Segment Reporting:

Meaning, Terminology, Need

and Disclosures
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Let us make an in-depth study of the meaning, terminology,

need and disclosures of segment reporting.
Meaning of Segment Reporting:
The AJCPA has defined a segment of business 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 AS17)

(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 segments 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
companys 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 investors information about profitability
risk and growth of various segments of enterprises operations.
Investors will be in better position to assess accurately a firms
future earnings. Investors uncertainty about companys 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.
A BUSINESS SEGMENT is a distinguishable component of an enterprise that is engaged in
providing an individual product or service or a group of related products or services and that
is subject to risks and returns that are different from those of other business segments.
A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is
engaged 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.
The risks and returns of an enterprise are both by the geographical
(1) location of production or service facilities and other assets of an enterprise and
(2) location of its customers. The definition allows geographical segments to be based on
any of the two.

A REPORTABLE SEGMENT is a business segment or a geographical segment identified

on the basis of foregoing definitions for which segment information is required to be
disclosed by the standard.

ENTERPRISE REVENUE is revenue is revenue from sales to external customers as

reported in the statement of profit and loss. (i.e. Sales made to external customers by all
segments)

(f) revenue directly attributable to segments

(g) revenue reasonably allocated to segment; and
(h) revenue from transactions with other segments.

SEGMENT EXPENSE is the aggregate of

(a) operating expense directly attributable to segment
(b) expenses reasonably allocated to segment; and
(c) expenses relating to transactions with other segments.

However, SEGMENT REVENUE/EXPENSE does not include

(a) Extraordinary items as defiened in AS-5

(b) Interest or dividend ( including earned/incurred on loans to other segment) unless the
operations of the segment are primarily of a financial nature
(c) Gains on sales of investments or on extinguishments of debt (Capital gain/loss) unless
the operations of the segment are primarily of a financial nature.
(d) General administration expenses, head office expenses and other expenses that arise at
the enterprise level and relate to the enterprise as a whole.

SEGMENT RESULT is segment revenue less segment expenses.

SEGMENT ASSETS are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable the segment or can be allocated to
the segment on a reasonable basis.

SEGMENT LIABILITIES are those operating liabilities that result from operating activities
and that either are directly attributable the segment or can be allocated to the segment on a
reasonable basis.
( If the segment result of a segment includes interest expense, its segment liabilities include
the related interest-bearing liabilities and vice versa.)
(Segment liabilities do not include income tax liabilities and vice versa.)
Similarly, if depreciation segment expenses then related assets comes under segment
assets.
Primary segment and Secondary segment
One among the two, Business Segment and Geographical Segment, is primary segment
and other becomes secondary segment. The reporting requirements for the primary and
secondary segments are different.

Basis for identifying primary and secondary segments

Risks and returns are the main criteria for identifying primary and secondary segments.
If the risks and returns of an enterprise are affected predominantly by differences in the
products, business segments are recognized as primary segments and geographical
segments as secondary segments and vice versa.
If the risks and returns of an enterprise are affected both by differences in the products as
well as differences in the locations in which it operates, then the enterprise should use
business segments as its primary segment and geographical segment as its secondary
segment.
 If risks and returns of an enterprise are affected neither by differences in products/services
nor by differences in geographical areas of operations, the management may elect any of
the two as primary with other being secondary segment.
(Internal organization and management structure of an enterprise and its system of internal
financial reporting to the board of directors and the CEO should normally be the basis for
identifying the predominant source and nature of risks and differing rates of return facing the
enterprise.)

Reportable Segments
A business segment or geographical segment should be identified as reportable segment if:
(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-
(1) the combined result of all segments in profit, or
(2) the combined result of all 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 business/reportable segment that is not a reportable segment as per above, may be

recognized as reportable segment despite its size at the discretion of the management of the
enterprise.

If total external revenue attributable to reportable segments constitutes less than 75% of
the total enterprise revenue, additional segments should be identified as reportable
segments, even if they do not meet 10% thresholds as above, until at least 75% percent
of the total enterprise revenue is included in reportable 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.

If Financial report contains both, then on the basis of CFS. Nomenclature:

1. Business Segment Distinguishable component of an enterprise, engaged in

providing an individual product or service or a group of related product or
services and subject to risks and returns exclusive of other segments. Factors to
be considered for classifying related products and services a. Nature of products
and services b. Nature of processing Class of customers Distribution system c.
Nature of domain (Banking,Insurance etc)

2. Geographical Segment Distinguishable component of an enterprise, engaged

in providing an individual product or service or a group of related product or
services within a specific environment and subject to risks and returns exclusive
of other segments. Factors to be considered in identifying Geographical Segment
a. Similarity of economic and political scene b.Proximity
 3. Enterprise Revenue Sales revenue from external customers (excludes internal
segment transfer)

4. Segment Revenue Includes revenue of- a. Specific segment b. Reasonably

allocable part of enterprise revenue c. Internal segment transfer If primarily a
financial segment includes a. Interest and dividend income b. Interest and
dividend income of advances and loans to other segments c.
Gains on sales of investment d. Gains on writing off of debts Excludes a.
Extraordinary items (as per AS 5) b. Non operational Interest and dividend
income c. Non operational Interest and dividend income of advances and loans
to other segments d. Non operational Gains on sales of investment e. Non
operational Gains on writing off of debts

5. Segment Expense Includes expense of a. Specific Segment b. Reasonably

allocable part of enterprise expense c. Reasonably allocable operationally
relevent part of administrative, head office and other expenses incurred on behalf
of the segment If primarily a financial segment includes- a. Interest expense b.
Interest expense on advances and loans from other segments c. Losses on sales
of investment d. Losses on writing off of debts Excludes a. Extraordinary
items (as per AS 5) b. Non operational Interest expense c. Non operational
Interest expense on advances and loans from other segments d, Non operational
Losses on sales of investment e. Non operational Losses on writing off of debts f.
Interest expense on overdrafts and operating liabilities of a specific segment g.
Income tax expense h. Administrative, head office and other expenses relevant to
whole enterprise

6. Segment Result Segment Revenue ( minus ) Segment Expense

7. Segment Assets Specific or reasonably allocable operating assets employed

by segment in operating activities If segment result includes interest or dividend
income then segment assets include related receivables, loans, investments or
other interest or dividend generating assets Income tax assets are excluded in
any case Relevant allowances and provisions are deducted before balance sheet
reporting

8. Segment Liabilities Specific or reasonably allocable operating liabilities of

segment from operating activities If segment result includes interest expense
then segment assets include related interest-bearing liabilities Income tax
liabilities are excluded in any case

9. Segment Accounting Policies Accounting policies applicable to enterprise as

well as specific segment policies. How to ascertain if a segment is reportable ?
Based on- a) Revenue Revenue of segment (external customers + internal
transfers) is atleast 10% of all segments. b) Profit or Loss Segment result ( higher
 of (combined result of all segments in profits or loss)) is atleast 10% of all
segments. c) Segment assets Segment assets are atleast 10 % of all segments.
If the segment becomes reportable in any one of the above tests then it becomes
a reportable segment. d) Preceeding data If segment reportable in previous
period, then reportable in current period also. e) Total External revenue If
external revenue of reportable segments less than 75% of total enterprise
revenue additional segments to be identified as reportable until 75% of external
revenue is included. f) Management Choice How to determine primary and
secondary reporting formats? Dominant source Reporting Format Primary
Secondary Differences in products and
services Business Geographic Differences in Geographic
locations Geographic Business Both
Business Geographic Neither Depending on
risks and returns more relevant to the segment

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overview--22324.asp

Segment reporting is the reporting of the operating segments of a company in the

disclosures accompanying its financial statements. Segment reporting is required for
publicly-held entities, and is not required for privately held ones. Segment reporting is
intended to give information to investors and creditors regarding the financial results and
position of the most important operating units of a company, which they can use as the
basis for decisions related to the company.

Under Generally Accepted Accounting Principles (GAAP), an operating segment engages

in business activities from which it may earn revenue and incur expenses, has discrete
financial information available, and whose results are regularly reviewed by the entity's
chief operating decision maker for performance assessment and resource allocation
decisions. Follow these rules to determine which segments need to be reported:

Aggregate the results of two or more segemnts if they have similar products, services,
processes, customers, distribution methods, and regulatory environments.
Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or
10% of the combined assets of the entity.
If the total revenue of the segments you have selected under the preceding criteria
comprise less than 75% of the entity's total revenue, then add more segments until you
reach that threshold.
You can add more segments beyond the minimum just noted, but consider a reduction if
the total exceeds ten segments.

The information you should include in segment reporting includes:

The factors used to identify reportable segments

The types of products and services sold by each segment
The basis of organization (such as being organized around a geographic region, product
line, and so forth)
Revenues
Interest expense
Depreciation and amortization
Material expense items
 Equity method interests in other entities
Income tax expense or income
Other material non-cash items
Profit or loss

The segment reporting requirements under International Financial Reporting Standards

are essentially identical to the requirements just noted under GAAP.