash flows of each reportable segment is relevant to understanding the

enterprise’s overall financial position, liquidity, and cash flows. Disclosure of

segment cash flow is, therefore, encouraged, though not required. An enterprise

that provides segment cash flow disclosures need not disclose depreciation and

amortization expense and noncash expenses.

An enterprise should present reconciliation between the information disclosed for

reportable segments and the aggregated information in the enterprise financial


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statements. In presenting the reconciliation, segment revenue should be reconciled

to enterprise revenue; segment result should be reconciled to enterprise net profit

or loss; segment assets should be reconciled to enterprise assets; and segment

liabilities should be reconciled to enterprise liabilities.

SECONDARY SEGMENT INFORMATION

The primary reporting format identifies the disclosure requirements to be applied

to each reportable segment based on primary reporting format of an enterprise.

The following paragraphs identify the disclosure requirements to be applied to

each reportable segment based on secondary reporting format of an enterprise, as

follows:

(a) if primary format of an enterprise is business segments, the required

secondary-format disclosures are identified in the net paragraph;

(b) if primary format of an enterprise is geographical segments based on location

of assets (where the products of the enterprise are produced or where its service

rendering operations are based), the required secondary-format disclosures are

identified in the next two paragraphs;

(c) if primary format of an enterprise is geographical segments based on the

location of its customers (where its products are sold or services are rendered), the

required secondary-format disclosures are identified in the last two paragraphs of

the segment.

If primary format of an enterprise for reporting segment information is business

segments, it should also report the following information:

(a) segment revenue from external customers by geographical area based on the

geographical location of its customers, for each geographical segment whose


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revenue from sales to external customers is 10 per cent or more of enterprise

revenue;

(b) the total carrying amount of segment assets by geographical location of assets,

for each geographical segment whose segment assets are 10 per cent or more of

the total assets of all geographical segments; and

(c) the total cost incurred during the period to acquire segment assets that are

expected to be used during more than one period (tangible and intangible fixed

assets) by geographical location of assets, for each geographical segment whose

segment assets are 10 per cent or more of the total assets of all geographical

segments.

If primary format of an enterprise for reporting segment information is

geographical segments (whether based on location of assets or location of

customers), it should also report the following segment information for each

business segment whose revenue from sales to external customers is 10 per cent

or more of enterprise revenue or whose segment assets are 10 per cent or more of

the total assets of all business segments:

(a) segment revenue from external customers;

(b) the total carrying amount of segment assets; and

(c) the total cost incurred during the period to acquire segment assets that are


assets).


geographical segments that are based on location of assets, and if the location of

its customers is different from the location of its assets, then the enterprise should

also report revenue from sales to external customers for each customer-based

geographical segment whose revenue from sales to external customers is 10 per

cent or more of enterprise revenue.


geographical segments that are based on location of customers, and if the assets of

the enterprise are located in different geographical areas from its customers, then

the enterprise should also report the following segment information for each


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asset-based geographical segment whose revenue from sales to external customers

or segment assets are 10 per cent or more of total enterprise amounts:

(a) the total carrying amount of segment assets by geographical location of the

assets; and

(b) the total cost incurred during the period to acquire segment assets that are


assets) by location of the assets.

ILLUSTRATIVE SEGMENT DISCLOSURES

Illustration II to this Statement presents an illustration of the disclosures for

primary and secondary formats that are required by this Statement.

OTHER DISCLOSURES

In measuring and reporting segment revenue from transactions with other

segments, 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 accounting policies adopted for segment reporting that have a material

effect on segment information should be disclosed. Such disclosure should

include a description of the nature of the change, and the financial effect of the

change if it is reasonably determinable.

AS 5 requires that changes in accounting policies adopted by the enterprise should

be made only if required by statute, or for compliance with an accounting

standard, or if it is considered that the change would result in a more appropriate

presentation of events or transactions in the financial statements of the enterprise.

Changes in accounting policies adopted at the enterprise level that affect segment

information are dealt with in accordance with AS 5. AS 5 requires that any

change in an accounting policy which has a material effect should be disclosed.

The impact of, and the adjustments resulting from, such change, if material,


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should be shown in the financial statements of the period in which such change is

made, to reflect the effect of such change. Where the effect of such change is not

ascertainable, wholly or in part, the fact should be indicated. If a change is made

in the accounting policies which has no material effect on the financial statements

for the current period but which is reasonably expected to have a material effect in

later periods, the fact of such change should be appropriately disclosed in the

period in which the change is adopted.

Some changes in accounting policies relate specifically to segment reporting.

Examples include changes in identification of segments and changes in the basis

for allocating revenues and expenses to segments. Such changes can have a

significant impact on the segment information reported but will not change

aggregate financial information reported for the enterprise. To enable users to

understand the impact of such changes, this Statement requires the disclosure of

the nature of the change and the financial effect of the change, if reasonably

determinable.

An enterprise should indicate the types of products and services included in each

reported business segment and indicate the composition of each reported

geographical segment, both primary and secondary, if not otherwise disclosed in

the financial statements.

To assess the impact of such matters as shifts in demand, changes in the prices of

inputs or other factors of production, and the development of alternative products

and processes on a business segment, it is necessary to know the activities

encompassed by that segment. Similarly, to assess the impact of changes in the

economic and political environment on the risks and returns of a geographical

segment, it is important to know the composition of that geographical segment.


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ILLUSTRATION I

Illustration on Determination of Reportable Segments

This example is illustrative only and does not form part of the Accounting

Standard. The purpose of this example is to illustrate the application of the

Accounting Standard.

An enterprise operates through eight segments, namely, A, B, C, D, E, F, G and

H. The relevant information about these segments is given in the following table

(amounts in Rs.’000):

Table 7.1: Determination of Reportable Segments (Amount in Rs.

‘000)

A B C D E F G HTotal

Segments

Total

Enterprise

SEGMENT

REVENUE

External

Sales

- 255 15 10 15 50 20 35 400

Inter

segment

Sales

100 60 30 5 - - 5 - 200

Total

Revenue100 315 45 15 15 50 25 35 600 400


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Total

Revenue of

each

segment as a

percentage

of total

revenue of

all segments

16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8

SEGMENT

RESULT

Profit/(Loss)

5 (90) 15 (5) 8 (5) 5 7

Combined

Result of all

Segments in

profits

5 15 8 5 7 40

Combined

Result of all

Segments in

loss

(90) (5) (5) (100)

Segment

Result as a

percentage

of the

greater of

the totals

arrived

above in

absolute

amount (i.e.,

100)

5 90 15 5 8 5 5 7

SEGMENT

ASSETS15 47 5 11 3 5 5 9 100

Segment

assets as a

percentage

15 47 5 11 3 5 5 9


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of total

assets

of all

segments

The reportable segments of the enterprise will be identified as below:

a), segments whose total revenue from external sales and inter-segment sales is

10% or more of the total revenue of all segments, external and internal, should be

identified as reportable segments. Therefore, Segments A and B are reportable

segments.

(b), it is to be first identified whether the combined result of all segments in profit

or the combined result of all segments in loss is greater in absolute amount. From

the table, it is evident that combined result in loss (i.e., Rs.100,000) is greater.

Therefore, the individual segment result as a percentage of Rs.100,000 needs to

be examined. Segments B and C are reportable segments as their segment result is

more than the threshold limit of 10%.

(c) Segments A, B and D are reportable segments, as their segment assets are

more than 10% of the total segment assets.

Thus, Segments A, B, C and D are reportable segments in terms of the criteria laid

down in above explanation.

The Statement gives an option to the management of the enterprise to designate

any segment as a reportable segment. In the given case, it is presumed that the

management decides to designate Segment E as a reportable segment.

The AS-17 requires that if total external revenue attributable to reportable

segments identified as aforesaid constitutes less than 75% of the total enterprise

revenue, additional segments should be identified as reportable segments even if

they do not meet the 10% thresholds, until at least 75% of total enterprise revenue

is included in reportable segments.

The total external revenue of Segments A, B, C, D and E, identified above as

reportable segments, is Rs.2,95,000. This is less than 75% of total enterprise

revenue of Rs.4,00,000. The management of the enterprise is required to

designate any one or more of the remaining segments as reportable segment(s) so “SEGMENT REPORTING IN A FOUNDRY”

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that the external revenue of reportable segments is at least 75% of the total

enterprise revenue. Suppose, the management designates Segment H for this

purpose the external revenue of reportable segments is more than 75% of the total

enterprise revenue. Segments A, B, C, D, E and H are reportable segments.

Segments F and G will be shown as reconciling items.

ILLUSTARTION II

Illustrative Segment Disclosures

This example is illustrative only and does not form part of the Accounting

Standard. The purpose of this example is to illustrate the application of the

Accounting Standard.

This example illustrates the segment disclosures that this Statement would require

for a diversified multi-locational business enterprise. This example is intentionally

complex to illustrate most of the provisions of this Statement.

Table 7.2: INFORMATION ABOUT BUSINESS SEGMENTS (NOTE xx)

(Amounts in Rs. lakhs)

Paper

Products

Office

Products

Publishing Other

Operations

Eliminations Consolidated

Total

‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07

REVENUE

External

sales55 50 20 17 19 16 7 7

Inter-

segment

sales

15 10 10 14 2 4 2 2 (29) (30)

Total

Revenue70 60 30 31 21 20 9 9 (29) (30) 101 90

RESULT

Segment

result20 17 9 7 2 1 0 0 (1) (1) 30 24


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Unallocated

corporate

expenses

(7) (9)

Operating

profit23 15

Interest

expense(4) (4)

Interest

income2 3

Income

taxes(7) (4)

Paper

Products

Office

Products

Publishing Other

Operations

Eliminations Consolidated

Total

‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07

Profit from

ordinary

activities

14 10

Extraordinary

loss:

uninsured

Earthquake

damage to

factory

(3) (3)

Net profit 14 7

OTHER

INFORMA-

-TION

Segment

assets54 50 34 30 10 10 10 9 108 99

Unallocated

corporate

assets

67 56

Total assets 175 155

Segment

liabilities25 15 8 11 8 8 1 1 42 35

Unallocated

corporate

liabilities

40 55

Total

liabilities82 90


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Capital

expenditure12 10 3 5 5 4 3

Depreciation 9 7 9 7 5 3 3 4

Non-cash

expenses

other than

Depreciation

8 2 7 3 2 2 2 1

NOTE XX-BUSINESS AND GEOGRAPHICAL SEGMENTS (AMOUNTS

IN RS. LAKHS)

Business segments: For management purposes, the Company is organized on a

worldwide basis into three major operating divisions-paper products, office

products and publishing - each headed by a senior vice president. The divisions

are the basis on which the company reports its primary segment information. The

paper products segment produces a broad range of writing and publishing papers

and newsprint. The office products segment manufactures labels, binders, pens,

and markers and also distributes office products made by others. The publishing

segment develops and sells books in the fields of taxation, law and accounting.

Other operations include development of computer software for standard and

specialized business applications. Financial information about business segments

is presented in the above table ‘Illustration II’

Geographical segments: Although the Company’s major operating divisions are

managed on a worldwide basis, they operate in four principal geographical areas

of the world. In India, its home country, the Company produces and sells a broad

range of papers and office products. Additionally, all of the Company’s

publishing and computer software development operations are conducted in India.

In the European Union, the Company operates paper and office products

manufacturing facilities and sales offices in the following countries: France,

Belgium, Germany and the U.K. Operations in Canada and the United States are

essentially similar and consist of manufacturing papers and newsprint that are

sold entirely within those two countries. Operations in Indonesia include the


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production of paper pulp and the manufacture of writing and publishing papers

and office products, almost all of which is sold outside Indonesia, both to other

segments of the company and to external customers.

Sales by market: The following table shows the distribution of the Company’s

consolidated sales by geographical market, regardless of where the goods were

produced:

Table 7.3: Distribution of the Company’s consolidated sales by geographical

market (Amount in Rs.

lakhs)

Sales Revenue by

Geographical Market

Current Year

(’06)

Previous Year

(’07)

India 19 22

European Union 30 31

Canada and the United States 28 21

Mexico and South America 6 2

Southeast Asia (principally Japan and

Taiwan)18 14

101 90

Assets and additions to tangible and intangible fixed assets by geographical area:

The following table shows the carrying amount of segment assets and additions to

tangible and intangible fixed assets by geographical area in which the assets are

located


SAAB MARFIN MBA

Table 7.4: Tangible and intangible fixed assets by geographical area

(Amount in Rs. Lakhs)

Carrying Amount of

Segment Assets

Additions to Fixed

Assets and Intangible

Assets

Current

Year (’06)

Previous

Year (’07)

Current

Year (’06)

Previous

Year (’07)

India 72 78 8 5

European Union 47 37 5 4

Canada and the United

States34 20 4 3

Indonesia 22 20 7 6

175 155 24 18

Segment revenue and expense: In India, paper and office products are

manufactured in combined facilities and are sold by a combined sales force. Joint

revenues and expenses are allocated to the two business segments on a reasonable

basis. All other segment revenue and expense are directly attributable to the

segments.

Segment assets and liabilities: Segment assets include all operating assets used

by a segment and consist principally of operating cash, debtors, inventories and

fixed assets, net of allowances and provisions which are reported as direct offsets


SAAB MARFIN MBA

in the balance sheet. While most such assets can be directly attributed to

individual segments, the carrying amount of certain assets used jointly by two or

more segments is allocated to the segments on a reasonable basis. Segment

liabilities include all operating liabilities and consist principally of creditors and

accrued liabilities. Segment assets and liabilities do not include deferred income

taxes.

Inter-segment transfers: Segment revenue, segment expenses and segment

result include transfers between business segments and between geographical

segments. Such transfers are accounted for at competitive market prices charged

to unaffiliated customers for similar goods. Those transfers are eliminated in

consolidation.

Unusual item: Sales of office products to external customers in the current year

were adversely affected by a lengthy strike of transportation workers in India,

which interrupted product shipments for approximately four months. The

Company estimates that sales of office products during the four-month period

were approximately half of what they would otherwise have been.

Extraordinary loss: As more fully discussed in Note x, the Company incurred an

uninsured loss of Rs.3,00,000 caused by earthquake damage to a paper mill in

India during the previous year.


SAAB MARFIN MBA

ILLUSTARTION III

The example is illustrative only and does not form part of the Accounting

Standard. Its purpose is to summarize the disclosures required by for each of the

three possible primary segment reporting formats.

Table 7.5: Summary of Required Disclosure

PRIMARY FORMAT IS

BUSINESS SEGMENTS

PRIMARY FORMAT IS

GEOGRAPHICAL

SEGMENTS BY

LOCATION OF ASSETS

PRIMARY FORMAT

IS GEOGRAPHICAL

SEGMENTS BY

LOCATION OF

CUSTOMERS

Required Primary

Disclosures

Required Primary

Disclosures

Required Primary

Disclosures

Revenue from external

customers by business

segment


customers by location of

assets


customers by location

of customers

Revenue from

transactions with other

segments by business

segment

Revenue from transactions

with other segments by

location of assets

Revenue from

transactions with other

segments by location of

customers

Segment result by

business segment

Segment result by location

of assets

Segment result by

location of customers

Carrying amount of

segment assets by

business segment

Carrying amount of

segment assets by location

of assets

Carrying amount of

segment assets by



SAAB MARFIN MBA

Segment liabilities by

business segment


location of assets



Cost to acquire tangible

and intangible fixed

assets by business

segment


and intangible fixed assets

by location of assets



assets by location of

customers

PRIMARY FORMAT IS

BUSINESS SEGMENTS

PRIMARY FORMAT IS

GEOGRAPHICAL

SEGMENTS BY

LOCATION OF ASSETS

PRIMARY FORMAT

IS GEOGRAPHICAL

SEGMENTS BY

LOCATION OF

CUSTOMERS

Required Primary

Disclosures

Required Primary

Disclosures

Required Primary

Disclosures

Depreciation and

amortization expense by

business segment

Depreciation and

amortization expense by

location of assets

Depreciation and

amortization expense

by location of

customers

Non-cash expenses

other than depreciation

and amortization by

business segment

Non-cash expenses other

than depreciation and

amortization by location

of assets

Non-cash expenses

other than depreciation

and amortization by


Reconciliation of

revenue, result, assets,

and liabilities by

business segment

Reconciliation of revenue,

result, assets, and

liabilities

Reconciliation of

revenue, result, assets,

and liabilities

Required Secondary

Disclosures

Required Secondary

Disclosures

Required Secondary

Disclosures


customers by location of

customers



segment



segment

Carrying amount of Carrying amount of Carrying amount of


SAAB MARFIN MBA

segment assets by

location of assets

segment assets by

business segment

segment assets by

business segment




assets


and intangible fixed assets

by business segment



assets by business

segment


customers by geographical

customers if different

from location of assets

Carrying amount of

segment assets by

location of assets if

different from location

of customers




assets if different from


Other Required

Disclosures

Other Required

Disclosures

Other Required

Disclosures

Basis of pricing

intersegment transfers

and any change therein

Basis of pricing

intersegment transfers and

any change therein

Basis of pricing

intersegment transfers

and any change therein

Changes in segment

accounting policies

Changes in segment

accounting policies

Changes in segment

accounting policies

Types of products and

services in each business

segment


services in each business

segment


services in each

business segment

Composition of each Composition of each Composition of each


SAAB MARFIN MBA

geographical segment geographical segment geographical segment


Segment Reporting

Segment = Distinguishable component of enterprise

Business Segment (BS)

If BS is primary GS will be Secondary

Geographical Segment (GS)

If GS is primary BS will be Secondary

Location of Assets

Location of Customers

Dominance of Risk/Return Organizational Structure

Reporting Structure/System Definition based decision

Reportable Segment

Disclosures: In both primary format and in secondary format

75% enterprise revenue criteria

Segment Revenue ≥ 10% of

all segments revenue

Previous year segment information to continue in current year Previous year figures to be regrouped to fall in line with current year

Management Choice

Segment Revenue ≥ 10% of higher of segments

in profit/loss

Segment Assets ≥ 10% of

enterprise assets

Business Primary – Geographic Secondary;

Geographic LOA Primary(a) Business secondary (b) Geographic LOC secondary

Geographic LOC Primary(b) Business secondary (b) Geographic LOA secondary

SAAB MARFIN MBA

Chapter VIII

Calculations and Segment Report


Other Disclosures:Basis of transfer pricing

Changes, if any, in accounting policies, types of products, services, composition of each geographical or business segment

SAAB MARFIN MBA

Table 8.1: Cost Sheet


Particulars Ventilated Disc Solid Disc FlywheelMATERIAL REQUIREMENT PIG 126.75 126.75 126.75MS 134.55 134.55 134.55RR 128.64 128.64 128.64BORING 0 0 0Total 128.64 128.64 128.64ALLOYS REQUIREMENT FeMn 2.15 1.95 1.95FeSi 0 0 0CPC 0.20 0 0FeCr 0.98 0.91 0.91Cu 0 8.06 8.06INOCULANT 3.25 2.80 2.80Total 6.58 13.72 13.72SAND ADDITIVES BENTONITE 4.49 2.21 2.21NEW SAND 2.08 1.04 1.04COAL ADDITIVE 5.92 2.99 2.99Total 12.49 6.24 6.24CORE COSTS SAND ADDITIVES 1.76 0 0RESIN 1.69 0 0BINDER 2.60 0 0CATALYST 1.95 0 0Total 8.00 0 0POWER UNITS REQ/ TON 43.68 39.98 39.98FETTLING & SHOT BLASTING/ KG 5.20 5.20 5.20TOTAL DIRECT COST 204.59 193.78 193.78LABOUR COST 19.50 22.75 22.75REPAIR & MAINTENANCE 3.25 3.25 3.25FRIEGHT 1.63 1.63 1.63OVER HEAD COSTS 16.25 16.25 16.25ADMIN & TESTING COSTS 6.50 6.50 6.50

TOTAL COST (per unit) 251.72 244.16 244.16

SAAB MARFIN MBA

Table 8.2: Calculation of Profit after Tax

ParticularsVentilated

Disc Solid Disc Flywheel Total

Total Cost per unit 251.72 244.16 244.16

Profit 42.28 40.84 34.84

Total Sales Price 294.00 285.00 279.00

No. of units 268500 193500 177450 639450

Total revenue 78939000 55147500 49508550 183595050

Total Cost 67586820 47244960 43326192 158157972


SAAB MARFIN MBA

Profit before interest, tax and depreciation (PBITD) 11352180 7902540 6182358 25437078

Less: Depreciation 1913000 1913000 1913000 5739000Profit before interest and tax (PBIT) 9439180 5989540 4269358 19698078

Less: Interest 4251783 2804367 1990196 9046347

Profit before tax (PBT) 5187397 3185173 2279162 10651731

Income Tax 1178171 777091 551484 2506746

Profit after tax (PAT) 4009226 2408082 1727678 8144985

Table 8.3: Segment Report

ParticularsVentilated

Disc Solid Disc Flywheel Total

REVENUE

External Sale 78939000 55147500 49508550 183595050

Inter-segment Sale 0 0 0 0

Total Revenue 78939000 55147500 49508550 183595050

RESULT


SAAB MARFIN MBA

Segment Result 11352180 7902540 6182358 25437078Unallocated corporate exp. 937467 937467 937467 2812402

Operating Profit 10414713 6965073 5244891 22624676

Interest 4251783 2804367 1990196 9046347

Income-Tax 1178171 777091 551484 2506746Profit from ordinary activities 0 0 0 0

Extraordinary 0 0 0 0

Net Profit 4009226 2408082 1727678 8144985OTHER INFORMATION

Segment Assets 68805406 45382289 32206786 146394480Unallocated corporate Assets 7645045 5042476 3578532 16266053

Total Assets 76450451 50424765 35785318 162660533

Segment Liabilities 107356452 70809575 50251956 228417984

Unallocated corporate liabilities 9019220 5948847 4221762 19189829

Total Liabilities 116375672 76758422 54473718 247607813

Capital Expenditure 0 0 0 0

Depreciation 1913000 1913000 1913000 5739000

CHAPTER IX

Conclusion

1. Segment reporting is not mandatory for companies that have a turnover of less

than 5 crores or have no stock market listed equity share. However, from this

study it may be concluded that segment reporting is quite useful for financial

analysis and decision making.

2. Accounting Standards when implemented meticulously add to the

convenience of Financial Analyst.


SAAB MARFIN MBA

3. In the study the findings of one segment (product category) not doing as good

as the other two segments is not clear in consolidate income statement.

Information about performance of products falling in similar risk and return

categories is a useful input in many a decision making situation.

4. Since it is not too expensive in terms of time, money and effort in maintaining

this accounting procedures that aid in reporting income segment wise and the

benefit of doing so make good for any additional resource expenditure,

segment reporting should be adopted by foundries of Alucast kind.

5. Alucast needs to do some analysis on the Flywheel segment in order to bring

it in par with the other two segments, this would ensure that the company

performs equally well with all the customers.

References and Bibliography

Books and Manuals

1. M. P. Vijay Kumar, First Lessons in Accounting Standards, Snow White

Publications, 2005.

2. D. S. Rawat, Students guide to Accounting Standards, Taxmann, 2006.

3. S. P. Jain and K. L. Narang, Cost Accounting, Kalyani Publications, 1990.

4. M. Y. Khan & P. K. Jain, Financial Management

5. Dr. S. N. Maheshwari, Principles of Management Accounting, Sultan Chand,

2005.


SAAB MARFIN MBA

WWW support

http://icai.org/icairoot/resources/as_index.jsp

http://www.smnpco.com/download/as/as17.html

http://icai.org/icairoot/publications/complimentary/cajournal_mar04/p946-1-

50.pdf

http://www.thehindubusinessline.com/2002/05/28/stories/2002052802211000.htm

http://www.wepindia.com/ap/2002_2003/page2_52.pdf

http://iob.in/segrep300605.asp

http://www.duncanwil.co.uk/pdfs/ias/ias14.pdf


“segment reporting in a foundry”

Documents

segment information

segment scope

system of segment reporting

flywheel segment

segment reporting technique

day accounting of companies

detailed segment report

segment ventilated disc