Segment Reporting: Meaning, Terminology, Need and Disclosures

Meaning of Segment Reporting:

Segment of business is defined as “Component of an entity whose activities represent a separate

major line of business or class of customer. A segment may be in the form of a subsidiary or division
or a department, and in some cases a joint venture or other non-subsidiary investee, provided that
its assets, results of operations and activities can be clearly distinguished, physically and
operationally and for financial reporting purposes from the other assets, results of operations and
activities of the entity.”

Business Segment:

Business Segment is a distinguishable part of an enterprise that is involved in providing an individual

product or service or a group of related product, or services and that is subject to risks and returns
that are different from those of other business segments.

Geographical Segment:

Geographical Segment is a distinguishable part of an enterprise that is involved in providing products

or services within a particular economic environment and that is subject to risks and returns that are
different from those of components operating in other economic environments.

Reportable Segment:

Reportable Segment is a business segment or a geographical segment identified based on the

foregoing definition for which segment information is required to be disclosed.

Terminology of Segment Reporting:

1. Segment Revenue:

Segment Revenue reported in the statement of profit and loss of an enterprise that is directly
attributable to a segment and the relevant portion of enterprise revenue that can be allocated on a
reasonable basis to a segment, whether from sales external customers or from transactions with
other segments of the same enterprise.

Segments revenue does not include:

(a) Extraordinary’ items.

(b) 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.

(c) Gain on sales of investments or gains on extinguishment of debt. Unless the operations of the
segment are primarily of a financial nature.

2. Segment Expense:

Segment Expense is an Expense resulting from the operating activities of a Segment that is directly
attributable to the segment and the relevant portion of an expense that can be allocated on a
reasonable basis to a segment, including expenses relating to sales to external customers and
expenses relating to transactions with other segments of the same enterprise. Segment expense
does not include. (As per AS—17)

(a) Extraordinary items.

(b) Interest; Including interest incurred on advances or Loans from other segments unless the
operations of the segment are primarily of a financial nature.

(c) Losses on Sale of Investments or losses on extinguishment of debt unless the operations of the
segment are primarily of a financial nature.

(d) Income tax expense.

(e) General administrative expenses, head office expenses, and other expenses that arise at the
enterprise level and relate to the enterprise as a whole. However costs are sometimes incurred at
the enterprise level on behalf of a segment such costs are segment expenses if they relate to the
segment’s operating expenses and if they can be directly attributed or allocated to the segment on a
reasonable basis.

3. Segment Result:

Segment result is Segment revenue less segment expenses.

4. Segment Assets:

Segment Assets are those operating assets that are used 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.

5. Segment Liabilities:

Segment Liabilities are those operating liabilities which result from the operating activities of a
division and either are directly attributable to the division or can be allocated to the division on a
reasonable basis.

6. Segment Accounting Policies:

Segment accounting policies are accounting policies framed for preparing and presenting the
financial statement of the enterprise as well as those accounting policies that relate specifically to
segment reporting.

Need for Segment Reporting:

Diversified companies present a unique type of problem for investment decision making. The
performance of a diversified company can be judged from the performance of all several segments.
The success of diversified company depends on success of all segments that is why segmental
disclosures in company’s annual reports are more useful to investors and other user groups.
Institute of Chartered Accountants of India has emphasized on segment reporting reason being, it
can be helpful to the users of financial statements in many ways:

(i) Users of financial statements can better understand the performance of an enterprise.

(ii) Users can better assess the risks and return of an enterprise.

(iii) Users can make more informed judgment about the enterprise judgment about the enterprise as
a whole.

(iv) Users can benefit from an enhanced degree of comparability with other enterprises.

Disclosures and User Groups of Segment Reporting:

1. Investors:

Segment reporting provides investor’s information about profitability risk and growth of various
segments of enterprises operations. Investors will be in better position to assess accurately a firm’s
future earnings. Investor’s uncertainty about company’s prospects will thus be reduced with the
help of segment reporting.

2. Employees:

Employees and trade unions are also interested in the performance and prospects of the enterprise
from the stand point of wage negotiations and job security. Segment reporting helps them as it helps
investors.

3. Management:

Segment reporting is also helpful to the management while taking various important managerial
decisions. Management while taking policy decisions may need for information on segmental
performance. Lack of information on segmental performance may lead to misunderstanding
between Management and workers.

4. Government Agencies:

Government agencies at national and international level in the case of multinational companies, are
becoming more concerned by the activities of large companies and the balance; of payments.
Segment disclosures by the geographical location seem likely to promote a better understanding of
corporate strategy and its impact.

5. Consumers:

The Interests of consumers and the General public may also be promoted by segmental disclosures
in the sense that social responsibility in terms of the removal of price discrimination could be
encouraged by segment disclosures regarding profits.
Summary of IFRS 8

Scope
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]
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]
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 its assets are 10 per cent or more of the combined assets of all operating segments.
Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principles of the the standard, the segments have
similar economic characteristics and are similar in various prescribed respects. [IFRS 8.12]
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) until at least
75 per cent of the entity's revenue is included in reportable segments. [IFRS 8.15]

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]
judgements made by management in applying the aggregation criteria to allow two or more
operating segments to be aggregated [IFRS 8.22(aa)]#
information about the profit or loss for each reportable segment, including certain specified
revenues* and expenses* such as revenue from external customers and from transactions
with other segments, interest revenue and expense, depreciation and amortisation, income
tax expense or income and material non-cash items [IFRS 8.21(b) and 23]
a measure of total assets* and total liabilities* for each reportable segment, and the amount
of investments in associates and joint ventures and the amounts of additions to certain non-
current assets ('capital expenditure') [IFRS 8.23-24]
an explanation of the measurements of segment profit or loss, segment assets and segment
liabilities, including certain minimum disclosures, e.g. how transactions between segments
are measured, the nature of measurement differences between segment information and
other information included in the financial statements, and asymmetrical allocations to
reportable segments [IFRS 8.27]
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]