Accounting Standard - 17
Segment Reporting
Presented by
Nitin Goyal
Objective of AS - 17
To establish principles for reporting financial information:
• About different types of products and services an enterprise
produces, and
• The different geographical areas in which it operates.
Concept & Relevance of Segment Reporting
• Diversified companies produces different products / group of
products & services, similarly there are enterprises which operates in
different geographical areas
• These different products / group of products and different
geographical areas are subject to different :
•
•
•
•
Rate of returns
Growth opportunities
Future prospects
Risks
• This information is useful in assessment of risk and returns of a
diversified / multi-locational enterprise.
Segment Information help user
• Better understanding of performance (i.e. profitability of the
enterprise)
• Better assessment of risk and returns of a diversified / multi-location
enterprise
• Make more informed judgment about the enterprise as a whole.
Applicability
Enterprise whose :
• Equity or Debt are list on a recognized stock exchange in India
• are in the process of issuing equity or debt securities that will be
listed on a recognized stock exchange in India.
• turnover for the accounting period exceeds Rs. 50 Crores.
Requirement of AS - 17
Identify business segment or geographical segment
Decide primary & secondary reporting format
Identify Reportable Segment based on “10% thresholds” criteria
Report segment information for reportable segment as per AS-17
If segment or part thereof satisfies the definition of discontinuing operation under AS 24, then AS-24 to be complied with
Business Segment is based on products &
services it provides
Individual or group of
related Product or
Service
Distinguishable
Component (AS-24)
• Separate
line
business
• Distinguishable
component
operationally
financially
of
and
• Nature of product or
services
• Nature of production
process
• Type of customers
• Methods of distribution
• Nature of regulatory
environment
Risk and returns are
different
• Return refers to the
profitability
of
a
product or service
• Risk is the variability of
return due to any
factor.
Case Study
Q1
Q2
• A company manufactures two products – viz. cloth and
ready-made garments. Are the products different business
segments or part of the same business segment?
• A newspaper publishing company is publishing an English
News paper & Hindi News paper. Are these products
different business segment or part of same business
segment?
Answers
A1
• In the above 2 products, the production process and type or class of
customers are different, however, method of distribution and regulatory
environment are same. In this case, greater weightage may be assigned
to production processes and type or class of customers and accordingly
should be treated as separate segment.
A2
• In this case products are similar as to the nature of product, production
process, method of distribution and regulatory environment. However,
the customer differ. In this case one may assign greater weightage to the
nature of product, production process, methods of distribution and
regulatory environment. Accordingly, both the news papers – English &
Hindi will be part of same business segment.
Geographical Segment is the area or location in which
the products and services are manufactured or marketed
Distinguishable Component
(AS-24)
Engaged in providing
product or services within a
particular economic
environment
Risk and Return differ from
those components
operating in other
economic environments
• Separate
area
of
operation
• Distinguishable
component operationally
and financially
• A single geographical
segment
should
not
include operations in
economic environments
with significantly differing
risks and returns.
• Return refers to the
profitability of a product
or service
• Risk is the variability of
return due to any factor.
Identification of Geographical Segment
a. Similarity of economic and political conditions
b. Relationship between operations in different geographical areas
c. Proximity of Operations
d. Special risks involved in operations in particular area
e. Exchange control regulations
f. Currency risks
Case Study
Q1
• A Ltd. Which is incorporated in India and
has businesses in all the Indian States
treats Jammu & Kashmir as a separate
geographical segment because of risks
involved due to terrorism and the rest of
India as a separate segment. Is this OK?
Answer
A1
• Since the company operates in India and hence factors e & f
listed before are not relevant. Factor d deals with special
risk involved in operations in a particular area and hence
company may have treated J&K as a separate segment in
view of terrorism risk. If other regions of India are similar
with regards to factors a, b & c, it is appropriate to treat
them as one segment. The segmentation of the company is
appropriate in accordance with factors given above.
Identification of Business and Geographical
Segments for external reporting purposes:
Sr.
No.
System of internal financial Reporting
prevailing in the enterprise
How segments for external reporting purpose should be
identified.
1
Internal organization and management
structure of an enterprise and system of
internal financial reporting to the Board of
Director / CEO are based on individual
products or services or based on
geographical areas or both.
In this case, the business and geographical segment for
external reporting purpose should be those
organizational units for which information is reported to
the Board of Directors / CEO for evaluating the units
performance and for making divisions about future
allocation of resources.
2
If internal organization and management
structure and system of internal financial
reporting are based on neither individual
products or services nor on geographical
areas.
The directors and management of the enterprise should
determine its business and geographical segments for
external reporting purposes based on the factors given
above rather than on the basis of the enterprise’s system
of internal financial reporting.
Identifying the Primary & Secondary Reporting
format
Sr. No.
Situation
Business Segment
Geographical Segment
1
Risk and returns of the enterprise are predominantly affected by differences in the
products or services that is produces.
Primary Reporting Format Secondary Reporting
Format
2
Risk and returns of the enterprise are predominantly affected by its operations in
different countries or other geographical
areas.
Secondary Reporting
Format
3
Risk and returns are strongly affected by
both as evidenced by a matrix approach to
managing the company and reporting
internally to BOD & CEO
Primary Reporting Format Secondary Reporting
Format, alternatively
matrix presentation with
full segment disclosures
may be adopted.
Primary Reporting Format
Important Definitions
Enterprise
Revenue
Segment
Revenue
Segment
Expense
Segment
Result
• Enterprise revenue is revenue from sale to external customers as reported in the statement of profit and loss.
• Segment revenue = portion of enterprise revenue that is directly attributable to a segment + relevant portion of
enterprise revenue that can be allocated on a reasonable basis + revenue from intersegment. It does not include
extraordinary items, interest or dividend income and gains on sales of investment or on extinguishment of debt.
• It is exactly opposite of segment revenue and it further does not include income tax expense and general
administrative expense, head office expense, and other expense that arise at the enterprise level and are related
to enterprise as a whole.
• Segment Result = Segment Revenue – Segment Expense
Important Definitions Continued
Segment
Assets
Segment
Liabilities
• Segment assets are those operating assets that are employed by a segment in its operating activities and are
directly attributable to the segment or can be allocated on a reasonable basis.
• Interest or dividend, income tax assets, head office assets, depreciation or amortization, goodwill, revalued
assets.
• Segment liabilities are operating liabilities that result from the operating activities of a segment and are either
directly attributable to the segment or can be allocated on a reasonable basis.
• Are the accounting policies adopted for preparing and presenting the financial statements of the enterprise.
• Those accounting policies that relate specifically to segment reporting, e.g. identification of segments,
Segment A/c method of pricing inter-segment transfers, and basis for allocating revenues and expenses to segment.
Policy
Identification of Reportable Segments
Reportable segment are those which satisfy any of 10% criteria discussed below.
Those business segment or geographical segment designated by the management as reportable segments at
their discretion.
Additional segment identified as reportable segment even if they do not meet 10% criteria, If the reportable
segment constitute less than 75% of the total enterprise revenue
If the segment was identified as reportable segment in the proceeding period because it satisfied the 10%
criteria.
10% criteria / 10% thresholds
• If the following works out to 10 or more, it is a reportable segment:
• 10% revenue criteria:
Revenue of segment from sale to external customer +
inter segment sales *100 / Total Revenue of all segments ( incl. inter seg.)
• 10% of combined segments results criteria:
Segment profit / loss * 100 / Combined profit of all segments in profits or combined loss of
all segment in loss whichever is greater in absolute amount.
• 10% of total segment assets criteria:
Segment assets * 100 / Total segment assets of all segments.
Primary Reporting Format
Disclosure
Remarks
Segment Revenue
Classified into external revenue and inter-segment revenue.
Segment Result
If an enterprise can compute segment net profit / loss or some other measure
of segment profitability other than segment result, without arbitrary
allocations, reporting of such amounts in addition segment result is
encouraged.
Segment Assets
Total carrying amount of segment assets
Segment Liabilities
Total amount of segment liabilities
Addition to Fixed Assets
Total cost incurred during the period to acquire segment assets that are in the
nature of tangible or intangible fixed assets
Depreciation and
amortization and Non-cash
expenditure
Total amount of deprecation / amortization and non cash expenditure included
in the expenses. This information need not be disclosed if enterprise provides
segment cash flow.
Reconciliations
Reconciliation of Segment revenue with enterprise revenue
Reconciliation of Segment result should be done with enterprise net profit/loss.
Reconciliation of Segment assets with enterprise assets
Reconciliation of Segment liabilities with enterprise liabilities
Other Disclosures
• Basis of Transfer Pricing : In measuring and reporting segment revenue, intersegment transfers should be measured on the basis that the enterprise actually
used to price those transfers. The basis of pricing inter-segment transfers and any
change therein should be disclosed in the financial statements.
• Changes in Segment Accounting policies
• Composition of each reported business / geographical segment
Secondary Reporting format
If primary Segment is
Business Segment
Then Secondary
Segment will be
Conditions and reporting by Secondary Segment
Geographical
Segment – customer
Segment revenue from customer is to be reported for those
segment whose external revenue is 10% or more of enterprise
revenue.
Geographical
segment – assets
Carrying amount of segment assets whose segment assets are
10% or more of total assets of all geographical segments.
Addition of fixed assets should also be reported.
Geographical Segment Business Segment
- customer or assets
Segment revenue from external Customer > 10% of enterprise
revenue, Segment assets > 10% of total segment assets of all
business segments. Segment revenue from external customers,
carrying amount of assets and addition to fixed assets to be
reported.
Geographical Segment Geographical
– location
segment – assets
Carrying amount of segment assets whose segment assets are
10% or more of total assets of all geographical segments.
Addition of fixed assets should also be reported.
Geographical Segment Geographical
- assets
Segment – customer
Segment revenue from customer is to be reported for those
segment whose external revenue is 10% or more of enterprise
revenue.
Illustration for identification of Segment
Particulars
A
B
C
D
E
F
G
H
Total
Segment Revenue
External Revenue
0
255
15
10
15
50
20
35
400
100
60
30
5
0
0
5
0
200
Segment Assets
15
47
5
11
3
5
5
9
100
Segment Results
5
-90
15
-5
8
-5
5
7
-60
Total Revenue
100
315
45
15
15
50
20
35
600
% of Above
16.7
52.5
7.5
2.5
2.5
8.3
4.2
5.8
% of Segment Assets
15
47
5
11
3
5
5
9
Combined result of all
Profitable Segments
5
5
7
Inter-Segment Revenue
Solution:
Combined Result of all
Segments in Loss
% of Segment Result
15
-90
5
90
8
-5
15
5
-5
8
5
40
-100
5
7
Illustration for Disclosure
Particulars
Food
Plastic &
Products Packaging
Health &
Scientific
Others
Total
Sales
5000
620
345
182
6147
Expenses
3585
400
222
200
4407
General Corporate Expenses
548
Income from Investment
126
Interest Expenses
Assets
63
7548
2000
700
682
General Corporate Assets
Intersegment sales included above
832
60
84
18
5
Operating profit on Intersegment sales
Liabilities
10930
33
6000
1800
500
400
Unallocated Corporate Liabilities
8700
500
Capital Expenditure
100
50
25
25
200
Depreciation
754
200
70
68
1092
Non Cash Expenses Other than Depreciation
100
75
25
25
225
Solution to Illustration
Particulars
Food
Products
Plastic &
Packaging
Health &
Scientific
Others
Total
Sales
5000
620
345
182
6147
Expenses
3585
400
222
200
4407
Segment Result
1415
180
123
-18
1700
% of Revenue
81.34
10.08
5.61
2.96
Absolute amount of profit
1718
Absolute amount of loss
-18
% of Segment result
82.36
10.47
7.15
1.04
% of Segment Assets
69.05
18.29
6.40
6.24
Disclosure
Particulars
Food Product
Plastic &
Packaging
Others
Elimination
Total
Revenue
External Sales
Intersegment sales
Total Revenue
4940
536
504
5980
60
84
23
-
5000
620
527
(167)
5980
1415
180
105
(33)
1667
Results
Segment Results
Unallocated Corporate Expenses
548
Operating Profit
1119
Interest Expense
(63)
Income from Investment
126
Tax Expense
-
Profit from Ordinary activity
Segment Assets
Unallocated Assets
Total Assets
1182
7548
2000
1382
10930
832
11762
Continue….
Particulars
Segment Liabilities
Food Product
6000
Plastic &
Packaging
1800
Others
Elimination Total
900
Unallocated Corporate Liabilities
8700
500
Total Liabilities
9200
Addition to Fixed Assets
100
50
50
200
Depreciation
754
200
138
1092
Non Cash Expenses Other than
Depreciation
100
75
50
225
Thank You