segment reporting

CA.CS. Naveen. Rohatgi TYBMS: Special study in finance.

Segment reporting under Indian GAAP (Accounting Standard 17 – Segment Reporting)

Segment reporting under International Financial Reporting Standards (IFRSs)(IFRS 8 – Operating Segments)

Meaning & Objective An enterprise deals in multiple product/ services and operates in different geographical areas. Multiple products / services and its operations in different geographical areas are exposed to different risk and return. Information about multiple products / service and its operation in different geographical areas is called Segment information. Such information is used to assess the risk and return of multiple products/ services and its operation in different geographical areas. Disclosure of such information is called segment reporting.

Segment reporting helps users of financial statement.- To better understand the performance of the enterprise- To better assess the Risk and Returns of the enterprise- To make more informed judgments about the enterprise as whole.

Accounting is mandatory in the following cases:

Enterprise whose equity or debt instrument is listed in India or outside India Enterprise whose equity or debt instrument is the process listing in India or outside India Banks including Co-operative banks Financial Institutions Insurance companies All commercial and business reporting enterprises having turnover exceeding Rs. 50 Crores. All commercial and business reporting enterprises having borrowings including public deposits

in excess of Rs. 10 Crore at any time during the accounting period. Holding and subsidiary companies of above.

SegmentThere are two types of segments

Business Segment- Segment is made on the basis of product / services, which are exposed to different risks and returns. A business segment is component of an enterprise, which satisfies the following conditions-

It is distinguishable component of an enterprise, It is engaged in providing an individual product or service or group of related products or services,

and It is subject to risks and returns that are different from those of other business segment.

Factors that should be considered in determining whether products or services are related include:- The nature of products or services;- The nature of the production processes:- The methods used to distribute the products or provide the services and

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- If applicable the nature of the regulatory environment, i.e.. Banking insurance or public utilities.

Example : Segments can be categorised based on the line of business a company is into. This is called reporting based on “business segments”. Take Hindustan Unilever. The company is divided its segments based on the products it offers to customers. They are: Soaps and detergents, personal products, beverages, foods, including culinary and branded staples, ice-creams, exports, and others, including chemicals and agri-product

Example : Based on the guiding principles given in Accounting Standard on Segment Reporting (AS-17), the NESTLE primary business segment is Food. The food business incorporates product groups viz. Milk Products and Nutrition, Beverages, Prepared dishes and cooking aids, Chocolatesand Confectionery, which mainly have similar risks and returns. As the Companys business activity falls within a single primary business segment the disclosure requirements of AS -17 in this regard are not applicable.

Example : Omax auto:The company is primarily engaged in the business of Auto Components for Two Wheeler and Four wheeler industry, which are governed by the same set of risk and returns. As the companys business activity falls within a single primary business segment, the disclosure requirements of Accounting Standard ( AS-17) Segment Reporting issued by The Institute of Chartered Accountants of India are not applicable. Exports being less than 10%, Geographical segment reporting is also notrequired.

Geographical segment- Segment is made on the basis of its operation in different geographical areas, which are exposed to different Risks and Return. A geographical segment is a component of an enterprise, which satisfies the following conditions: It is distinguishable component of an enterprise; It is engaged in providing products or services within a particular economic environment. The

risks and return of an enterprise are influenced both by the geographical location of its operations (where its products are products or where its services 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 segment to be based on either:

- The location of production or service facilities and other assets of an enterprise; or- The location of its customers.

In process of identifying the predominant source of risk and returns of the company, internal organization and management structure of company and system of internal reporting to Board of Directors and chief executive officer provide the best evidence of predominant source of risks and return of the company. So, the reportable segment may be either a Business segment or Geographical segment.

Example : TCS identifies its revenues based on continents from which it earns. Therefore its “Geographic segments” are Americas, Europe, India and others.

ISSUES

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What about a business that has a single product line or does not operate in different regions? These companies usually make a disclosure in their annual report stating that, though the standard is applicable to them, there is only one segment that can be reported that year.

Classic example is the automobiles industry. Maruti Suzuki, in its annual report, says that the only reportable and primary segment is the passenger cars. NTPC and Hexaware may be a few more under this category.

SEGMENT REPORTING FOR THE QUARTER / FULL YEAR ENDED 31ST MARCH, 2010 of BANK OF BARODA

Part A: Business Segments Rs. in lacs

Sr. No. Particulars

QuarterEnded

31.03.10Audited

QuarterEnded

31.03.09Reviewed

Year Ended

31.03.10Audited

Year Ended

31.03.09 Audited

1 Segment Revenue

(a) Treasury Operations 117941 118779 459916 444229

(b) Wholesale Banking 190082 134717 732424 524737

(c) Retail Banking 143536 162978 495691 538310

(d) Other Banking Operations 68659 82767 262439 277648

Total Revenue 520218 499241 1950470 1784924

2 Segment Results



(c) Retail Banking 22560 9471 77865 140650


Total 172767 149461 614413 504068

Unallocated expenditure 47622 39987 190607 169774

Profit before Tax 125145 109474 423806 334294

Provision for Tax 34517 34205 117973 111574

Net Profit 90628 75269 305833 222720

3 Capital Employed



(c) Retail Banking 244292 280224 244292 280224


(e) Unallocated 12806 16419 12806 16419

Total Capital Employed 1510638 1283554 1510638 1283554

#Total revenue of "Other Banking Operations" is exclusive of inter segment revenue which is Rs.339989 lacs for the QE Dec-09 (Rs.293800 lacs for QE Dec-08).

Part- B : Geographic Segments Rs. in lacs

Sr. No. ParticularsQuarter Ended

Quarter Ended

Nine Months Ended

Nine Months Ended

YearEnded

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31.12.09 Reviewed

31.12.08 Reviewed

31.12.09 Reviewed

31.12.08 Reviewed

31.03.09Audited

1 Revenue

(a) Domestic 422375 433136 1243757 1112214 1546520

(b) International 61287 69220 186495 173468 238404

Total 483662 502356 1430252 1285682 1784924

2 Assets

(a) Domestic 18934276 15981096 18934276 15981096 17710626

(b) International 6101122 4036204 6101122 4036204 5030047

Total 25035398 20017300 25035398 20017300 22740673

Notes on Segment Reporting:

1. As per guidelines of RBI on compliance with Accounting Standards, Bank has adopted "Treasury Operations", Wholesale, ", Retail and "Other Banking Operations" as Primary business segments and "Domestic" and "International" "Domestic" and "International" as secondary / geographic segments for the purpose of compliance with AS-17 on Segment Reporting issued by ICAI.

2. In determining the segment results, the funds transfer price mechanism followed by the bank has been used. 3. Segment revenue represents revenue from external customers. 4. Capital employed for each segment has been allocated proportionate to the assets of the segment.

Segment wise Revenue, Results and Capital Employed for the Quarter ended 31st March, 2007 OF NRE COKE LTD

(Rs. in crores)

S.N. PARTICULARSQUARTER ENDED

31.03.2007 YEAR ENDED

31.03.2007

1. Segment Revenue(Net Sale/Income from Segment)

a) Coke Division 132.41 385.46

b) Steel Division 44.62 124.42

c) Unallocated 9.64 24.68

Net Sales/ Income from Operations 186.67 534.56

2. Segment ResultsProfit/(Loss) Before Tax & Interest




Total 67.78 98.44Less : Interest 7.33 23.69

Total Profit/ (Loss) Before Tax 60.45 74.75

3. Capital Employed

a) Coke Division (including captive windmills of Rs.9.84 crores ) 372.26 372.26

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b) Steel Division (including captive windmills of Rs.115.97 crores) 211.84 211.84

c) Unallocated / Others 831.64 831.64

Total 1,415.74 1,415.74

Reportable segment is a ‘business segment or a geographical segment identified on the basis of their definitions for which segment information is required to be disclosed by the statement.

Business segment or geographical segment which has been identified as reportable segment shall be further dividend to include sub-segments based on the following conditions:

If the total Revenue ( external customers and intersegment ) of a segment is 10% or more of all revenue of all segments

Or 10% or more of segment result

(Segment result means: if some segments are in loss then total of loss of all loss-making segments or if some segment are in profit total profit of all profit-making segments. Whichever is higher i.e. total profit or total loss figure in absolute term.) Or

Segment asset is 10% or more than total assets of all segments All the above three criteria must be applied first and-

-Further, Management may at its discretion choose any segment as reportable segment Even if such segment does not fulfill the criteria stated above

- Ensure whether at least 75% of total external revenue should be in the reportable segment.- If 75% of total external revenue is not in the reportable segment, then additional reportable

segment should be identified ignoring 10% threshold limits until at least 75% of total external revenue is included in reportable segment.

Note: Any segment, which was reportable segment in the previous year on the fulfillment of 10% threshold limit, should be reportable segment during current year even if 10% threshold limit in current year is not fulfilled.

Example1: Identify the reportable segments and reconciling segment from the following details of Induga Ltd.

REPORTABLE SEGMENTS

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S T U V W X Y Z Total (Segment)

Total (Enterprise)

1.Segment Revenue(a) External Sales(b) Inter-Segment

Sales(c) Total revenue

- 100 . 100

255 60 . 315

15 30 . 45

10 5 . 15

15 - . 15

50 - . 50

20 5 . 25

35 - . 35

400 200 . 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 segment in profit

5 15 8 5 7 40

5. Combined result of all segment in loss

(90) (5) (5) (100)

6.Segment result as a percentage of the greater of the total 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 1008. Segment assets as a percentage of total percentage of total assets of all segment

15 47 5 11 3 5 5 9

Solution Steps for identification of sub-segments:

(a) 10% of total revenue- S (16.7%); T (52.5%) identified in term of sales criteria.(b) 10% of absolute figure of profit (40) or loss (100) –segment T (90%) and U (15%) identified on

the basis of 10% of profit or loss.(c) 10% of segment assets- segment S (15%); T (47%); V (11%) identified on the basis of asset.(d) It is presumed that segment W is chosen by management.(e) Now segment are S, T, U, V, W as identified in steps 1 to 4. But external sales revenue of these

segments only 73.75% (0+63.75+3.75+2.5+3.75=73.75%)(f) Z is chosen as segment to make it 75% based on assets and asset and profit. Thus segments S, T, V, U, W and Z are reportable segment.

Reportable Segments In addition, segments should be identified as primary and secondary segments.

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The dominant source and nature of risks and returns of an enterprise will decide whether its segment report should provide business 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 should be business segments. The report on geographic segment will be secondary. The segment report should contain information on both primary and secondary segments. Invariably, the popular choice for primary reporting will be the business segment.

Reportable segment are classified in following two parts for the purpose of disclosure: Primary Reportable Segment. Secondary Reportable Segment

Disclosure The disclosure requirements of primary segments are as under:-

Revenue from external customers. Revenue from transaction with other segment Segment Asset Segment liabilities Segment result. Capital expenditure incurred during the year Depreciation and amortization expenses. Non- Cash expenses other than depreciation and amortization (for eg provision for bad and

doubtful debts, loss on sale of asset, writing of inventories to net realisable value) ``zA

ILLUSTRATION Q.1 Hinduja Ltd. has three divisions A, B, and C. Details of their turnover results and net assets are

given below:

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Rs. (000)Division A. Sales to B Other sales (Home) Export sales

3,050 60 4,090 7200

Division B. Sales to C Export sales to Europe

30 200 230

Division C Export sales to America

180

Head Office. . Division A B C

Operating Profit or Loss before Tax

160 20 (8)

Re-allocated cost from Head Office

48 24 24

Interest costs 4 5 1Fixed assets 50 200 40 120Net current assets 48 120 40 90Long-term liabilities 38 20 10 120


Prepare a segment Report for publication in Induga Ltd.

Solution. Induga Ltd. Division A B C

Inter-segment Elimination

Consolidated Total

Segment Revenue SalesDomestic 60 - - - 60Export 4,090 200 180 - 4,470External sales 4,150 200 180 - 4,530Inter –segment sales 3,050 30 - 3,080 -Total revenue 7,200 230 180 3,080 4,530Segment result (given) 160 20 (8) 172Head office expenses (96)Operating profit 76Interest expenses (10)Profit before tax 66Other informationFixed assets 200 40 120 360Net current assets 120 40 90 250Segment assets 320 80 210 610Unallocated corporate assets

98

Segment liabilities 20 10 120 150Unallocated corporate liabilities

38

Sales Revenue by Geographical MarketHome Sales

Export sales (by Division A)

Export to Europe

Export to America

Consolidated Total

60 4,090 200 180 4,530

Q2: Following is the data regarding six segments of Z Ltd..

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Particulars A B C D E F Segment Revenue 150 310 40 30 40 30Segment Result 25 (95) 5 5 (5) 15Segment Assets 20 40 15 10 10 5

The Finance Director is of the view that is sufficient that segment A and B alone be reported. Advise.

Solution: According to AS-17 on “Segment Reporting” issued by the ICAI, a business segment or geographical segment should be identified as a reportable segment if:

(a) Its revenue from sales to external customers and from transaction with other segment is 10% or more of the total revenue, external and internal of all segments; or

(b) Its segment result, whether profit or loss, is 10% or more of:(1) The combined result of all segment in profit, or(2) The combined result of all segment in loss

( c) Its segment assets are 10% or more of the total assets of all segment.

If total external revenue attributable to reportable segment constitute less than 75% of the total enterprise revenue, additional segment should be identified as reportable segment, even if they do not meet the 10% threshold until at least 75% of total enterprise revenue is included in reportable segment. Based on the above criteria, following segments are reportable segment:

Basis Reportable segmentSegment Revenue A & BSegment Result A, B & F Segment Assets A, B,C, D & E

Hence, the contention of the Finance Director that only segment A and B need reporting is not correct, as all the six segment are reportable segment.

Q 3. Following details are given for NDA Ltd. for the year ended 31st March 2004:

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You are required to prepare a statement showing financial information about NDA Ltd. operations in different industry segment.

Solution: Information about NDA Ltd. operation different Industry segment is furnished in the following table:

Food Product

Plastic & Packaging

Health & Scientific

others Inter segment Elimination

Consolidated

External Sales 5595 553 324 155 - 6627Inter- segment 55 72 21 7 155 -Total 5650 625 345 162 155 6627Segment Expenses 3335 425 222 200 122 4060Operating Profit 2315 2000 123 (38) 33 2567

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(Amt. in lacs)

(Amt. in lacs)

Sales Food product 5650Plastic and Packaging 625Health and Scientific 345Other 162 6782ExpensesFood product 3335Plastic and Packaging 425Health and Scientific 222Other 2000 4182Other items:General Corporate Assets 562Income from investment 132Interest expenses 65Identifiable assets:Food product 7320Plastic and Packaging 1320Health and Scientific 1050Other 665 10355General Corporate Assets 722Other Information(a) Inter-segment sales are as below:Food product 55Plastic and Packaging 72Health and Scientific 21Other 7(b)Operating profit includes Rs.33 lakhs on inter-segment sales.(c ) Information about inter-segment expenses are not available.


General Corporate Expenses

(562)

Income from Investment 132Interest (65)Income from continuing operations

2072

Identifiable assets 230 1320 1050 665 10355Corporate assets - - - - - 722Total assets 11077

5. segment.

Segment wise Revenue, Results and Capital Employed for the Quarter ended 31st March, 2007

(Rs. in crores)

S.N. PARTICULARSQUARTER ENDED

31.03.2007 YEAR ENDED

31.03.2007

1. Segment Revenue(Net Sale/Income from Segment)




Net Sales/ Income from Operations 186.67 534.56

2. Segment ResultsProfit/(Loss) Before Tax & Interest




Total 67.78 98.44Less : Interest 7.33 23.69

Total Profit/ (Loss) Before Tax 60.45 74.75

3. Capital Employed

a) Coke Division (including captive windmills of Rs.9.84 crores ) 372.26 372.26

b) Steel Division (including captive windmills of Rs.115.97 crores) 211.84 211.84

c) Unallocated / Others 831.64 831.64

Total 1,415.74 1,415.74

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