Sachin
Quick Summary
Summary of IND AS 108
Importance
- Important for the stakeholders to understand and evaluate the performance of the business.
- Not a part of Schedule III but a part of SEBI disclosure.
Guidelines
- Identify operating segments
- Aggregation of operating segments based on similar economic characteristics.
- Identify reportable segments.
- Preparation of segment reporting.
A. Identification of operating segments
Identification is based on 3 criterias. That is any operating segment should have 3 characteristics.
- Component of entity for which discrete financial information is available. (income, expense, assets, liability)
- Component of entity whose performance is evaluated and reviewed by the Chief Operating Decision Maker (CODM) for the purpose of allocation of resources and better decision making.
- Component of entity which generates revenue on its own and incurs expenditure too. It also includes a component which has already incurred expenses and is yet to generate revenue.
Note
- CODM is not a position in itself. It is a function. It can be performed by the CEO, COO, executive director, etc.
- AS 17 required segmentation into business segment wise and geographical segment wise based on risk and return approach. However IND AS 108 follows management approach.
B. Aggregation of operating segments
Operating segments are aggregated based on similar economic characteristics. It includes:
- Based on customer type
- Based on production process
- Based on distribution type
- Based on the products/services offered
- Based on the regulatory environment to which it belongs (eg: Banking, Insurance)
C. Quantitative thresholds
Separate financial information should be available for and presented for the operating segments that meet the following criterias:
a. Revenue of that segment should be atleast 10% of the total revenue. (Revenue includes external as well as inter-segment revenue)
b. Profit or loss from that segment should be atleast 10% of the total entity.
Eg: Whether profit or loss-it should be considered as absolute numbers
Take a total of 10 operating segments
|
Segment |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
|
Profit/(Loss) |
10 |
20 |
30 |
40 |
(20) |
(30) |
(50) |
(70) |
50 |
90 |
- Combined profits=240
- Combined losses=170
- Higher of the above is 240
- 10% of 240 is 24
Therefore segment with profit or loss greater than 24 is identified as a reportable segment.
c. Assets of that segment should be atleast 10% of the total assets.
Note:
- In case an operating segment does not meet the criteria of quantitative threshold and yet is found to be useful to the users of the financial statements, in such cases, the information shall be disclosed.
- In case a reportable segment in the previous year, enjoys a continuing significance from the previous year inspite of not qualifying a quantitative threshold in the current year, the same shall be identified as a reportable segment and disclosed.
- If the total external revenue reported by the operating segments does not constitute 75% of the external revenue then additional operating segments irrespective of them qualifying to be reportable segments based on quantitative thresholds shall be disclosed in order to report atleast 75% of the entity’s revenue.
Source: ICAI
FAQ :
IND AS 108 is important for stakeholders to understand and evaluate the performance of a business by providing guidelines on identifying and reporting operating segments.
An operating segment must be a component of the entity for which discrete financial information is available, whose performance is evaluated by the Chief Operating Decision Maker (CODM) for resource allocation, and which generates its own revenue and incurs expenditure.
Unlike AS 17 which segmented based on business and geographical segments, IND AS 108 follows a 'management approach', identifying segments based on how the Chief Operating Decision Maker (CODM) manages the business.
A segment is reportable if its revenue, profit or loss (in absolute terms), or assets are at least 10% of the total entity's revenue, profit/loss, or assets, respectively.
Additional segments are disclosed if the total external revenue from identified operating segments is less than 75% of the entity's total external revenue, to ensure at least 75% is reported.
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