OPERATING SEGMENTS & SEGMENT REPORTING

IFRS 8: OPERATING SEGMENTS

The IFRS requires publicly held entities to report certain information about the following:-

 Their products and services.

 Their geographic areas in which they operate.
 Their major customers.

The IFRS specifies how an entity should report information about its operating segments in
annual financial statements and, as a consequential amendment to IAS 34 Interim Financial
Reporting, requires an entity to report selected information about its operating segments in
interim financial reports. It also sets out requirements for related disclosures about products and
services, geographical areas and major customers.

SCOPE OF IFRS 8:

IFRS 8 applies to the separate or individual financial statements of an entity (and to the
consolidated financial statements of a group with a parent):

 whose debt or equity instruments are traded in a public market or

 that files, or is in the process of filing, its (consolidated) financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any
class of instruments in a public market [IFRS 8.2]

However, when both separate and consolidated financial statements for the parent are presented
in a single financial report, segment information need be presented only on the basis of the
consolidated financial statements [IFRS 8.4]

OPERATING SEGMENTS:

IFRS 8 defines an operating segment as follows. An operating segment is a component of an

entity: [IFRS 8.2]

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 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 reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance and
 for which discrete financial information is available

REPORTABLE SEGMENTS:

IFRS 8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments or aggregations of operating segments
that meet specified criteria: [IFRS 8.13]

Specified criteria for reportable segment:

 Separate information must be reported for an operating segment that meets any of the
following quantitative thresholds:
 Its reported revenue, from both external customers and intersegment sales or
transfers, is 10 per cent or more of the combined revenue, internal and external, of
all operating segments; or
 The absolute measure of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of
i. the combined reported profit of all operating segments that did not report a
loss and
ii. the combined reported loss of all operating segments that reported a loss;
or
iii. Its assets are 10 per cent or more of the combined assets of all operating
segments.
 If the total external revenue reported by operating segments constitutes less than 75 per
cent of the entity's revenue, additional operating segments must be identified as
reportable segments (even if they do not meet the quantitative thresholds set out above)

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until at least 75 per cent of the entity's revenue is included in reportable segments. [IFRS
8.15]
 Information about other business activities and operating segments that are not reportable
are combined and disclosed in an “all other segments”.
 When an operating segment is first identified as a reportable segment according to the
quantitative thresholds, comparative data should be presented, unless the necessary
information is not available and the cost to develop it would be excessive.

DISCLOSURE REQUIREMENTS:

Required disclosures include:

 general information about how the entity identified its operating segments and the types
of products and services from which each operating segment derives its revenues [IFRS
8.22]
 information about the reported segment profit or loss, including certain specified
revenues and expenses included in segment profit or loss, segment assets and segment
liabilities, and the basis of measurement [IFRS 8.21(a) and 27]
 reconciliations of the totals of segment revenues, reported segment profit or loss, segment
assets, segment liabilities and other material items to corresponding items in the entity's
financial statements [IFRS 8.21(b) and 28]
 some entity-wide disclosures that are required even when an entity has only one
reportable segment, including information about each product and service or groups of
products and services [IFRS 8.32]
 Analyses of revenues and certain non-current assets by geographical area – with an
expanded requirement to disclose revenues/assets by individual foreign country (if
material), irrespective of the identification of operating segments [IFRS 8.33]
 information about transactions with major customers [IFRS 8.34]

Considerable segment information is required at interim reporting dates by IAS 34.

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AS 17: SEGMENT REPORTING

This standard comes into effect with effect from 1-4-2001 and is mandatory in nature. This
standard applies to companies which have an annual turnover of Rs 50 crores or more. These
companies have to present financial statements and consolidated financial statements.
This standard requires that the accounting information should be reported on segment basis. AS
17 establishes principles for reporting financial information about different types of products and
services an enterprise produces and different geographical areas in which it operates. The
information helps the users of financial statements, to better understand the performance and
assess the risks and returns of the enterprise and make more informed judgments about the
enterprise as a whole. The standard is more relevant for assessing risks and returns of a
diversified or multi-locational enterprise which may not be determinable from the aggregated
data.

MEANING & OBJECTIVE:

An enterprise deals in multiple products/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/services and its operation in
different geographical areas is called segment operation. Such information is used to access 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 statements.

- To better understand the performance of the enterprise.
- To better access the risks and returns of the enterprise.
- To make more informed judgments about the enterprise as a whole.

TYPES OF SEGMENTS:

There are two types of segments: Business Segment and Geographical Segment

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1. Business Segment: Segment is made on the basis of products/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.
 It is subject to risks and returns that are different from those of other business
segments.
2. Geographical Segment: Segment is made on the basis of its operation in different
geographical areas, which are exposed to different risks and returns. 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 returns of an enterprise are influenced both by the
geographical location of its operations (where its products are produced 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.

So, the reportable segment may be either a Business segment or Geographical segment. Business
and geographical segments of an enterprise for external reporting should be those organizational
units for which information is reported to the board of directors and to the chief executive officer
for the purpose of assessing the unit’s performance and for making decisions about the future
allocations of resources.

REPORTABLE SEGMENTS:

According to this standard, a business segment or geographical segment should be identified as

reportable segment if :

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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 the combined result of all
segments in profit or the combined result of all the 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 segment identified as a reportable segment in the immediately preceding period because it

satisfied the relevant 10% thresholds should continue to be a reportable segment for the current
period notwithstanding that its revenue, result and assets no longer meet the 10% thresholds.

DISCLOSURE REQUIREMENTS:

Segment information should be prepared in conformity with the accounting policies adopted for
preparing and presenting the financial statements of the enterprise as a whole. An enterprise
should disclose the following for each reportable segment:

i. Segment revenue;
ii. Segment result;
iii. Total carrying amount of segment assets and liabilities;
iv. Total cost incurred during the period to acquire segment tangible and intangible fixed
assets;
v. Total amount of expense included in the segment result for depreciation and amortization
in respect of segment assets for the period and other significant non cash expenses.

An enterprise that reports the amount of cash flows arising from operating, investing and
financing activities of a segment need not disclose depreciation and amortization expense and
non cash expenses of such segment.

An enterprise should present a reconciliation between the information disclosed for reportable
segments and the aggregated information in the enterprise financial statements. In presenting the
reconciliation, segment revenue should be reconciled to enterprise revenue; segment result
should be reconciled to enterprise net profit or loss; segment assets should be reconciled to
enterprise assets; and segment liabilities should be reconciled to enterprise liabilities.

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