AS-17: Segment Reporting:
Applicability of Accounting Standard: Applicable to Level I Enterprises. Not applicable to Level II and Level III enterprises in their entirely.
List of Level I Enterprises:
1. Enterprises whose equity or debt securities are listed whether in India or outside India.
2. Enterprises which are in the process of listing their equity or debt securities as evidenced by the Board resolution in this regard.
3. Banks including co-operative banks.
4. Financial institutions
5. Enterprises carrying insurance business
6. Enterprises whose turnover exceeds Rs. 50 crores.
7. Enterprises having borrowings in excess of Rs. 10 crores at any time during the accounting period.
8. Holding companies and subsidiaries of enterprises falling under any one of the categories mentioned above.
List of Level II Enterprises:
1. Enterprises whose turnover exceeds Rs. 40 lakhs but does not exceed Rs. 50 crores.
2. Enterprises having borrowings in excess of Rs. 1 crore but not in excess of Rs. 10 crores at any time during the accounting period.
3. Holding companies and subsidiaries of enterprises falling under any one of the categories mentioned above.
List of Level III Enterprises:
Enterprises which are not covered under Level I, and Level II.
Main gist of accounting standard:
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 multiproduct/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.
1) Business Segment: 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. The following factors are considered for grouping related products or services:
a) The nature of product / service.
b) The nature of production processes (e.g. labour intensive or capital intensive.)
c) The type or Class of customer (e.g. gender, income, etc.)
d) The method used to describe the products or provide services (e.g. wholesaler, franchisee, dealer, etc.), 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 facilities 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).
2) Geographical segment: 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. The following factors are considered for identification of geographical segments.
a. Significant difference in risk and rewards.
b. Internal Management Information Systems (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 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: 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: 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: Segment result is segment revenue less segment expense.
Segment Assets: Segment Assets comprise of directly attributable or reasonably allocable operating assets 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/Head Office (H.O.) asset.
Segment Liabilities: Segment liabilities are worked out on above basis but excluding:
a. Income tax liabilities
b. General enterprise liabilities/Head Office (H.O.) lease liabilities.
Disclosure required for primary segment:
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).
Disclosure required for secondary segment.
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 acquires segments 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 form 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 assets) of all geographical location where geographical segment used for primary format is base 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 revenue 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.
Interpretation of AS- 17:
1. Segment information will enable the users to understand better and also to assess the underlying risks and returns of an enterprise.
2. 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 statement.
3. 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.
4. 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 companies operating in other economic environments.
5. Segment revenue, costs, assets, etc. with a break-up consisting of 10 percent or more of enterprise activity has to be disclosed in segment reporting.
Extracting from RIL Annual Report 2008-09:
The Company has identified three reportable segments viz. Petrochemicals, Refining and Oil & Gas. Segments have been identified and reported taking into account nature of products and services, the differing risks and returns and the internal business reporting systems. The accounting policies adopted for segment reporting are in line with the accounting policy of the Company with following additional policies for segment reporting.
a. Revenue and expenses have been identified to a segment on the basis of relationship to operating activities of the segment. Revenue and expenses which relate to enterprise as a whole and are not allocable to a segment on reasonable basis have been disclosed as “Unallocable”.
b. Segment assets and segment liabilities represent assets and liabilities in respective segments. Investments, tax related assets and other assets and liabilities that cannot be allocated to a segment on reasonable basis have been disclosed as “Unallocable”.
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