AS 17 – Segment Reporting

Objectives

The objective of this statement is 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.

Such information helps the users of financial statements to:

1. have a better understanding of the performance of the enterprise;
2. assess the risks and returns of the enterprise; and
3. make more informed judgements about the enterprise as a whole.

Applicability

This Standard comes into effect in respect of accounting period commencing on or after 1st April, 2001 and is mandatory in nature.

It is applicable to the following enterprises:

1. Enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and enterprises, which are in the process of issuing equity, or debt securities that will be listed on a recognised stock exchange in India evidenced by the Board of Director’s resolution in this regard.
2. All other commercial, industrial and business reporting enterprises, whose annual turnover is more than Rs.50 crores.

Thus this standard affects both companies and other economical entities having turnover exceeding Rs. 50 crores during the accounting year.

Scope

The standard should be applied in presenting general purpose financial statements and enterprises should comply with the requirements of this standard fully and not selectively.

The references in this Statement to any item in the financial statement should be construed to be information pertaining to the consolidated financial statement, where segment information is reported in a consolidated financial statement.

Segment information should be prepared in compliance with the accounting policies adopted for preparing and presenting the financial statements of the enterprise as a whole.

Definitions

• 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 which products or services are related include:
1. the nature of the products or services;
2. the nature of the production processes;
3. the type or class of customers for the products or services;
4. the methods used to distribute the products or provide the services; and
5. if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.
• 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:
1. similarly of economic and political conditions;
2. relationships between operations in different geographical areas;
3. proximity of operations;
4. special risks associated with operations in a particular area;
5. exchange control regulations; and
6. the underlying currency risks.
• Reportable Segment is a business segment or a geographical segment identified on the basis of the above definitions for which segment information is required to be disclosed.
• Enterprise Revenue is revenue from sales to external customers as reported in the statement of profit.
• Segment Revenue is the aggregate of:
1. the portion of enterprise revenue that is directly attributable to a segment;
2. the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, and
3. revenue from transactions with other segments of the enterprise.
It does not include extraordinary items, interest and dividend income, gains on sale of investments or extinguishments of debt. Inclusion of financial income in segment revenue is relevant only for a segment of financial nature.
• Segment Expense does not include extraordinary items, finance charges, losses on sales of investments or losses on extinguishment of debt, income tax expense, and general administrative expenses, head-office expenses, and other expenses that arise at the enterprise level.
• Segment Result is the difference between segment revenue and segment expense.
• Segment Assets are those operating assets that are employed by a segment in its operating activities and either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.
  Segment assets do not include income tax assets.
  Segment assets are determined after deducting related allowances/provisions that are reported as offsets in the balance sheet of the enterprise.
• Segment Liabilities are those operating liabilities that result from the operating activities of a segment and either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. 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.

Identifying Reportable Segments

A business segment or geographical segment should be identified as a reportable segment if:

1. its revenue from sales to external customers and from transactions with other segments is 10 per cent more of the total revenue, external and internal, of all segments; or
2. 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
3. its segment assets are 10 per cent or more of the total assets of all segments.

The risks and returns of an enterprise are effected both by the geographical location of its operations and also by the location of its customers. The definition allows geographical segments to be based on either:

1. the location of production or service facilities and other assets of an enterprise; or
2. the location of its customers.

The organisational and internal reporting structure of an enterprise will generally provide substantiation of whether its dominant source of geographical risks results from the location of its assets or the location of its customers. Consequently, 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.

If total external revenue attributable to reportable segment constitutes less than 75% of the total enterprises revenue, additional segments should be identified as reportable segments, even if they do not meet the 10% thresholds as mentioned above, until at least 75% of total enterprises revenue is included in reportable segments.

If a segment is identified as a reportable segment in the current period because it satisfies the relevant 10% threshold, preceding period segment data is presented for comparative purpose, unless it is impracticable to do so, be restated to reflect the newly reportable segment even if that segment did not satisfy the 10% threshold in the preceding period.

A segment identified as a reportable segment in the immediately preceding period because it satisfied the relevant 10% threshold should continue to be a reportable segment for the current period notwithstanding that its revenue, result, and assets no longer meet the 10% threshold.

Explanation to 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 largely 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 primarily 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 foundation 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 below:

1. 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
2. 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, opt business segments or geographical segments as the primary segment reporting format of the enterprise, with the other as its secondary reporting format.

An enterprise will report segment information in its financial statements on the same basis as it reports internally to top management. Its foremost source of risks and returns becomes its primary segment reporting format. Its secondary source of risks and returns becomes its secondary segment reporting format.

Matrix Presentation: Both business segments and geographical segments as primary segment reporting formats with full segment disclosures on each basis - will regularly provide useful informationn 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 bar, a 'matrix presentation'.

Disclosures

1. An enterprise should disclose the following in respect of each reportable segment:
1. segment revenue, categorised into segment revenue from sales to external customers and segment revenue from transactions with other segments,
2. segment result,
3. total carrying amount of segment assets,
4. total amount of segment liabilities,
5. total cost incurred during the period to acquire segment assets that are expected to be used for more than one period (tangible and intangible fixed assets,
6. total amount of expense included in the segment result for depreciation and amortisation with respect to segment assets for the period, and
7. 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 for ascertaining segment result.
2. If an enterprise reports the amount of cash flows arising from operating, investing and financing activities of a segment, then items such as depreciation and amortisation expense and non-cash expenses relating to such segment need not be disclosed.
3. An enterprise should present reconciliation between the information disclosed for reportable segments and the aggregated information in the enterprise financial statements.
4. If primary format of an enterprise for reporting segment information is business segment, it should also report the following information:
1. 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,
2. 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
3. the total cost incurred during the period to acquire segment assets that are expected to be used for 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.
5. 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:
1. segment revenue from external customers,
2. the total carrying amount of segment assets, and
3. the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period (tangible and intangible fixed assets).
6. If primary format of an enterprise for reporting segment information is geographical segment 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.
7. If primary format of an enterprise for reporting segment information is geographical egment 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:
1. the total carrying amount of segment assets by geographical location of the assets, and
2. 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.

Other Disclosures

1. In measuring and reporting segment revenue from transactions with other segments, inter-segment transfers should be measured on that basis that was adopted by the enterprise to price such transfers. The measure for pricing inter-segment transfers and any change therein should be disclosed in the financial statements.
2. Changes in accounting policies adopted for segment reporting that have a material effect on segment information should be disclosed.
3. 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 not otherwise disclosed in the financial statements.