Introduction: AS 17, or Accounting Standard 17, mandates how enterprises should disclose financial information about their operating segments and geographical segments in their financial statements. The standard aims to provide transparency and clarity regarding an enterprise’s business activities and economic environment.
OBJECTIVE
- Understand the performance of the enterprise
- To assess the risk and returns of the enterprise
- Make more informed judgement about the enterprise
SCOPE
- AS 17 should be applied in presenting general purpose financial statement
- An enterprise shall apply the standard fully rather than not selectively.
- In a single financial report contains both consolidated financial statement and the separate financial statement of the parent, the segment information shall be presented only on the basis of the consolidated dated financial statements.
DEFINITION OF TERMS USED IN THIS ACCOUNTING STANDARDS
A BUSINESS SEGMENT, is defined as a distinguishable component of an enterprise that is engaged in providing products or services (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. In simpler terms, it’s a part of an enterprise that operates in a distinct business environment and is separately identifiable in terms of its activities and profitability.
Key points about a business segment under AS 17 include:
1. The segment should be identifiable based on the enterprise’s organizational structure, internal financial reporting, and the nature of the products or services offered.
2. Each business segment should have its own set of risks and returns that are distinguishable from other segments. This means the segment’s profitability and risk profile should be different enough to warrant separate reporting.
3. The segment should be regularly reviewed by the enterprise’s management to assess its performance and allocate resources effectively. Financial information should be available separately for each business segment.
4. AS 17 distinguishes between primary and secondary business segments. Primary segments are typically based on the nature of products or services offered, geographical location, or customer type. Secondary segments are those that provide additional information about the enterprise’s operations, such as major customers or product lines.
A GEOGRAPHICAL SEGMENTS is defined as a distinguishable component of an enterprise engaged in providing products or services within a particular economic environment that is subject to risks and returns different from those of components operating in other economic environments.
Key characteristics of a geographical segment under AS 17 include:
1. The segment’s activities are based in a particular geographical area, such as a country or group of countries, regions, or continents.
2. The segment operates independently in terms of its economic environment, local regulations, competitive landscape, and customer base.
3. The risks and returns associated with the segment’s operations are different from those of other geographical segments or business segments of the enterprise.
4. Financial information about the segment, including revenues, expenses, assets, and liabilities, is available separately and is reported to enable users of the financial statements to assess the enterprise’s performance in different geographical areas.
REPORTABLE SEGMENT is a segment or a geographical segment identified on the basis of forgoing definitions for which the segment information is required to be disclosed by AS 17.
SEGMENT REVENUE it is the aggregate of:
1. Revenue that is directly attributable to the segment
2. Revenue that can be allocated on a reasonable segment
3. Revenue from transaction with other segments of the enterprise
And segment does not include:
1. Extraordinary item as described in AS 5
2. Interest or dividend income including interest earned on advances or loans to other segments unless the operations of the segment are primarily of a financial nature
3. Gains on sales of investment are primarily of a financial nature
4. Gains on sale of investment or on extinguishment of debt unless operations of the segment are primarily of a financial nature.
SEGMENT EXPENSES can include various costs directly attributable to a specific segment. These expenses may vary by segment and typically include:
– Direct costs related to producing goods or services sold by the segment.
– Expenses incurred to promote and sell products or services specific to the segment.
– Costs related to running the segment’s operations, such as rent, utilities, and salaries directly attributable to the segment.
– Allocation of these expenses specifically to the segment.
AS 17 requires that segment expenses be separately identified and reported to provide transparency regarding the profitability and performance of each segment. This helps users of financial statements (such as investors, analysts, and creditors) to assess the risks and returns of the enterprise’s different business activities and geographical locations.
SEGMENT REVENUE is the aggregate of
(i) The portion of enterprise revenue that is directly attributable to a segment;
(ii) The relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment; and
(iii) Revenue from transactions with other segments of the enterprise.
SEGMENT ASSETS are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable to the segment or can
be allocated to the segment on a reasonable basis.
If the segment result of a segment includes interest or dividend income, its segment assets include the related receivables, loans, investments, or other interest or dividend generating assets.Segment assets do not include:
- income tax assets; and
- assets used for general enterprise or head-office purposes.
Segment assets are determined after deducting related allowances/provisions that are reported as direct offsets in the balance sheet of the enterprise.
Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.If the segment result of a segment includes interest expense, its segment liabilities include the related interest-bearing liabilities.Examples of segment liabilities include trade and other payables, accrued liabilities, customer advances, product warranty provisions, and other claims relating to the provision of goods and services.
Segment liabilities do not include:
- income tax liabilities; and
- borrowings and other liabilities that are incurred for financing rather than operating purposes.
ALLOCATION
1. First, segments of a business must be identified based on the internal organization and reporting structure. Segments are typically identified based on factors such as products, geographical areas, customer types, etc.
2. Revenue should be allocated to segments based on the revenue directly attributable to the segment and revenue that is allocable on a reasonable basis. This could include sales to external customers as well as inter-segment sales.
3. Expenses should be allocated to segments based on the expenses directly attributable to the segment and expenses that can be reasonably allocated to the segment. This may include direct costs like materials, labor, and direct overheads.
4. Assets and liabilities should be allocated to segments based on the identifiable assets and liabilities directly attributable to the segment. For example, specific assets located in a particular geographical area would be allocated to that segment.
5. Costs that are common to multiple segments should be allocated based on a reasonable allocation method. AS 17 emphasizes that costs should be allocated in a manner that reflects the underlying economics of the business operations.
6. Finally, AS 17 requires extensive disclosure about segment revenue, segment result, segment assets, and segment liabilities. This helps users of financial statements understand the performance and financial position of each segment.
7. It’s important to note that AS 17 aims to provide relevant and reliable information to users of financial statements about the enterprise’s business activities and economic environment in which it operates. Therefore, allocations should be done based on principles that reflect the business reality and economic substance of the segments.
PRIMARY AND SECONDARY SEGMENT
- The dominant source and nature of risks and returns of an enterprise should govern whether its primary segment reporting format will be business or geographical segments.
- Dominance of the source is decided on the basis of direction of organization structure, internal organization, and management structure of an enterprise and its system of interim financial reporting to BOD and CEO.
PRIMARY REPORTING FORMAT
1. Segment revenue classified into segment revenue from the 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 the assets which are expected to be used during more than one period.
6. Total amount of expense included in the segment result for depreciation and amortization in respect of segment assets for the period.
7. Total amount of significant non cash expense other than depreciation and amortization in respect of segments assets that were included in the segment expense and therefore deducted in measuring the segment result.
8. An enterprise that reports the amount of cash flows arising from the operating, investing and financing activites of a segment need not to be disclose depreciation and amortization expense and non cash expenses
SECONDARY SEGMENT INFORMATION
If primary format of an enterprise for reporting segment information is business segments, it should also report the following information:
(a) 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% or more of enterprise revenue;
(b) The total carrying amount of segment assets by geographical location of assets, for each geographical segment whose segment assets are 10% or more of the total assets of all geographical segments; and
(c) 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 geographical location of assets, for each geographical segment whose segment assets are 10% or more of the total assets of all geographical segments.
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% or more of enterprise revenue or whose segment assets are 10% 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 during more than one period (tangible and intangible fixed assets).
IDENTIFYING REPORTABLE SEGMENTS (QUANTITATIVE METHODS)
A business segment or geographical segment should be identified as a reportable segment if:
(a) Its revenue from sales to external customers and from transactions with other segments 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 –
(i) The combined result of all segments in profit, or
(ii) The combined result of all segments in loss, Whichever is greater in absolute amount; or
(c) Its segment assets are 10% or more of the total assets of all segments.
A business segment or a geographical segment which is not a reportable segment as per above paragraph, may be designated as a reportable segment despite its size at the discretion of the management of the enterprise. If that segment is not designated as a reportable segment, it should be included as an unallocated reconciling item.
If total external revenue attributable to reportable segments constitutes less than 75% of the total enterprise revenue, additional segments should be identified as reportable segments, even if they do not meet the 10% thresholds, until at least 75% of total enterprise revenue is included in reportable segments.
EXAMPLE
The Chief Accountant of Sports Ltd. gives the following data regarding its six
segments: ` in lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 (190) 10 10 (10) 30 (100)
Segment Revenue 300 620 80 60 80 60 1,200
The Chief accountant is of the opinion that segments “M” and “N” alone should be
reported. Is he justified in his view? Discuss.
Solution
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment
should be identified as a reportable segment if:
Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments;
or
Its segment result whether profit or loss is 10% 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
Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less
than 75% of total enterprise revenue, additional segments should be identified as
reportable segments even if they do not meet the 10% thresholds until atleast 75%
of total enterprise revenue is included in reportable segments.
On the basis of turnover criteria segments M and N are reportable segments.
On the basis of the result criteria, segments M, N and R are reportable segments
(since their results in absolute amount is 10% or more of Rs. 200 lakhs).
On the basis of asset criteria, all segments except R are reportable segments.
Conclusion: AS 17 Segment Reporting is crucial for stakeholders to assess an enterprise’s performance, risks, and returns across its business and geographical segments. By providing detailed disclosures about each segment’s financials, AS 17 enhances transparency and aids informed decision-making.
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