1. Accounting Standard - 17 Segment Reporting Presented by Nitin Goyal

2. Objective of AS - 17 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.

3. Concept & Relevance of Segment Reporting Diversified companies produces different products / group of products & services, similarly there are enterprises which operates in different geographical areas These different products / group of products and different geographical areas are subject to different : Rate of returns Growth opportunities Future prospects Risks This information is useful in assessment of risk and returns of a diversified / multi-locational enterprise.

4. Segment Information help user Better understanding of performance (i.e. profitability of the enterprise) Better assessment of risk and returns of a diversified / multi-location enterprise Make more informed judgment about the enterprise as a whole.

5. Applicability Enterprise whose : Equity or Debt are list on a recognized stock exchange in India are in the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India. turnover for the accounting period exceeds Rs. 50 Crores.

6. Requirement of AS - 17 Identify business segment or geographical segment Decide primary & secondary reporting format Identify Reportable Segment based on “10% thresholds” criteria Report segment information for reportable segment as per AS-17 If segment or part thereof satisfies the definition of discontinuing operation under AS 24, then AS-24 to be complied with

7. Business Segment is based on products & services it provides Distinguishable Component (AS-24) Separate line of business Distinguishable component operationally and financially Individual or group of related Product or Service Nature of product or services Nature of production process Type of customers Methods of distribution Nature of regulatory environment Risk and returns are different Return refers to the profitability of a product or service Risk is the variability of return due to any factor.

8. Case Study Q 1 A company manufactures two products – viz. cloth and ready-made garments. Are the products different business segments or part of the same business segment? Q 2 A newspaper publishing company is publishing an English News paper & Hindi News paper. Are these products different business segment or part of same business segment?

9. Answers A 1 In the above 2 products, the production process and type or class of customers are different, however, method of distribution and regulatory environment are same. In this case, greater weightage may be assigned to production processes and type or class of customers and accordingly should be treated as separate segment. A 2 In this case products are similar as to the nature of product, production process, method of distribution and regulatory environment. However, the customer differ. In this case one may assign greater weightage to the nature of product, production process, methods of distribution and regulatory environment. Accordingly, both the news papers – English & Hindi will be part of same business segment.

10. Geographical Segment is the area or location in which the products and services are manufactured or marketed Distinguishable Component (AS-24) Separate area of operation Distinguishable component operationally and financially Engaged in providing product or services within a particular economic environment A single geographical segment should not include operations in economic environments with significantly differing risks and returns. Risk and Return differ from those components operating in other economic environments Return refers to the profitability of a product or service Risk is the variability of return due to any factor.

11. Identification of Geographical Segment a. Similarity of economic and political conditionsb. Relationship between operations in different geographical areas c. Proximity of Operations d. Special risks involved in operations in particular area e. Exchange control regulationsf. Currency risks

12. Case Study Q 1 A Ltd. Which is incorporated in India and has businesses in all the Indian States treats Jammu & Kashmir as a separate geographical segment because of risks involved due to terrorism and the rest of India as a separate segment. Is this OK?

13. Answer A 1 Since the company operates in India and hence factors e & f listed before are not relevant. Factor d deals with special risk involved in operations in a particular area and hence company may have treated J&K as a separate segment in view of terrorism risk. If other regions of India are similar with regards to factors a, b & c, it is appropriate to treat them as one segment. The segmentation of the company is appropriate in accordance with factors given above.

14. Identification of Business and Geographical Segments for external reporting purposes: Sr. No. System of internal financial Reporting prevailing in the enterprise How segments for external reporting purpose should be identified. 1Internal organization and management structure of an enterprise and system of internal financial reporting to the Board of Director / CEO are based on individual products or services or based on geographical areas or both. In this case, the business and geographical segment for external reporting purpose should be those organizational units for which information is reported to the Board of Directors / CEO for evaluating the units performance and for making divisions about future allocation of resources. 2If internal organization and management structure and system of internal financial reporting are based on neither individual products or services nor on geographical areas. The directors and management of the enterprise should determine its business and geographical segments for external reporting purposes based on the factors given above rather than on the basis of the enterprise’s system of internal financial reporting.

15. Identifying the Primary & Secondary Reporting format Sr. No.SituationBusiness SegmentGeographical Segment 1Risk and returns of the enterprise are pre- dominantly affected by differences in the products or services that is produces. Primary Reporting FormatSecondary Reporting Format 2Risk and returns of the enterprise are pre- dominantly affected by its operations in different countries or other geographical areas. Secondary Reporting Format Primary Reporting Format 3Risk and returns are strongly affected by both as evidenced by a matrix approach to managing the company and reporting internally to BOD & CEO Primary Reporting FormatSecondary Reporting Format, alternatively matrix presentation with full segment disclosures may be adopted.

16. Important Definitions Enterprise Revenue Enterprise revenue is revenue from sale to external customers as reported in the statement of profit and loss. Segment Revenue Segment revenue = portion of enterprise revenue that is directly attributable to a segment + relevant portion of enterprise revenue that can be allocated on a reasonable basis + revenue from intersegment. It does not include extraordinary items, interest or dividend income and gains on sales of investment or on extinguishment of debt. Segment Expense It is exactly opposite of segment revenue and it further does not include income tax expense and general administrative expense, head office expense, and other expense that arise at the enterprise level and are related to enterprise as a whole. Segment Result Segment Result = Segment Revenue – Segment Expense

17. Important Definitions Continued Segment Assets Segment assets are those operating assets that are employed by a segment in its operating activities and are directly attributable to the segment or can be allocated on a reasonable basis. Interest or dividend, income tax assets, head office assets, depreciation or amortization, goodwill, revalued assets. Segment Liabilities Segment liabilities are operating liabilities that result from the operating activities of a segment and are either directly attributable to the segment or can be allocated on a reasonable basis. Segment A/c Policy Are the accounting policies adopted for preparing and presenting the financial statements of the enterprise. Those accounting policies that relate specifically to segment reporting, e.g. identification of segments, method of pricing inter-segment transfers, and basis for allocating revenues and expenses to segment.

18. Identification of Reportable Segments Reportable segment are those which satisfy any of 10% criteria discussed below. Those business segment or geographical segment designated by the management as reportable segments at their discretion. Additional segment identified as reportable segment even if they do not meet 10% criteria, If the reportable segment constitute less than 75% of the total enterprise revenue If the segment was identified as reportable segment in the proceeding period because it satisfied the 10% criteria.

19. 10% criteria / 10% thresholds If the following works out to 10 or more, it is a reportable segment: 10% revenue criteria: Revenue of segment from sale to external customer + inter segment sales *100 / Total Revenue of all segments ( incl. inter seg.) 10% of combined segments results criteria: Segment profit / loss * 100 / Combined profit of all segments in profits or combined loss of all segment in loss whichever is greater in absolute amount. 10% of total segment assets criteria: Segment assets * 100 / Total segment assets of all segments.

20. Primary Reporting Format DisclosureRemarks Segment RevenueClassified into external revenue and inter-segment revenue. Segment ResultIf an enterprise can compute segment net profit / loss or some other measure of segment profitability other than segment result, without arbitrary allocations, reporting of such amounts in addition segment result is encouraged. Segment AssetsTotal carrying amount of segment assets Segment LiabilitiesTotal amount of segment liabilities Addition to Fixed AssetsTotal cost incurred during the period to acquire segment assets that are in the nature of tangible or intangible fixed assets Depreciation and amortization and Non-cash expenditure Total amount of deprecation / amortization and non cash expenditure included in the expenses. This information need not be disclosed if enterprise provides segment cash flow. ReconciliationsReconciliation of Segment revenue with enterprise revenue Reconciliation of Segment result should be done with enterprise net profit/loss. Reconciliation of Segment assets with enterprise assets Reconciliation of Segment liabilities with enterprise liabilities

21. Other Disclosures Basis of Transfer Pricing : In measuring and reporting segment revenue, inter- segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements. Changes in Segment Accounting policies Composition of each reported business / geographical segment

22. Secondary Reporting format If primary Segment isThen Secondary Segment will be Conditions and reporting by Secondary Segment Business Segment Geographical Segment – customer Segment revenue from customer is to be reported for those segment whose external revenue is 10% or more of enterprise revenue. Geographical segment – assets Carrying amount of segment assets whose segment assets are 10% or more of total assets of all geographical segments. Addition of fixed assets should also be reported. Geographical Segment - customer or assets Business SegmentSegment revenue from external Customer > 10% of enterprise revenue, Segment assets > 10% of total segment assets of all business segments. Segment revenue from external customers, carrying amount of assets and addition to fixed assets to be reported. Geographical Segment – location Geographical segment – assets Carrying amount of segment assets whose segment assets are 10% or more of total assets of all geographical segments. Addition of fixed assets should also be reported. Geographical Segment - assets Geographical Segment – customer Segment revenue from customer is to be reported for those segment whose external revenue is 10% or more of enterprise revenue.

23. Illustration for identification of Segment ParticularsABCDEFGHTotal Segment Revenue External Revenue0255151015502035400 Inter-Segment Revenue100603050050200 Segment Assets15475113559100 Segment Results5-9015-58 57-60 Solution: Total Revenue1003154515 502035600 % of Above16.752.57.52.5 8.34.25.8 % of Segment Assets15475113559 Combined result of all Profitable Segments 51585740 Combined Result of all Segments in Loss -90-5 -100 % of Segment Result5901558557

24. Illustration for Disclosure ParticularsFood Products Plastic & Packaging Health & Scientific OthersTotal Sales50006203451826147 Expenses35854002222004407 General Corporate Expenses548 Income from Investment126 Interest Expenses63 Assets7548200070068210930 General Corporate Assets832 Intersegment sales included above6084185 Operating profit on Intersegment sales33 Liabilities600018005004008700 Unallocated Corporate Liabilities500 Capital Expenditure1005025 200 Depreciation75420070681092 Non Cash Expenses Other than Depreciation1007525 225

25. Solution to Illustration ParticularsFood Products Plastic & Packaging Health & Scientific OthersTotal Sales50006203451826147 Expenses35854002222004407 Segment Result1415180123-181700 % of Revenue81.3410.085.612.96 Absolute amount of profit1718 Absolute amount of loss-18 % of Segment result82.3610.477.151.04 % of Segment Assets69.0518.296.406.24

26. Disclosure ParticularsFood ProductPlastic & Packaging OthersEliminationTotal Revenue External Sales49405365045980 Intersegment sales608423- Total Revenue5000620527(167)5980 Results Segment Results1415180105(33)1667 Unallocated Corporate Expenses548 Operating Profit1119 Interest Expense(63) Income from Investment126 Tax Expense- Profit from Ordinary activity1182 Segment Assets75482000138210930 Unallocated Assets832 Total Assets11762

27. Continue…. ParticularsFood ProductPlastic & Packaging OthersEliminationTotal Segment Liabilities600018009008700 Unallocated Corporate Liabilities500 Total Liabilities9200 Addition to Fixed Assets10050 200 Depreciation7542001381092 Non Cash Expenses Other than Depreciation 1007550225

28. Thank You