Segment reporting is the process of disclosing a business organization’s data on profits, expenses, and revenue generated for each of its divisions or product lines in its financial statement. It allows all the stakeholders involved to have an insight into the various types of operations the company is involved in and also enables the leadership to have a better understanding of how the different verticals of the organisation are doing independently in their own fields. In this article, we will try to have a detailed understanding of the entire process and purpose of segment reporting, the disclosure requirements, and how segment reporting is governed under both Accounting Standards (AS) and Indian Accounting Standards (Ind AS).
- Segment reporting is governed under
- Accounting Standards (AS)
- Indian Accounting Standards (Ind AS)
Segment Reporting: The Process & Its Purpose
Segment reporting is the part of financial reporting where the entity discloses the full financial details of its various operating segments. These segments are parts of the business that engage in different business activities or operate in different geographical areas, and their financial performances are tracked independently.
Segment reporting is devised to provide more detailed information about the company’s financial health, allowing stakeholders to assess the risks and returns associated with each part of the business.
According to segment reporting guidelines, operating segments are those components of an enterprise that:
Under AS 17
- Provides products or services, subject to different risks and returns than other segments, considering factors like product nature, production processes, customer types, distribution methods, and regulatory environments.
- Provides products or services in a specific economic environment, subject to distinct risks and returns, considering factors like economic conditions, operational relationships, proximity, risks, and exchange control regulations
Under Ind AS 108
- Engage in business activities that earn revenues and incur expenses.
- Have discrete financial information available.
- Are regularly reviewed by the company’s chief operating decision-maker to assess performance and make resource allocation decisions.
The main purpose of segment reporting is to provide transparency in how a company generates revenue, manages risks, and allocates resources across its business and enables better-informed decisions regarding each segment of it.
Applicability of Segment Reporting
Segment Reporting under AS 17
AS 17 applies to companies that are engaged in multiple segments, requiring them to report information on each of these segments. In AS 17, the primary objective is to focus on the importance of disclosure and transparency in different business and geographical segments. It is also important to note that AS 17 is not applicable for Level II and Level III entities. For the definition of Level I, II and III entities for applicability of Accounting Standards, please refer to https://www.icai.org/post/applicability-of-accounting-standards-with-reference-to-small-and-medium-sized-enterprises
Segment Reporting under Ind AS 108
Ind AS 108 provides a comprehensive and detailed framework for segment reporting, incorporating guidance from IFRS 8 Operating Segments and aligning India’s segment reporting standards with global practices.
Disclosure Requirements
Under AS 17
Disclosure requirements under AS 17 include:
General Information:
- Description of the types of products and services from which each reportable segment derives its revenues.
- The basis of segmentation, whether by nature of services or product type or by geographical areas.
Primary Segment
Information:
- The revenue generated and the assets allocated must be disclosed for each reportable segment.
- Segment reporting should reflect all the incomes and expenses directly attributable to each segment, including the capital expenditure as well as non-cash expenses incurred in each of those segments.
Reconciliation:
- A reconciliation of segmental information with the company’s consolidated financial results is needed to ensure alignment of segment performance with overall financial reporting.
Secondary Segment
Information:
- Disclosures regarding geographical segments include revenue from external customers, segment assets, and capital expenditures.
Under Ind AS 108
Disclosure requirements under Ind AS 108 include:
Operating Segments:
- Disclosures about the factors used to identify operating segments (such as the internal management structure, operational focus, or geographical areas).
Segment Performance Metrics:
- Revenue, profit or loss, assets, and liabilities for each reportable segment, including the capital expenditure as well as non-cash expenses incurred in each of those segments. Ind AS 108 places a strong emphasis on segment results as they are reviewed by the chief operating decision-maker (CODM).
- Profit or loss should reflect operating income and expenses, excluding certain items such as taxation and finance costs.
Reconciliation:
- Similar to AS 17, Ind AS 108 requires reconciliation of segment information with the company’s overall consolidated financial results.
Geographical Segments:
- Ind AS 108 requires further disclosures on geographical segments, including total revenue and total assets for segments by location.
Inter-Segment Transactions:
- For entities with transactions among their various operating segments, the inter-segment revenues and transfers also need to be disclosed.
Conclusion
As stated at the beginning of this article, segment reporting is very much essential in maintaining transparency and enabling all the stakeholders, including the decision-making authority, to properly understand the financial health of all the verticals of the organisation and the performance of each operational segment. Both AS 17 and Ind AS 108 provide specific guidelines for segment reporting that the entities must adhere to while making their disclosures in their financial reports. Detailed segment reporting with accuracy and consistency in disclosures is pivotal for improving the credibility of an organisation with its investors, performance analyst and regulatory bodies, which goes a long way in furthering its business goals.
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