Ind AS-108 Operating Segment

Operating segment

An operating segment is a component of an entity:

(a) 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),

(b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and

(c) for which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues.

Not every part of an entity is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or some functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the entity and would not be operating segments. For the purposes of this Ind AS, an entity’s post-employment benefit plans are not operating segments.

Chief operating decision maker

The term CODM identifies a function, not necessarily a manager with specific title. That functions to allocate the resources and assess the performance of the operating segment.

Generally C.E.O or C.O.O (chief operating officer) but it may be a group of executive directors.

Reportable segments

An entity shall report separately information about each operating segment that:

(a) has been identified or results from aggregating two or more of those segments, and

(b) exceeds the quantitative thresholds.

The standard specifies other situations in which separate information about an operating segment shall be reported.

Aggregation criteria

Two or more operating segments may be aggregated into a single operating segment if

  • aggregation is consistent with the core principle of this Ind AS;
  • the segments have similar economic characteristics; and
  • the segments are similar in each of the following respects:

(a) the nature of the products and services;

(b) the nature of the production processes;

(c) the type or class of customer for their products and services;

(d) the methods used to distribute their products or provide their services; and

(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

Quantitative thresholds

An entity shall report separately information about an operating segment that meets any

of the following quantitative thresholds:

  • Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.
  • The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of
  • the combined reported profit of all operating segments that did not report a loss and
  • the combined reported loss of all operating segments that reported a loss.
  • Its assets are 10 per cent or more of the combined assets of all operating segments.

Other situations in which separate information about an operating segment shall be reported

If any operating segment doesn’t meet the quantitate threshold, but reportable if economic characteristics or aggregation criteria is satisfied. (see para. of aggregation)

If the total external revenue reported by operating segments constitutes less than 75 percent of the entity’s revenue, additional operating segments shall be identified as reportable segments (even if they do not meet the criteria) until at least 75 per cent of the entity’s revenue is included in reportable segments.

Disclosure

An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

The entity shall disclose the

  • general information
  • information about reported segment profit or loss, including specified revenues and expenses included in reported segment profit or loss, segment assets, segment liabilities and the basis of measurement,
  • Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material segment items.

General information

  • factors used to identify the entity’s reportable segments, including the basis of organisation (for example, whether management has chosen to organise the entity around differences in products and services, geographical areas, regulatory environments, or a combination of factors and whether operating segments have been aggregated) ;
  • The judgements made by management in applying the aggregation criteria. This includes a brief description of the operating segments that have been aggregated in this way and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics; and
  • Types of products and services from which each reportable segment derives its revenues.

Information about profit or loss, assets and liabilities

An entity shall report a measure of profit or loss for each reportable segment. An entity shall report a measure of total assets and liabilities for each reportable segment if such amounts are regularly provided to the chief operating decision maker. An entity shall also disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit or loss:

(a) revenues from external customers;

(b) revenues from transactions with other operating segments of the same entity;

(c) interest revenue;

(d) interest expense;

(e) depreciation and amortisation;

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

(g) the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;

(h) income tax expense or income; and

(i) material non-cash items other than depreciation and amortisation.

An entity shall report interest revenue separately from interest expense for each reportable segment unless a majority of the segment’s revenues are from interest and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segment and make decisions about resources to be allocated to the segment. In that situation, an entity may report that segment’s interest revenue net of its interest expense and disclose that it has done so.

An entity shall disclose the following about each reportable segment if the specified amounts are included in the measure of segment assets reviewed by the chief operating decision maker or are otherwise regularly provided to the chief operating decision maker, even if not included in the measure of segment assets:

(a) the amount of investment in associates and joint ventures accounted for by the equity method, and

(b) the amounts 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.

Measurement

The amount of each segment item reported shall be the measure reported to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing an entity’s financial statements and allocations of revenues, expenses, and gains or losses shall be included in determining reported segment profit or loss only if they are included in the measure of the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets and liabilities that are included in the measures of the segment’s assets and segment’s liabilities that are used by the chief operating decision maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss, assets or liabilities, those amounts shall be allocated on a reasonable basis.

 If the chief operating decision maker uses only one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities in assessing segment performance and deciding how to allocate resources, segment profit or loss, assets and liabilities shall be reported at those measures. If the chief operating decision maker uses more than one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities, the reported measures shall be those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity’s financial statements.

An entity shall provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following:

(a) the basis of accounting for any transactions between reportable segments.

(b) the nature of any differences between the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before income tax expense or income and discontinued operations (if not apparent from the reconciliations). Those differences could include accounting policies and policies for allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.

(c) The nature of any differences between the measurements of the reportable segments’ assets and the entity’s assets (if not apparent from the reconciliations) Those differences could include accounting policies and policies for allocation of jointly used assets that are necessary for an understanding of the reported segment information.

(d) the nature of any differences between the measurements of the reportable segments’ liabilities and the entity’s liabilities (if not apparent from the reconciliations). Those differences could include accounting policies and policies for allocation of jointly utilised liabilities that are necessary for an understanding of the reported segment information.

(e) the nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.

(f) the nature and effect of any asymmetrical allocations to reportable segments. For example, an entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

Reconciliations

An entity shall provide reconciliations of all of the following:

(a) the total of the reportable segments’ revenues to the entity’s revenue.

(b) the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.

(c) the total of the reportable segments’ assets to the entity’s assets if the segment assets are reported.

(d) the total of the reportable segments’ liabilities to the entity’s liabilities if segment liabilities are reported.

(e) the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.

All material reconciling items shall be separately identified and described. For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity’s profit or loss arising from different accounting policies shall be separately identified and described.

Restatement of previously reported information

  • If an entity changes the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, shall be restated unless the information is not available and the cost to develop it would be excessive. The determination of whether the information is not available and the cost to develop it would be excessive shall be made for each individual item of disclosure. Following a change in the composition of its reportable segments, an entity shall disclose whether it has restated the corresponding items of segment information for earlier periods.
  • If an entity has changed the structure of its internal organisation in a manner that causes the composition of its reportable segments to change and if segment information for earlier periods, including interim periods, is not restated to reflect the change, the entity shall disclose in the year in which the change occurs segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive

Information about major customers

 An entity shall provide information about the extent of its reliance on its major customers. If revenues from transactions with a single external customer amount to 10 per cent or more of an entity’s revenues, the entity shall disclose that fact, the total amount of revenues from each such customer, and the identity of the segment or segments reporting the revenues. The entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from that customer. For the purposes of this Ind AS, a group of entities known to a reporting entity to be under common control shall be considered a single customer. However, judgement is required to assess whether a government (including government agencies and similar bodies whether local, national or international) and entities known to the reporting entity to be under the control of that government are considered a single customer. In assessing this,the reporting entity shall consider the extent of economic integration between those entities.

Information about products and services

 An entity shall report the revenues from external customers for each product and service, or each group of similar products and services, unless the necessary information is not available and the cost to develop it would be excessive, in which case that fact shall be disclosed. The amounts of revenues reported shall be based on the financial information used to produce the entity’s financial statements.

Information about geographical areas

An entity shall report the following geographical information, unless the necessary information is not available and the cost to develop it would be excessive:

  • revenues from external customers

(i) Attributed to the entity’s country of domicile; and

(ii) Attributed to all foreign countries in total from which the entity derives revenues.

If revenues from external customers attributed to an individual foreign country are material, those revenues shall be disclosed separately. An entity shall disclose the basis for attributing revenues from external customers to individual countries.

  •  Non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts
  • located in the entity’s country of domicile; and
  • located in all foreign countries in total in which the entity holds assets. If assets in an individual foreign country are material, those assets shall be disclosed separately.

The amounts reported shall be based on the financial information that is used to produce the entity’s financial statements. If the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed. An entity may provide, in addition to the information required by this paragraph, subtotals of geographical information about groups of countries.

Important:

  • If consolidation is apply, then operating segment is apply only for consolidate financials (i.e. not for both separate and consolidated financials.)
  • If an entity discloses the information relating to segment even not required complying with Ind AS 108, such information not to be described as segment information.
  • If management judges that an operating segment identified as a reportable segment in the immediately preceding period is of continuing significance, information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria
  • If an operating segment is identified as a reportable segment in the current period, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria for report ability in the prior period, unless the necessary information is not available and the cost to develop it would be excessive

Priyansh Minocha

Priyansh Minocha is C.E.O and Director at Amonest India Private Limited and Founder at Casolutionsglobal

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