2020-05-08 10:15:20Accounting & TaxesEnglishAccounting standard 17 deals with segment reporting that was established to help better understand the performance risk and returns of an...https://quickbooks.intuit.com/in/resources/accounting-taxes/accounting-standard-17/Accounting Standard 17 (AS 17): Segment Reporting

Accounting Standard 17 (AS 17): Segment Reporting

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Accounting standard 17 deals with segment reporting that was established to help better understand performance risk and returns of an enterprise. It deals with the provisions pertaining to the reporting of segment information in order to meet the needs of the users of the financial statements.

In this article you will learn different ways in which an entreprise can take segment reporting, identifying reportable segments, business and geographical segments, reportable segments etc.

Applicability of AS 17

Following are the categories of entreprises to which accounting standard 17 applies for a given accounting period:

  • entreprises with equity or debt securities listed in India and outside India
  • entreprises in the process of listing their equity or debt securities as acknowledged by board of directors
  • banks including cooperative banks
  • financial institutions
  • entreprises into insurance business
  • entreprises having turnover exceeding Rs. 50 crores immediately preceding the accounting period. Here turnover does not include other income
  • entreprises having borrowings including public deposits exceeding Rs. 10 crores during a a given accounting period
  • holding and subsidiary entreprises of any of the above during a given accounting period

Business and Geographic Segments

Business Segment

Business segment is a distinguishable unit of an entreprise engaged in providing individual product or service or a group of related products or services. Further, it is subject to risk and returns that are different from those of other business segments.

Geographical Segment

Business segment is a distinguishable unit of an enterprise engaged in providing products or services within a particular economic environment. Further, it is subject to risk and returns that are different from units operating in other economic environments.

Other Definitions

Reportable Segment

It is a business or geographical segment for which segment information is required to be disclosed.

Enterprise Revenue

It is revenue from sales made to external customers as reported in profit and loss statement.

Segment Revenue

It is the total of:

  1. fraction of entreprise revenue directly attributable to a segment
  2. portion of entreprise revenue that can be allocated on a reasonable basis to a segment
  3. revenue from transactions with other segments of the enterprise

Segment Expense

It is the total of:

  1. expense resulting from the operating activities of a segment directly attributable to the segment
  2. portion of entreprise expense that can be allocated on a reasonable basis to the segment including expense related to transactions with other segments of the entreprise

Segment Result

It is the difference between segment revenue a segment expense

Segment Assets

These are:

  • operating assets employed by a segment in its operating activities and
  • are either directly attributable to a segment or can be allocated to a segment on a reasonable basis

Segment Liabilities

These are:

  • operating liabilities employed by a segment in its operating activities of a segment and
  • are either directly attributable to a segment or can be allocated to a segment on a reasonable basis

Identifying Reportable Segments

In order to determine whether entreprise will consider business segments or geographical segments as the primary segment reporting format, the dominant source and nature of risks and returns of an entreprise are considered.

  • The primary format for reporting segment information should be business segments if the risks and returns of an entreprise are majorly impacted by variations in the products and services it produces
  • The primary format for reporting segment information should be geographical segments if the risks and returns of an entreprise are majorly impacted by the geographical areas in which it operates
  • To identify the predominant source and risk and return of an entreprise, internal organization and management structure of an entreprise, as well as the system of the internal financial reporting to the top management, is generally considered. There can be two possibilities:
    • The entreprise can consider business segments as its primary segment reporting format and geographic segments as its secondary format. This is the case when risk and returns of an entreprise get majorly affected both by differences in products and services it produces and by differences in geographical areas in which it operates.
    • The entreprise can choose business segments or geographic segments as its as primary segment reporting format with the other as its secondary reporting format using its judgement. This is the case where the internal organization and management structure of an entreprise and its system of internal financial reporting to the top management are neither based on individual products or services nor on geographical areas. In case the segments reported internally to the top management do not comply with the definition of the business and geographical segment as mentioned above, in such case management must consider next lower level of internal segmentation that reports informations along product or service lines or geographical lines.

Reportable Segments

A business segment or geographical segment is identified as a reportable segment if:

  • revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue of all segments
  • Segment result is 10% or more of the following whichever is greater in absolute amount:
    • combined result of all segments in profit
    • combined result of all segments in loss
  • Segment assets are 10% or more of total assets of a segment

Segment Accounting Policies

Segment information must be prepared as per the accounting policies adopted for preparing and presenting the entreprise’s financial statements. Furthermore, assets and liabilities that jointly relate to two or more segments should be allocated to the respective statements. Provided their related revenues and expenses are allocated to such segments.

Primary Reporting Format

Following are the items that an entreprise must disclose for each reportable segment:

  • Segment revenue
  • Segment result
  • Total carrying amount of segment assets
  • Total amount of segment liabilities
  • Cost incurred in a given period to acquire segment assets expected to be used during more than one period
  • Expense included in segment result for depreciation and amortization pertaining to the segment assets for the period
  • Significant non – cash expenses other than depreciation and amortization in respect of segment assets that were included in segment expense and thus deducted while measuring segment result

Furthermore, an entreprise need not disclose depreciation and amortization expense as well as non cash expenses of a segment if it reports the amount of cash flows arising from operating, investing and financing activities of such a segment.

In addition to this, the entreprise should also present reconciliation between information disclosed for reportable segments and aggregated information in the entreprise financial statements.

Secondary Segment Information

If the Primary Segment Reporting Format is Business Segments

If the primary format of segment reporting is business segments, following information should also be reported:

  • segment revenue from external customers by geographical area based on the geographical location of its customers. Provided the revenue from sales to external customers for each geographical segment is 10% or more of entreprise revenue
  • total carrying amount of segment assets by geographical location of assets provided the segment assets for each geographical segment are 10% or more of the total assets of all geographical segments
  • total cost incurred during the period to acquire segment assets expected to be used for more than one period by geographical location of assets. Provided segment assets for each geographical segment are 10% or more of total assets of all geographical assets

If the Primary Segment Reporting Format is Geographical Segments

There are cases where primary format of segment reporting is geographical segments (whether based on location of assets or location of customers). In such a case, the entreprise should also report following segment information for each business segment having revenue from sale to external customers equal to 10% or more of entreprise revenue or having segment assets equal to 10% or more of total assets of all business segments:

  • segment revenue from external customers
  • total carrying amount of segment assets
  • total cost incurred during the period to acquire segment assets expected to be used during more than one period

If the Primary Segment Reporting Format is Geographical Segments Based on Location of Assets

There is another case where the primary format of segment reporting is geographical segments based on location of assets. And the location of customers is different from the location of its assets. In such a case, entreprise should also record revenue fro sale to external customers for each customer based geographical segment. Provided that revenue from sales to external customers is 10% or more of entreprise revenue.

If the Primary Segment Reporting Format is Geographical Segments Based on Location of Customers

There is another case where the primary format of segment reporting is geographical segments based on location of customers. And the assets of the entreprise are located in different geographical areas from its customers. In such a case entreprise should also report the following segment information for each asset based geographical segment provided revenue from sales to external customers or segment assets are 10% or more of total entreprise amounts:

  • total carrying amount of segment assets by geographical location of assets
  • total cost incurred during the period to acquire segment assets expected to be used for more than one period by location of the assets
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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