Ind AS 108 Operating Segments

CA Jyoti Malkani
18.04.2023
Scope

• This Accounting Standard shall apply to companies to which Indian Accounting Standards
(Ind AS) notified under the Companies Act apply.
• If an entity that is not required to apply IndAS 108 chooses to disclose information about
segments that does not comply with Ind AS 108, it shall not describe the information as
segment information.
• If a financial report contains both the consolidated financial statements of a parent that is
within the scope of IndAS 108 as well as the parent’s separate financial statements,
segment information is required only in the consolidated financial statements.
What is an Operating Segment

• A segment that satisfies all of the following conditions

 Engages in business activities from which it may earn revenue and incur expenses
(including inter segment transfer)

 Operating results are reviewed by entity’s CODM (Chief Operating Decision Maker)

 Discrete (separate & distinct) financial info is available

Structure – Example – Identify Segments?

Entity

CODM

Manager 1 Manager 2

Component Component Component Component

1 2 3 4

What about HEADQUARTERS?

Example 1

• ABC Ltd manufactures and sells healthcare products and food and grocery products.
These products namely A, B & C are manufactured. Product A is classified as health care
product and product B & C are classified as food and grocery products. Product B & C are
similar products. Discrete financial information is available for each manufacturing
locations and for the selling activity of each product. There are two line managers
responsible for manufacturing activities of products A, B & C. Manager X managers
product A and Manager B operates Product B & C . The operating results of health care
products A and food and grocery B& C are regularly reviewed by the CODM. Identify
reportable segments of ABC Ltd
Example 1- Solution

• In this situation both the healthcare and food and grocery product line meet the criteria for
operating segment.

• Therefore it is likely that ABC Ltd’s operating segments would be classified as being

o Healthcare

o Food & Grocery segments

Example 2

• X ltd is engaged in the manufacture and sale of two distinct type of products A & B. X ltd
also supplies the product in the domestic market in India as well as in Singapore. There
are two regional managers responsible for manufacturing activities of product A & B world
wide and also two other managers responsible for different geographical areas. For
internal reporting purposes, X Ltd provides information product-wise and as per the
geographical location of the company. The CODM regularly reviews the operating results
of both sets of components. How should X ltd identify its operating segments?
Example 2– Solution

• Core Principle: Entity should disclose information to enable users of its FS to evaluate
the nature and financial effects of the business activities in which it engages and the
economic environment in which it operates

• The entity should also assess whether the identified operating segments could
realistically represent the level at which the CODM is assessing performance and
allocating resources

• Thus X Ltd, should consider all the above factors and apply judgement to determine
which component should be disclosed as operating segment
Reportable Segment

• An entity should 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

• Standard specifies other situations in which separate information about an operating

segment should be reported
Reportable Segment

Identify CODM

Satisfies ALL 3
Identify Operating Segments Conditions
A. Satisfies Aggregation
Criteria, AND
Define Reportable Operating Segments B. Exceeds Quantitative
Thresholds
Disclose Information about each What happens to other than
Reportable Segment reportable segments?

Clubbed under the head “Other

Segments”
A – Aggregation Criteria

• Segments similar w.r.to-

 Long Term Financial Performance
 Economic Characteristics
 Nature of product/services
 Nature of production processes
 Type of class of customer for their products/ services
 Method used to distribute their products or provide their services
 Nature of regulatory environment
Example

• X ltd is engaged in the business of manufacturing and selling papers. Varietes of paper
like adhesive paper, anti-rust paper, art paper, antique paper etc. are manufactured and
sold by X Ltd. Should X Ltd, classify these papers into different segments?

• Solution
Two or more operating segments may be aggregated into a single operating segment if the
segments have similar economic characteristics, and the segments are similar with respect
to various factors like nature of the product, production process, type of customer, method
of distribution and regulatory requirement.
In case X Ltd, So far as varieties of paper concerned, if all factors such as nature of the
product and production process, type of customers, method of distribution and regulatory
requirement are common, there is no need to create different segments for each type of
paper
B- Quantitative Threshold (ANY)
Greater than or
equal to
10% of revenue (internal and external) for all
Revenue; OR
segments; or

10% of absolute combined profit or combined

Profit or Loss; OR
loss ( whichever is greater); or

Assets 10% of combined assets for all segments

Note:
External revenue of reportable segments must be greater than or equal to 75% of total
external revenue of the entity
Operating Segments that do not meet any of the quantitative thresholds may be considered
reportable and separately disclosed, if information about the segment is useful to users.
Example
• X Ltd, has identified the following business segments
Segment Revenue Profit Assets
External Internal
Pharma 97,00,000 NIL 20,00,000 55,00,000
FMCG NIL 4,00,000 2,50,000 25,00,000
Ayurveda 3.00.000 NIL 2,00,000 4,00,000
Others 8,00,000 41,00,000 5,50,000 6,00,000
Total for the entity 1,08,00,000 45,00,000 30,00,000 90,00,000

Which of the segments will be reportable segments as per IndAS 108

Solution

• Qualitative Threshold
Segments Pharma FMCG Ayurveda Others
% segment sales to total Sales 63.40 2.61 1.96 32.03
% segment profits to total Profits 66.67 8.33 6.67 18.33
% segment assets to total Assets 61.11 27.78 4.44 6.67
• As per quantitative Threshold Pharma and FMCG fit the criteria
• Now check criteria – 75% of the external revenue
• Thus Pharma qualifies to be the reportable segment
Important Points

• If segment is identified as reportable in CY – relevant comparative information of PY

should be presented unless it is impracticable to do so, Like:
 Information is not available
 Cost to develop it will be too expensive

• Once the number of reportable segments reaches to 10, entity should consider whether
“practical limit” reached.
Measurement

• Basic Rule
• What information is given to CODM for the purpose of making decisions like allocation of
funds to the segment and assessing the segment performance, the same should be
disclosed in the FS
• What if CODM is using more than one measure of segments P& L and assets &
liabilities?
• Then 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.
Minimum Disclosure

• Explanation for measurement of segment P&L

• Basis of accounting of inter-segment transactions
• Differences between measurement of
 Reportable Segments P&L Entities P&L & Discontinued operations
 Reportable Segments A&L Entities A&L
• Nature of change of measurement methods of profit or loss in CY from PY
• Nature and effect of any asymmetrical allocations to reportable segments
Reconciliation
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.
(d) the total of the reportable segments’ liabilities to the entity’s liabilities if segment
liabilities are reported in accordance with paragraph 23.
(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
• Entity to consider whether current operating segment disclosure continues to be
appropriate at each reporting date
• If an entity changes the structure of its internal organization such that the composition of
its reportable segments to change, it should restate the corresponding information of the
prior periods, including interim periods, unless the information is not available and the
cost to develop it would be excessive.
• Following a changes to be considered for change in internal organisation
 CODM
 Reporting package review by CODM
 Organisational Chart (business acquisition/ disposal)
 Budgeting process
 Communication to external parties (investors/ creditors/ customers)
• If entity does not alter comparatives it gives additional information in the CODM in
segmental info in old as well as new basis
Entity – wide disclosure
• Note: Applicable to all segments even if entity has one operating segment

Provided it is not provided as a part of reportable segment information as required by this IndAS

Information about product and Information about geographical Information about major
services areas customers

Reported revenue from external 1. Extent of reliance on its

Revenue from External major customers
customers of each product & Customers
service or a group of similar 2. Revenue from single external
product and services customer>=10% of entities
revenue
NCA other than financial 3. Disclosure of identity of &
instruments, DTA, post revenue form customers to
employment benefit assets, & be disclosed
rights under insurance contracts 4. Group of entities known to
are to be under the common
control shall be considered
single control
 1. Attributable to entity’s country of domicile, and
Revenue from External
2. Attributed to all foreign countries in total from which
Customers
the entity derives revenues

NCA other than financial

1. Located in entity’s country of domicile, and
instruments, DTA, post
2. Located in all foreign countries in total from which
employment benefit assets, &
the entity derives revenues
rights under insurance contracts
THANK YOU