SEGMENT REPORTING

Accounting Standard 17

INTRODUCTION
y Diversification, in terms of both industry activity and

geographical area or market has become an important feature of most of the business organizations. y In recent years, diversification has mainly occurrence due to internal expansion y Consolidated financial statements are prepared and presented to disclose financial information on all the different segments of a diversified enterprise. y It has been noticed that the financial statement users group find segment information more useful and valuable in assessing an enterprise standing, its past results and future prospects.

BUSINESS SEGMENT
y It is a distinguishable component of an

enterprise that is engaged in providing an individual product/ service or a group of related products /services and that is subject to risks and returns that are different from those of other business segments.

GEOGRAPHICAL SEGMENT
y It is a distinguishable component of an

enterprise that is engaged in providing products/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.

REPORTING SEGMENT
y It is a business /geographical segment for

which segment information is required to be disclosed by this AS.

ENTERPRISE SEGMENT
y It is revenue from sales to external customers

as reported in the P & L Account.

SEGMENT REVENUE
Segment revenue is the aggregate of :
y (i) the portion of enterprise revenue that is directly attributable to a segment, y (ii) the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, and y (iii) revenue from transactions with other segments of the enterprise.

Segment revenue does not include:

y (a) extraordinary items as defined in AS 5 y (b) interest or dividend income y (c) gains on sales of investments

SEGMENT EXPENSE
Segment expense is the aggregate of :
y (i) the expense resulting from the operating activities
of a segment that is directly attributable to the segment, and

y (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.

Segment expense does not include:

y (a) extraordinary items as defined in AS 5 y (b) interest expense y (c) losses on sales of investments y (d) income tax expense y (e) general administrative expenses

SEGMENT RESULT
y

It is segment revenue less segment expense.

SEGMENT ASSETS
y Segment assets are those operating assets

that are employed by a segment in its operating activities and y that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.

SEGMENT LIABILITIES
y Segment liabilities are those operating

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

SEGMENT ACCOUNTING POLICIES

y 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

NEED FOR SEGMENT REPORTING

y Diversified companies present a unique type of

problem for investment decision making. y The performance of a diversified company can be judged from the performance of all segment. y The success of diversified company depends on success of all segments. y That is why segmental disclosures in companys annual reports are more useful to investors and other user groups.

SEGMENT DISCOLSURES AND USER GROUPS

1) INVESTORS y Segment reporting provides investors risk and growth of various segments of enterprise operations. Investors will be in a better position to assess accurately a firms future earnings. Investors uncertainty about company's prospectus will thus be reduced with the help of segment reporting.

2) EMPLOYEES Employees and trade unions are also interested in the performance and prospects of the Enterprise from the point of wage negotiations and job security. 3) MANAGEMENT Segment reporting is also helpful to the management while taking various important managerial decisions. Lack of information on segmental performance may lead to misunderstanding between Management and workers.

4) GOVERNMENT AGENCIES Government agencies at national and international level in case of MNCs are becoming more concerned by the activities of large companies and the balance of payments. Segment disclosures by the geographical location seem likely to promote a better understanding of corporate strategy and its impact 5) CONSUMERS The interest of consumers and general public may also be promoted by segmental disclosures in the sense that, social responsibility in terms of removal of price discrimination could be encouraged by segment disclosures regarding profits.

PROBLEMS IN SEGMENT REPORTING

1) Base of segmentation : Identification of segmentation is

also problematic. Segmentation can be done on the basis of organizational division, market, product etc. Each base has its own limitation and own problem. 2) Allocation Problem : In business organization where more than one product are dealt. Allocation of joint costs becomes a complex problem while doing segment reporting. However there can be some common costs which can be apportioned on some reasonable basis for example electricity charges which can be apportioned on the basis of light points.

y 3) Disclosure cost : Segment reporting also involves cost

of disclosure. The provision of additional information along with routine information increases firm's operating costs in terms of cost of collection processing and costs of management control systems. y 4) Managerial Conservatism : In the absence of some regulatory provisions to disclose segment reports; voluntary disclosures are likely to be perceived by manager to be beneficial only in certain situations. y 5) Inter-segment Transactions : There are number of methods for inter segment transfers i.e.; cost, cost plus, market price, negotiated prices. All these methods result in different operating results for reporting segment.

SEGMENT INFORMATION TO BE DISCLOSED

y Separate disclosure should be made regarding sales to

unaffiliated customers and sales or transfers to other industry segments of the enterprise. y In case , if diversified company is also engaged in foreign operations so separate disclosures should be made regarding revenue, operating profit or loss, and identifiable assets. y A company is required to disclose information about the extent of reliance on major customers if 10% or more of the revenue of the enterprise is derived from sales to nay single customer.

METHODS OF PRESENTING SEGMENT INFORMATION

y There are 3 ways to represent segment information

which are given as under: y 1) Within the package of financial statements with explanatory footnotes to the financial statements. y 2) Only in the footnotes. y 3) A separate schedule can be prepared as an Integral part of the financial statements.

SEGMENT REPORTING IN INDIA

y Segmental information in annual reports such as

quantity and value of sales, quantity and units produced, stocks in quantity and value and purchases in quantity and value are disclosed by Indian Companies as per the provisions of Indian Company law. y Moreover there is no uniformity in presentation of segment information by Indian Companies.

y It has been observed while going through annual

reports of many diversified Indian Companies that they develop segment information for their managerial planning and decision making.
y It has been found that some of the diversified

companies are disclosing segment information in directors report on the performance of various divisions.

APPLICABILITY
It is applicable for the accounting periods commencing from 01.04.2001,in respect of the following: y (i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India. y (ii) All commercial, industrial & business reporting enterprise whose annual turnover exceed Rs.50 Crores.

OBJECTIVE
The objective of this Standard 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 judgements about the enterprise as a whole.

SCOPE
y This AS should be applicable in presenting

general-purpose financial statements. y If a single financial report contains both consolidated as well as separate financial statements of the parent, segment information need be presented only on the basis of the consolidate financial statements.

PRIMARY AND SECONDARY REPORTING

The dominant source and nature of risks & returns of an enterprise should govern whether its primary reporting format will be business segments or geographical segments. The identification of these two aspects are normally based on the enterprises y (1) Internal organization and management structure. y (2) System of financial reporting to the B.O.D. and the C.E.O.

EXCEPTIONS
(i) If risks and returns of an enterprise are strongly affected both by differences in business segments as well as geographical segments : y then the enterprise should use business segments as its primary reporting format and geographical segments as its secondary reporting format. (ii) If (1)and (2) are based neither on business segments nor on geographical segments : y the management should determine whether the risks and returns are related more to products/services it produces or the geographical areas in which it operates and should, accordingly, make a choice of primary and secondary segments.

REPORTABLE SEGMENTS
y A business/geographical segment should be

identified as a reportable segment if : (a) Its revenue from sales to external customers and from intra-segment transactions is 10% or more of the total revenue, external and internal, of all segments; also known as 10% Revenue test

Example: 10% Revenue Test

Separate profitable and unprofitable segments Operating Total segment Intersegment segment Reportrevenue revenue revenue able? Transportation $360 $0 $360 Yes Oil refining 405 480 885 Yes Insurance 95 20 115 No 0 140 No Financing 140 Total $1,000 $500 $1,500 A segment is reportable if its total revenue 10% of combined segment revenue. Threshold = 10%(1,500) = $150 Transportation ($360) and Oil refining ($885) are reportable segments.
Pearson Education, Inc. publishing as Prentice Hall 14-32

(b) Its segment result, profit or loss, is 10% or more of (i) The combined result of all segments in profit, or (ii) The combined result of all segments is loss Whichever is greater in absolute amount Also known as 10% Profit or loss test

Example: 10% Profit or Loss Test

Separate profitable and unprofitable segments. Segment Segment operating profit operating loss Reportable? Transportation (100) Yes Oil refining 200 Yes Insurance 20 No Yes Financing 50 (100) Total 270 A reportable segment's |profit or loss| 10% of the greater of |combined profits or combined losses|. $270 is greater than $100. Threshold = 10%(270) = $27. Transportation, Oil refining and Finance are reportable segments.
Pearson Education, Inc. publishing as Prentice Hall 14-34

y (c) Its segment assets are 10% or more of

the total assets of all segments. y Also known as 10% Asset test

Example: 10% Asset Test

Operating segment's identifiable assets Reportable? Transportation $700 Yes Oil refining 950 Yes Insurance 180 No Yes Financing 1,170 Total $3,000 A segment is reportable if its identifiable assets 10% of combined segment assets. Threshold = 10%(3,000) = $300 Transportation, Oil refining, and Financing are reportable segments.

y Apart from above, any other

business/geographical segment may be designated as reportable segment at the discretion of the management. y All the unreportable segments are included under unallocated reconciling item.

y A segment identified as reportable segment in

immediately preceding period should continue to be a reportable segment for the current period even if it is no longer meeting the 10% thresholds. y If a new segment is identified as reportable segment in the current period then preceding periods segment data , presented for comparison purposes, should be restated to reflect the newly reportable segment as a separate segment, unless it is impracticable to do so.

SEGMENT ACCOUNTING POLICIES

y 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. y Assets and Liabilities that relate jointly to two or more segments should be allocated to segments if, and only if, their related revenue and expense, are allocated to those segments.

DISCLOSURE REQUIREMENT
y Primary Reporting Format :
An enterprise should disclose the following for each reportable segment(a) Segment revenue: - from sales to external customers - 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 fixed assets y (f) Total amount of depreciation & amortization in respect of segment assets for the period
y y y y y y y

Secondary Segment Information:

y 1.If primary segment reporting format is business

segments, the enterprise should also report the following information: y (a) For each geographical segment (based on location of customers), whose external revenue is 10% or more of enterprise revenue, segment revenue from external customers. y (b) For each geographical segment (based on location of assets) , whose segment assets are 10% or more of total assets of all geographical segments,
y - Carrying value of segment assets y - Total cost incurred during the period on segment fixed assets

y 2. If primary segment reporting format is

geographical segment, the enterprise should also report the following information y for each business segment whose external revenue is 10% or more of enterprise revenue, or whose segment assets are 10% or more of total assets of all business segments: y (a) Segment revenue from external customers y (b) Total carrying amount of segment assets y (c) Total cost incurred during the period on segment fixed assets.

OTHER DISCLOSURES:
y The basis of pricing inter-segment transfers and

any changes therein should be disclosed in the financial statements. y An enterprise should disclose the types of products & services included in each reported business segment and the composition of each reported geographical segment, both primary and secondary.

Answer following 5 questions:

1 ) What are the problems of segment reporting??

2) When business/geographical segment should be identified as a reportable segment?? 3) What do you mean by Geographical segment?? 4)The identification of primary and secondary reporting are normally based on ?? 5)Segment revenue does not include??