Accounting Standard (AS) 17: Segment Reporting
In view of the complexities of types of businesses, the aggregated financial information is not adequate to evaluate a company’s and management’s operating and financial strategies with regard to specific or distinct line of activities i.e. segment. As an enterprise deals in multi-product/ multiple services and operates in different geographical areas, the degree of risk and return also varies considerably.
Segment information will enable the users to understand better and also to assess the underlying risks and returns of an enterprise.
Initially the segment needs to be broadly classified into either ‘Business Segments’ or ‘Geographical Segments’ before being slotted as ‘Primary’ or ‘Secondary’ for reporting in the financial statements as per AS- 7.
A ‘Business Segment’ is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of products or services, and that is subject to risk and return as distinctly different from those of other business segments. For grouping related products or services, following factors are considered:
(a) The nature of product/service;
(b) The nature of production processes (e.g. labour or capital intensive);
(c) The type or Class of customer (e.g. gender, income).
(d) The method used to describe the products or provide services (e.g. wholesaler, franchisee, dealer) similarity of economic and political condition relationship between operations in different geographical areas proximity of operation special risks associated with operation in a particular area exchange control regulation underlying currency risk (geographical location means the location of production or service facilities and other assets of an enterprise and the location of markets and customers).
(e) Nature of regulatory environment e.g. insurance, banking, public utilities etc the majority of the factors will be considered to form a single segment even though, there may be dissimilarities and a single business segment does not include products and services with significant differing risks and returns (risk in investment and potential earnings as reward).
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 risk and returns that are different from those of components operating in other economic environments. Factors for identification of geographical segments are:
(a) Significant difference in risk and rewards;
(b) Internal MIS and organization structure;
(c) Essential factors that defines a business segment.
Segment accounting policies: AS-17 does not require that the enterprise apply accounting policies to reportable segments on stand-alone reporting entities, hence, additional segment information may be disclosed provided that:
(i) Information is reported internally to the Board or CEO for the purpose of making decisions about allocating resources to the segment and assessing its performance.
(ii) The basis of measurement for additional information is closely described.
Segment Revenue is the aggregate of the portion of enterprise’s total revenue that is attributable to a segment on a reasonable basis as distinct from other segments including inter-segment transfer with the exception of
(a) extra ordinary item as AS-5
(b) income by way of interest/dividend etc unless the operation of the segments are primarily of a financial nature
(c) gains or sale of investment or on extinguishments of debts unless the operation of the segment, are primarily of a financial nature
Inter-segment transfer should be made on the basis that is actually used to price those transfers i.e. at cost, below cost or market price and the same should be disclosed and followed consistently.
Segment result is segment revenue less segment expense.
Segment Assets comprise of directly attributable or reasonably allocable operating asset to the segment as reduced by related allowances or provisions pertaining to those assets including allocable common assets, however exclude:
(a) income tax asset
(b) general enterprise asset/H.O asset
Segment liabilities are worked out or above basis but excluding:
(a) income tax liabilities
(b) general enterprise liabilities/H.O lease liabilities.
For primary segment, disclosure required for:
(a) segment revenue with a break-up of sales to external customers and inter segment result deduction made to arrive at segment result in respect of total amount of non cash expenses (provisions, unrealized foreign exchange gain/loss as included in segment expenses);
(b) total amount of depreciation and amortization in respect of segment assets (not required if cash flow of the enterprise reports operating, investing and financing activities;
(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 for more than one period (both fixed assets and intangible assets).
For secondary segment, disclosure required for:
(a) If primary format for reporting segment is business segment, it should also report;
1. segment revenue from external customers by geographical location of customers for each geographical segment consisting 10 percent or more of enterprise revenue.
2. total carrying amount of segment assets, by geographical location of assets for each of such geographical segment accounting for 10 percent or more of the total assets of all geographical segments.
3. total cost incurred during the accounting period to acquire segment assets, which are expected to be used for more than one accounting period with 10 percent more criteria as in the aforesaid line.
(b) where primary format is geographical, disclosure also required for each business segment accounting for 10 percent or more of revenue from sales to external customers of enterprises’ total revenue or whose segment assets are 10 percent or more of the total assets of all business segments:
1. segment revenue from external customers
2. total carrying amount of segment assets
3. total cost incurred during the accounting period to acquire segment assets with expected use extending beyond one accounting period (both tangible and intangible) of all geographical location where geographical segment used for primary format is based on a location, of assets which is different from location of customers.
Additional disclosure required for
1) revenue from sales to external customers for each customer based geographical segment whose revenue from sales to external customers constitutes 10 percent or more of enterprise’s revenue.
2) in a reverse situation, disclosure for
(i) total carrying amount of segment assets by geographical location of assets
(ii) total cost incurred during the accounting period to acquire segment assets expected to be used for more than one accounting period both tangible and intangible by location of assets.