|
Statements of Accounting Standards
(AS 17)
Segment Reporting
(In this Accounting Standard, the
standard portions have been set in bold italic type. These
should be read in the context of the background material which
has been set in normal type, and in the context of the ‘Preface
to the Statements of Accounting Standards’.)
The following is the text of Accounting
Standard 17, ‘Segment Reporting’, issued by the Council of the
Institute of Chartered Accountants of India. This Standard comes
into effect in respect of accounting periods commencing on or
after 1.4.2001 and is mandatory in nature, from that date, in
respect of the following:
-
Enterprises whose equity or debt
securities are listed on a recognised stock exchange in India,
and enterprises that are in the process of issuing equity
or debt securities that will be listed on a recognised stock
exchange in India as evidenced by the board of directors’
resolution in this regard.
-
All other commercial, industrial
and business reporting enterprises, whose turnover for the
accounting period exceeds Rs. 50 crores.
Objective
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:
-
Better understand the performance
of the enterprise;
-
Better assess the risks and returns
of the enterprise; and
-
Make more informed judgements
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
-
This Statement should be
applied in presenting general purpose financial statements.
-
The requirements of this Statement
are also applicable in case of consolidated financial statements.
-
An enterprise should comply
with the requirements of this Statement fully and not selectively.
-
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.
Definitions
5. 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:
-
The nature of the products
or services;
-
The nature of the production
processes;
-
The type or class of customers
for the products or services;
-
The methods used to distribute
the products or provide the services; and
-
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:
-
Similarity of economic and
political conditions;
-
Relationships between operations
in different geographical areas;
-
Proximity of operations;
-
Special risks associated
with operations in a particular area;
-
Exchange control regulations;
and
-
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
-
The portion of enterprise
revenue that is directly attributable to a segment
-
The relevant portion of
enterprise revenue that can be allocated on a reasonable basis
to a segment, and
-
Revenue from transactions
with other segments of the enterprise.
Segment revenue does not include:
-
Extraordinary items as defined
in AS 5, Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies;
-
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
-
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
-
The expense resulting from
the operating activities of a segment that is directly attributable
to the segment, and
-
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.
Segment expense does not include:
-
Extraordinary items as defined
in AS 5, Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies;
-
Interest expense, including
interest incurred on advances or loans from other segments,
unless the operations of the segment are primarily of a financial
nature;
-
Losses on sales of investments
or losses on extinguishment of debt unless the operations
of the segment are primarily of a financial nature;
-
Income tax expense; and
-
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.
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.
-
The factors in paragraph 5 for
identifying business segments and geographical segments are
not listed in any particular order.
-
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:
- The location of production or service facilities and
other assets of an enterprise; or
- The location of its customers.
-
The organisational 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 judgement.
In making that judgement, enterprise management 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 organised and managed. Therefore, the
organisational 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 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 amortisation 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 amortisation 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.
- P align="justify">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 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 organisation 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 sub-paragraphs (a) and (b) below:
-
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 segment reporting format
and geographical segments as its secondary reporting format;
and
-
if internal organisational
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 organised and managed. Organisational 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, organisation 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. Accordingly, paragraph
20(b) 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 organisational 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,
except as provided in paragraph 25.
-
If internal organisational
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, paragraph 20(b) 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 in paragraph 5 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:
-
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 in paragraph 5 but others
are not, sub-paragraph (b) below should be applied only
to those internal segments that do not meet the definitions
in paragraph 5 (that is, an internally reported segment
that meets the definition should not be further segmented);
-
for those segments reported
internally to the directors and management that do not
satisfy the definitions in paragraph 5, 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 in paragraph 5; and
-
if such an internally
reported lower-level segment meets the definition of business
segment or geographical segment based on the factors in
paragraph 5, the criteria in paragraph 27 for identifying
reportable segments should be applied to that segment.
-
Under this Statement, most enterprises
will identify their business and geographical segments as
the organisational 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 paragraph 25
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 organisational 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 organisational 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:
-
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
-
its segment result,
whether profit or loss, is 10 per cent or more of -
-
the combined result
of all segments in profit, or
-
the combined result
of all segments in loss,
whichever is greater
in absolute amount; or
-
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 as
per paragraph 27, 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 in paragraph 27, 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.
Appendix II to this Statement
presents an illustration of the determination of reportable
segments as per paragraphs 27-29.
-
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 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 judgements 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.
-
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 amortisation is included in segment
expense.
-
Disclosure
-
Paragraphs 39-46 specify the
disclosures required for reportable segments for primary
segment reporting format of an enterprise. Paragraphs
47-51 identify the disclosures required for secondary
reporting format of an enterprise. Enterprises are encouraged
to make all of the primary-segment disclosures identified
in paragraphs 39-46 for each reportable secondary segment
although paragraphs 47-51 require considerably less disclosure
on the secondary basis. Paragraphs 53-59 address several
other segment disclosure matters. Appendix III to this
Statement illustrates the application of these disclosure
standards.
Primary Reporting Format
-
The disclosure requirements
in paragraphs 40-46 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:
-
segment revenue,
classified into segment revenue from sales to external
customers and segment revenue from transactions with
other segments;
-
segment result;
-
total carrying amount
of segment assets;
-
total amount of
segment liabilities;
-
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);
-
total amount of
expense included in the segment result for depreciation
and amortisation in respect of segment assets for
the period; and
-
total amount of
significant non-cash expenses, other than depreciation
and amortisation in respect of segment assets, that
were included in segment expense and, therefore, deducted
in measuring segment result.
-
Paragraph 40 (b) 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 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 amortisation expense and non-cash expenses
of such segment pursuant to sub-paragraphs (f) and (g)
of paragraph 40.
-
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
amortisation expense and non-cash expenses pursuant to
sub-paragraphs (f) and (g) of paragraph 40.
-
An enterprise should
present a reconciliation between the information disclosed
for reportable segments and the aggregated information
in the enterprise financial 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
-
Paragraphs 39-46 identify
the disclosure requirements to be applied to each reportable
segment based on primary reporting format of an enterprise.
Paragraphs 48-51 identify the disclosure requirements
to be applied to each reportable segment based on secondary
reporting format of an enterprise, as follows:
-
if primary format of an
enterprise is business segments, the required secondary-format
disclosures are identified in paragraph 48;
-
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 paragraphs 49 and 50;
-
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 paragraphs 49 and 51.
-
If primary format of
an enterprise for reporting segment information is business
segments, it should also report the following information:
-
segment revenue
from external customers by geographical area based
on the geographical location of its customers, for
each geographical segment whose revenue from sales
to external customers is 10 per cent or more of enterprise
revenue;
-
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
-
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:
-
segment revenue
from external customers;
-
the total carrying
amount of segment assets; and
-
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).
-
If primary format of
an enterprise for reporting segment information is 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.
-
If primary format of
an enterprise for reporting segment information is 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 asset-based geographical segment whose revenue from
sales to external customers or segment assets are 10 per
cent or more of total enterprise amounts:
-
the total carrying
amount of segment assets by geographical location
of the assets; and
-
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 location of the assets.
Illustrative Segment Disclosures
-
Appendix III 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, 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.
Appendix I
Segment Definition Decision Tree
The purpose of this appendix is
to illustrate the application of paragraphs 24-32 of the Accounting
Standard.
Appendix II
Illustration on Determination
of Reportable Segments [Paragraphs 27-29]
This appendix is illustrative
only and does not form part of the Accounting Standard. The
purpose of this appendix is to illustrate the application
of paragraphs 27-29 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):
| |
A |
B |
C |
D |
E |
F |
G |
H |
Total (Segments) |
Total (Enterprise) |
1.SEGMENT REVENUE
(a) External Sales |
- |
255 |
15 |
10 |
15 |
50 |
20 |
35 |
400 |
|
| (b) Inter-segment Sales |
100 |
60 |
30 |
5 |
- |
- |
5 |
- |
200 |
|
| (c) Total Revenue |
100 |
315 |
45 |
15 |
15 |
50 |
25 |
35 |
600 |
400 |
| 2. 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 |
|
|
3.SEGMENT RESULT
[Profit/(Loss)] |
5 |
(90) |
15 |
(5) |
8 |
(5) |
5 |
7 |
|
|
| 4. Combined Result of all Segments in
profits |
5 |
|
15 |
|
8 |
|
5 |
7 |
40 |
|
| 5. Combined Result of all Segments in
loss |
|
(90) |
|
(5) |
|
(5) |
|
|
(100) |
|
| 6. Segment Result as a percentage of
the greater of the totals arrived at 4 and 5 above in
absolute amount (i.e., 100) |
5 |
90 |
15 |
5 |
8 |
5 |
5 |
7 |
|
|
| 7.SEGMENT ASSETS |
15 |
47 |
5 |
11 |
3 |
5 |
5 |
9 |
100 |
|
| 8. Segment assets as a percentage of
total assets of all segments |
15 |
14 |
5 |
11 |
3 |
5 |
5 |
9 |
|
|
The reportable segments of the enterprise will
be identified as below:
-
In accordance with paragraph
27(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.
-
As per the requirements of
paragraph 27(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. In accordance with paragraph 27(b),
Segments B and C are reportable segments as their segment
result is more than the threshold limit of 10%.
-
Segments A, B and D are reportable
segments as per paragraph 27(c), 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
paragraph 27.
Paragraph 28 of 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.
Paragraph 29 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
in paragraph 27, 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.295,000. This is less than 75% of total enterprise
revenue of Rs.400,000. The management of the enterprise is
required to designate any one or more of the remaining segments
as reportable segment(s) so 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.
Now 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.
Appendix III
Illustrative Segment Disclosures
This appendix is illustrative
only and does not form part of the Accounting Standard. The
purpose of this appendix is to illustrate the application
of paragraphs 38-59 of the Accounting Standard.
This Appendix 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.
|
