Ind AS 108: Operating Segments

Applicability (Para 2 – Para 4)

♣ Applicable to all companies to which Ind ASs notified under Companies Act apply.

♣ Companies to which Ind AS are not applicable but voluntarily opts to disclose Segment information, in that case entity has two options: either comply with all the requirements of this Ind AS or provide selective disclosures without using the term Segment Information.

♣ If a financial report contains both Parent’s consolidated financial statement and Parent’s standalone financial statement, Segment Information is required only in Parent’s consolidated financial statement.

However, Segment Information can optionally be disclosed in Parent’s Standalone financial statement.

Operating Segments (Para 5)

An Operating Segment is a component of an entity that satisfies all of the following conditions:

• that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity);
• whose operating results are regularly reviewed by entity’s chief operating decision maker (CODM) to make decisions about resources allocation to the segment and assess its performance ; and
• for which discrete financial information is available. 

Explanations:-

Para 6: Every business activity is not necessarily an operating segment and clarifies that corporate headquarters or some functional departments which do not earn revenues / may earn revenues that are only incidental to the activities of the entity would not be operating segments. Examples:- Rent, Interest, Dividend etc.

Entities may incur expenses on centrally managed initiatives which are attributable to entity as a whole and not attributable to any operating segment. Example: – CSR, Management expense of brand, exploratory costs relating to new business opportunities, etc. An entity may elect to report such expenses under ‘Unallocated corporate expenses’ with an appropriate disclosure note so long as such reporting is consistent with the manner in which operating results are reviewed by its CODM.

Explanation on Condition I:

It is not necessary for a component to earn revenue to qualify as an operating segment if other conditions are fulfilled, such as, the costs incurred are reviewed by CODM to make decision about resource allocation and discrete financial information is available. Example: start-up operations may be operating segments before earning revenues.

Further, where revenue information is representative of operating results and the cost involved is insignificant or where review of revenue only may be sufficient for CODM to allocate the resources and performance assessment. In such cases, business activity can be treated as Operating Segment.

Explanation on Condition III:

Discrete financial Information – level of details required by CODM to allocate resources to segments and to assess the performance. A segment balance sheet is not always necessary to conclude that discrete financial information is available. Requirement of discrete financial information can be met with operating performance information only where CODM needs only that much information, such as Revenue and Operating Profit.

However, in many cases, a specific component of business (e.g., R&D unit) may not have a discrete financial information and hence would not qualify as an Operating Segment.

CODM:

Para 7: CODM identifies a function, not necessarily a manager with specific title. CODM functions (resource allocation and assessing performance) may be carried out by Entity’s CEO, chief operating officer, CFO, senior management, BOD. 

Para 10:

Management approach required identification of Operating Segments on the basis of criteria mentioned in Para 5 (i.e., how CODM reviews to allocate the resources and assess the performance). Two industries in the same industry can have very different operating segments because each will determine how their operating segments based on how its CODM reviews. Example: – In ABC Ltd (BPO and IT industry provides services to India, UAE and Rest of the world), CODM reviews for different products and services worldwide, whereas in XYZ Ltd (BPO and IT industry provides services to India, UAE and Rest of the world), CODM reviews for specific geographical areas. In that situation, ABC Ltd will disclose Segment Information ‘BPO and IT’ as two Operating Segments and XYZ Ltd will disclose Segment Information ‘India, UAE and Rest of the world’ as three Operating Segments.

Reportable Segments

Para 12:  Aggregation Criteria

Two or more Operating Segments may be aggregated into a single operating segment if the segments have similar economic characteristics and segments are similar in each of the following respects:

• the nature of the products and services;
• the nature of the production processes;
• the type or class of customer for their products and services;
• the methods used to distribute their products or provide their services; and
• if applicable, the nature of the regulatory environment, for e.g., banking, insurance or public utilities. 

Explanation:-

It is not mandatory to apply aggregation criteria. Entity can still disclose separately Information about Segments that meet all the criteria of Para 12.

Standard does not define “similar” and therefore whether two operating segments are similar or not is dependent on the facts and circumstances and is subject to the judgement.

While the standard does not define “economic characteristics” it states ‘operating segments often exhibit similar long-term financial performance if they have similar economic characteristics’. Example: similar long term average gross margins for two operating segments would be expected if their economic characteristics are similar.

Similar economic characteristics may also be indicated by metrics such as sales growth, return on assets, return on capital employed in a long term perspective Or other valuation metrics that embed in the market’s perception of competitive and financial risks and opportunities related to such industries. If operating segments are located in different geographical areas, entity needs to further evaluate whether economic characteristics across such geographies are similar or otherwise. 

The nature of the products and services

An entity with a relatively narrow product line may not consider two products to be similar, while an entity with a broad product line may consider the two products to be similar. Example: a highly diversified entity may consider all consumer products to be similar if it has other businesses such as financial services and road construction.

Nature of the production process

Similar degrees of labour or capital intensiveness may indicate a similarity in the production process. 

Type of class of customer

This criteria may be evaluated based on how CODM views the customer, viz., similar market and promotional efforts, common or interchangeable sales forces. Example: customer of entity A engaged in production of fabric – different from – entity B whose customers are engaged in manufacture of branded apparel. 

Methods used to distribute their products or provide their services

This criteria may be evaluated based nature of the distribution channels (e.g., retail outlets, mail order, web site) and the nature of the products sold (e.g., component parts, finished goods). 

Para 13:  Quantitative Thresholds

• Operating Segment’s Reported revenue (External customers sale + Intersegment sale) >=10% of combined revenue (internal + external) of all operating segments

OR

Operating Segment’s Reported profit/loss >=Greater of A) or B)

A) Combined reported PROFIT of all PROFITABLE operating segments

B) Combined reported LOSS of all operating segments reported LOSS

OR

• Operating Segment’s Assets >=10% of combined assets of all operating assets

Operating Segments that do not meet any of the quantitative thresholds may be considered reportable, if management believes that segment information would be useful to users of the financial statement.

Para 14: Operating Segments that do not meet quantitative thresholds

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Entity may combine those operating segments with other operating segments ONLY IF Para 12 conditions are met

 To Produce a Reportable Segment

Para 15:

If Total EXTERNAL Revenue reported by Operating Segments < Entity’s Revenue, then additional operating segments SHALL be identified as reportable segments (even if Para 13 criteria not met) until at least 75% of Entity’s Revenue included in Reportable segments.

Para 16:

Information about all other business activities and operating segments that are not reportable shall be disclosed under “All Other Segments” category separately from other reconciling items required by Para 28.

Para 17:

If Operating Segment identified as Reportable Segment in the immediately preceding period is of continuing significance, that Segment Information shall be reported in the current period even if Para 13 criteria no longer meets.

Para 18:

If Operating Segment is Reportable in the current period, segment data for prior period presented for comparatives shall be restated, even if Para 13 criteria not satisfied for the prior period, unless necessary information is not available and the cost to develop is excessive.

Para 19:

There may be a practical limit to the number of reportable segments beyond which segment information become too detailed. Although no precise limit has defined, as no. of reportable segments increases above 10, entity should consider whether a practical limit has reached.

Explanations:

Example on Para 13: ABC has 5 operating segments with following data:

Segment	Profit / (Loss)  (in Rs. Crores)	As Absolute % of Rs. 8,280 crores	Reportable
A	780	9%	No
B	1,580	18%	Yes
C	(2,300)	28%	Yes
D	(4,500)	54%	Yes
E	6,000	72%	Yes
Total	1,480

Working:

All segments in profit i.e., A, B and E – Total Profit Rs. 8,280 crores

All segments in loss i.e., C and D – Total Loss Rs. 6,800 crores

Greater = Rs. 8,280 crores

Ind AS 108 does not deal specifically with such a situation where segments report different measures of segment profitability, assets and liabilities. However, in such a situation a consistent basis of measurement should be developed by the entity to perform 10 per cent test.

Continuing from above example: Profitability of Segment A and B are measured and reported to CODM on Earnings before Interest and Tax (EBIT) basis whereas Profitability of Segment C, D and E are measured and reported on Earnings after Tax (EAT) basis.

In this case, EBIT is the lowest measure of profitability that is provided to CODM for all the segments. This should be the measure used to perform 10% test in such a case. 

Continuing Significance under Para 17: While no specific guidance provided in this regard, education material on Ind AS 108 says – Operating segment would be regarded is of continuing significance when, for example : decline below 10% is considered temporary, management considers the segment to be of strategic importance, etc. 

Disclosure Requirements (Para 22 to Para 30)

Para 22: General Information

1. Factors used to determine reportable segments (example: on what basis management has chosen to organise the entity – difference in products and services, geographical areas, regulatory environment, and whether segment have been aggregated)

Judgements made by management in applying the aggregation criteria in Para 12 (includes brief description of the operating segments that have been aggregated and economic indicators & similar economic characteristics that have been assessed in determining aggregation.

2. Types of products and services from which each reportable segment derives its revenues

(The sources of the revenue included in “All Other Segments” category shall be described).

Para 23: Info about Profit/ Loss, Assets and Liabilities

1. Measure of Profit or Loss for each reportable segment (even if not provided to CODM)

2. Measure of total Assets and Liabilities for each reportable segment IF such amounts are regularly provided to CODM

3. Following shall disclose about each reportable segment if the specified amounts are included in Segment Profit or Loss reviewed by CODM OR provided regularly to CODM even if not included in Segment Profit or Loss:

a) Revenue from external customers;

b) Revenue from intersegment sales;

c) Interest revenue;

d) Interest expense;

e) Depreciation and amortisation;

f) material items of income and expense disclosed in accordance with Para 97 of Ind AS 1, Presentation of Financial Statements;

g) Entity’ interest in Profit or Loss of Associates or JV accounted for by Equity method;

h) Income tax expense or income;

i) Material non-cash items other than depreciation and amortisation;

Note: Segment’s interest revenue net of its interest expense may be reported ONLY IF CODM relies primarily on net interest revenue to assess the performance of the segment and make decisions about resources allocation. 

Para 24: Following shall disclose about each reportable segment if the specified amounts are included in Segment Profit or Loss reviewed by CODM OR provided regularly to CODM even if not included in Segment Profit or Loss:

a) Amount of investment in associates or JV accounted for by Equity method; and

b) Amount of additions to Non-current assets other than financial instruments, deferred tax assets, net defined benefit assets (see Ind AS 19: Employee benefits) and rights arising under insurance contracts.

Para 26: If CODM uses more than one measure of an operating segment’s profit or loss, segment’s assets, segment’s liabilities – reported measures shall be those which are most consistent with corresponding amounts in the entity’s financial statements.

Para 27: Explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment.

a) Basis of accounting for transactions between reportable segments;

b) Nature of differences between the measurements of segment’s each disclosure item, viz., expense/income/assets/liabilities etc. and comparable items in entity’s financial statements. Example: accounting policy differences, policies for allocation of jointly used assets – provided these differences are not apparent from reconciliations under Para 28.

c) Nature of changes from the previous year in measurement methods used to determine Segment’s Profit/Loss and the effect of those changes on Segment’s Profit/Loss.

d) Nature and Effect of Asymmetrical allocations to reportable segments

Example: Depreciation expense has allocated without allocating related depreciable assets. 

Para 28: Reconciliations

a) Total of Reportable segment’s Revenue, Profit/Loss, Assets, Liabilities and other material items to Entity’s corresponding amounts in financial statements

b) Material reconciling items shall be separately identified and described.

Example: Entity use weighted average cost formula for inventory valuation for its financial statements but reports provided to CODM use FIFO method. In this case, FIFO method (used for reporting to CODM) should be used for reporting under Ind AS 108. However, reconciliation between segment results and results in entity’s financials shall be given in Segment Information. 

Para 29 and Para 30: Entity changes structure of its internal organisation

⇓

Results in change of composition of its reportable segments

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Corresponding information for earlier periods shall be restated unless info is not available and cost to develop it would be excessive however Entity shall disclose the fact whether earlier period info restated or not

⇓

If info for earlier periods not restated

⇓

Disclose segment information on both old basis and new basis for the Current Year unless info is not available and cost to develop it would be excessive.

Entity-wide disclosures

Para 31: Para 32 to 34 applies to all entities including single reportable segment. Information required by Para 32 – 34 shall be provided ONLY IF it is not provided as part of the reportable segment information required by this Ind AS.

Para 32: Info about products and services

a) Revenue from external customer for each product or service;

Para 33: Info about geographical areas

a) Revenue from external customers (disclose the basis for attributing revenue to individual countries) attributed to :

b) Non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts located in :

• Entity’s country of domicile and
• All the foreign countries (if material, disclose individual foreign country) 

Note for Para 32 and Para 33:

• Should be based on financial statements
• Need not be provided if info is not available and cost to develop it would be excessive. (THE FACT SHOULD BE DISCLOSED) 

Country of domicile: where it has a legal address, registered office, centre of its corporate affairs. (Example: Principal activities of an entity not located in its country of domicile and in other case, principal activities of an entity located in its country of domicile, disclosure requirement would be same in both of the situations) 

Para 34: Info about major customers (extent of entity’s reliance on its major customers)

Revenue from Single External customer >= 10% of Entity’s revenue, fact shall disclose alongwith total amount of revenues from each such customer and the segment to which it relates.

No need to disclose: identity of the customer or the amount of revenues that each segment reports from that customer.

Example: Revenues from one customer of company’s IT sector represents approx. Rs. 50 million (10% of the company’s total revenue.

General points

1) If activities conducted through JV or associates are reviewed separately by CODM for taking decisions about the group and the criteria for identifying operating segments are met, JV operations or associates may qualify as Operating segments for the purpose of Consolidated Financial Statements.

2) Terms such as Segment profit/loss, segment assets and segment liabilities are not defined in Ind AS 108. Ind AS 108 follows the management approach to segment reporting. It allows any measure of the above terms as long as that measure is what is reported to and reviewed by CODM for the purposes of making decisions about allocating resources and assessing performances.

3) At the time of preparation of consolidated accounts, segment should be determined based on how CODM of parent company views the group as a whole.

4) The Standard provides no guidance on when the cost to develop information is excessive. The entity will have to weigh the benefits of disclosing segmental information and the cost that will be incurred in developing the information. If it is time-consuming to prepare and the benefits to most of the users of financial statement are insufficient to justify the cost, such information need not be presented.

5) Summary:

6) Summary:

Identify CODM

↓

Identification of documents and level of info reviewed by CODM

↓

Identify Operating Segments

↓

Apply Aggregation criteria to identified Operating Segments

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Identify operating segments who meets Quantitative Threshold

↓

Remaining Operating Segments who does not meet Quantitative Threshold – Apply aggregation criteria on those segments

↓

Now identified operating segments are Reportable Segments

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Confirm if identified Reportable Segments account for 75% of the Entity’s Revenue, if not report additional other operating segments

↓

Prepare Disclosures for identified reportable segments

7) Key differences between AS 17 and Ind AS 108

S. No.	AS 17: Segment Reporting	Ind AS 108: Operating Segments
1	Two sets of segments: Business Segment and Geographical Segment. One set is regarded as Primary Segment and other as Secondary Segment.	Ind AS 108 is based on management approach. Operating segments are identified based on reports reviewed by CODM. Operating segments can either be based on products/services or on geographical basis.
2	Segment data is prepared in conformity with the accounting policies adopted for financial statements. AS 17 defines segment revenue, segment expense, segment assets and segment liabilities.	Amounts reported for each operating segment shall be measured on the same basis used by CODM. And further reconciliation to be given. Ind AS 108 does not define the mentioned terms, it works on the management approach.
3	No concept of aggregation criteria.	Deals with aggregation of two or more segments.
4	No disclosure in case of single reportable segment, however the fact should be disclosed.	Ind AS 108 required certain disclosures even in case of single reportable segment.
5	Interest expense related to overdrafts and other operating liabilities identified to a particular segment should not be included as part of segment expense. However, if interest expense is part of inventory and those inventories are part of segment assets, then such interest should be considered as segment expense.	Requires separate disclosure for interest revenue and interest expense of each reportable segment if these are included in reports reviewed by CODM.
6	Disclosures are based on classification of primary or secondary segments. Disclosures for primary segments are more detailed.	Disclosures: Revenue from external customers for each products/services; Revenue from customers and non-current assets in the country of domicile and all other foreign countries.

8) Extract of reconciliations (taken from education material on Ind AS 108)

Profit or Loss Total profit/loss for reportable segments Elimination of inter segment profits Unallocated amounts: Litigation settlement received Other corporate expenses Income before income tax expense	Rs.
Assets Total assets for reportable segments Elimination of receivable from corporate headquarters Other Unallocated amounts Entity’s Assets	Rs.