Ind AS 108 Operating Segments MAY 18, 2017

Transcription

1 Ind AS 108 Operating Segments MAY 18, 2017

2 Agenda Scope and overview The Chief Operating Decision Maker (CODM) Operating Segments Reportable Segments Disclosure

3 Scope Scope Applies to all companies covered by the reporting requirements of Ind AS. Core principle: 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. There is a growing focus of transparency in the bedrock of corporate financial reporting. Relevant information is required by stakeholders - investors, analysts and other users of financial statements for evaluating the sustainability and growth of a company. This standard aims to facilitate a better understanding of the financial statements, to the users of the financial statements with more meaningful disclosures

4 Overview: 4-step management approach Step 1 Identify the CODM Step 2 Identify operating segments Step 3 Determine reportable segments Step 4 Disclose segment information

5 Step 1: Identify the CODM Highest level of management responsible for: Allocation of resources Assessment of performance CODM is a function and not a title One CODM per reporting entity CODM could be a body or a person (e.g. Board of directors, CEO, Managing Director, Chairman) Operating segments are based on information regularly reviewed by the CODM A group of executives who merely approve management decisions would not represent a CODM if they are not involved in allocating resources.

6 Case studies: CODM ABC Limited s Executive Committee comprises CEO, COO and President Committee assesses performance and makes resource allocation decisions Each Committee member has a single vote Can you identify the CODM? Executive committee is the CODM Same as previous scenario, except that the President can override a vote of the Committee Same as previous scenario, except that a Supervisory Board reviews the operation of the Committee In each case, can you identify the CODM? 1 st scenario President 2 nd scenario Executive Committee

7 Not an operating segment Step 2: Identify operating segments Is the component able to earn revenues and incur expenses? Yes No Which of these are valid bases for identifying operating segments? Are the component s results reviewed regularly by the CODM to allocate resources/assess performance? Yes Is discrete financial information for the component available? Yes No No a) Products b) Services c) Customers d) Geography e) Legal entity f) Individual plants g) Individual properties Operating segment

8 Case studies: Identifying Operating segments XYZ Limited s operates in mining industry and has gold, copper and coal as its business components CODM makes resource allocation decisions based on financial performance of each of these three business components Please identify the operating segment (s)!!! Each of the business components will be operating segment even all of them are in mining industry PQRS Limited has four business components (P, Q, R & S) P and Q are located in India. Each manufactures and sells a different product to Indian customers. R and S are located in Europe. These business components are organized to mirror the Indian operations - i.e. each manufactures and sells its products but to European customers. CEO assesses performance, makes operating decisions and allocates resources to these business components based on the financial information presented on a product-line basis. M's president of the US operations is responsible for assessing performance, making operating decisions and allocating resources to the business components in the US and is directly accountable to the CODM. Please identify the operating segments!!! P and Q India (Productline basis) R and S Europe (Geographical basis)

9 Operating segments might include Start-up operations May not earn revenues but incur expenses Discrete financial information is available and used by CODM Vertically integrated operations (e.g. petrochemical company) Petrochemical companies Automobile companies Certain corporate activity Treasury, legal, HR and R&D These functions might be reflected as business units for internal reporting purposes. Typically, these are not units from which revenues are earned Jointly controlled entities and associates Unilateral control over investee s activities or control over performance is not required to satisfy the definition of operating segment

10 Cannot aggregate Aggregation of operating segments Consistent with core principle? No Yes Similar economic characteristics? Nature of products and services Nature of production processes Yes Similar in each of the following: Yes Distribution methods Regulatory environment Types of customers No No May be aggregated

11 Similar economic characteristics Long-term average gross margins Useful to consider: Sales metrics Trends in sales growth Return on assets Capital investment levels Operating cash flows Also, consider the future Also consider: Competitive / operating risks Currency risks Economic / political conditions

12 Case study: Aggregation of operating segments Company T is a tour operator providing services in three neighbouring European countries, each of which is determined to be an operating segment. The CODM reviews the operating results of each operation separately to assess the individual performance of and to allocate resources to each one. Can the company aggregate its operations based on economic characteristics? May not be in line with the CORE PRINCIPLE Automobile supplier with same products (Basic Vs Luxury product) 1 st scenario - Yes Manufacturer of basic cleaning solution (Commercial use and Home use) Is aggregation possible in each of these scenarios? 2 nd scenario - No

13 Step 3: Determine reportable segments Revenue or Profit or loss 10% of combined revenue for all segments (internal and external) 10% of absolute combined profit or combined loss (whichever is greater) or Assets 10% of combined assets for all segments Reportable segments But external revenue of reportable segments must be 75% of total revenue

14 Remaining operating segments Report separately if useful Additional aggregation opportunity: Similar economic characteristics Majority of aggregation criteria met All other segment category

15 Disclosure Disclosures Details General information Factors used to identify the entity s reportable segments, including the basis of organization Types of products and services from which each reportable segment derives its revenues Brief description of the operating segments that have been aggregated along with their operating segments Information about profit or loss, assets and liabilities measure of profit or loss for each reportable segment measure of total assets and liabilities for each reportable segment revenues from external customers; Inter-segment revenue transactions Depreciation and amortisation Interest revenue and interest expense Material items of income and expenditure Income tax expense Reconciliations Total of the reportable segments revenue to the entity s revenue Total of the reportable segments measure of profit or loss to the entity s profit or loss before tax Total of the reportable segments assets / liabilities to the entity s assets / liabilities Entity wide disclosures Information about products and services Information about geographical areas Information about major customers (i.e., with 10% or more of entity s revenues) Information about major customers The fact Total amount of revenues from each such customer The identity of the segment or segments reporting the revenues

16 Key differences Ind AS 108 Vs AS 17 Particulars Ind AS 108 AS 17 Identification of segments Identified based on the manner in which the entity s financial information is reviewed by CODM Segments were identified and measured based on risks and returns of an entity s different products or services for a business segment and different economic environments for a geographic segment Aggregation 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 in aspects such as nature of products/ services, production process, class of customers etc. No such option Disclosure of major customers Additional disclosure stating The fact Total amount of revenues from each such customer The identity of the segment or segments reporting the revenues No such requirement

17 Practical difficulties Identification of CODM and operating segments The CODM's identity and will not always be clear and will depend on the entity s structure. Hence, the CODM will vary from entity to entity. Therefore, judgement is required to ensure that the right person has been identified as CODM. IBM and Microsoft CEO, Wipro Chairman and Manging Director, Tata Consultancy Services CEO and Managing Director Basis of segmentation Company Industry Segments identified Product based Apple Inc Electronics iphone ipad Mac Service based Larsen & Toubro Multiple Infrastructure Power Heave Engineering Services Others Elec Automation IT & ITES FS Developmental projects Geographic InterGlobe Aviation Transport Domestic International Customers TATA Consultancy Information technology Banking, FS Manufacturing Retail and consumer Communication

18 Points to remember 1) The CODM is a function and not a title 2) Operating segments are based on results regularly reviewed by the CODM 3) Operating segments are aggregated only if strict similarity tests are met 4) Reportable segments are based on quantitative threshold tests 5) Both segment-specific and entity-wide disclosures are required

19 Thank you CA S K JEGADESAN SKJEGADESAN@GMAIL.COM MOBILE: