IND AS 108: OPERATING SEGMENTS

Applicability: Ind AS 108 does not contain the applicability criterion, as the standard applies
to all entities to whom Ind AS is applicable. There are no exemption from disclosures on the
grounds that disclosures will be seriously prejudicial to the interest of the entity. Ind AS 108
applies both to standalone and consolidated financial statements.

Scope: If a financial report contains both the consolidated financial statements of a parent
that is within the scope of this Indian Accounting Standard as well as the parent’s separate
financial statements, segment information is required only in the consolidated financial
statements.

Identification of Segments: Ind AS 108 focuses on the internal decision making and
performance measurement structure of an entity to identify its segments.

It requires those business activities to be identified as operating segments for which the
operating results are regularly reviewed by the chief operating decision maker (CODM) to
make decisions about resource allocation and performance measurement.

Definition of Operating Segment

 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, i.e., vertical segment),
 Whose operating results are regularly reviewed by the entity's CODM to make
decisions about resources to be allocated to the segment and assess its
performance, and
 For which discrete financial information is available.

Corporate headquarters are not operating segments because they do not earn any revenue.

The standard does not prescribe how detailed the information should be to classify as
discrete financial information. It is a matter of judgement

Reportable segments: Under Ind AS 108 a reportable segment is an operating segment that
meets either of the following criteria:

 Contributes 10% or more of the entity's total sales (including inter-segment sales)
 Earns 10% or more of the combined reponed profit of all operating segments that
did not report a loss (or 10% or more of the combined reported loss of all operating
segments that reported a loss)
 Has 10% or more of the combined assets of all operating segments

If the total external revenue reported by operating segments constitutes less than 75% of
the entity's revenue, additional operating segments will be identified as reportable
segments until at least 75% of the entity's revenue is included in reportable segments.
Ind AS 108 does not specify which of the remaining operating segments should be selected
to achieve the 75 per cent threshold. Theoretically, an entity may report any additional
operating segment as per its choice. However, to give useful information to the users of
financial statements an entity should select the next most meaningful operating segment.
(Both quantitative and qualitative factors to be considered)

Disclosures

 The factors used to identify the entity's reportable segments, including discussion of
how the entity is organized and whether operating segments have been aggregated.
 The judgements made by management in applying the aggregation criteria which
includes a brief description of the operating segments that have been aggregated
and the economic indicators that have been assessed in determining that the
aggregated operating segments share similar economic characteristics.
 The types of products and services from which each reportable segment receives its
revenue.

Explanation of the measurement basis to be provided including

 Basis of accounting for inter-segment transactions

 Nature of differences between the measurement of reportable segments’ profit/loss
and as per entity’s financial statements in accordance with Ind AS
 The nature of any changes from prior period in the measurement methods
 The nature and effect of any asymmetrical allocations to reportable segments.

Reconciliations: Ind AS 108 requires reconciliation between the reportable segments' and
the entity's total revenue, profit or loss, segment assets, liabilities and every material item
of information to be disclosed. Further, the details of major reconciling items are required
to be disclosed. Information that cannot be reconciled to financial statements should not be
provided in segment disclosures, for example, operational data of the company.

Restatement: In case of change in structure of internal organization that causes change in

composition of its reportable segments then corresponding information for earlier periods
will be restated unless the information is not available and the cost to develop will be
excessive.

It is the ability of a segment to earn revenues rather than the mere existence or an
allocation of revenue that is determinative.

5 Step Practical Application of Ind AS 108

1. Identify the CODM

CODM is the apex decision maker engaged in assessing the performance of a
component of an entity and allocation of resources to them.
 For eg:
- The board of directors may be CODM in case major operating decisions are taken
by them, but if the CEO has rights to override the BoD, then the CEO is CODM.

2. Identify Operating Segments

Under Ind AS 108, operating segments are the individual operations that the CODM
reviews for purposes of assessing performance and making resource allocation
decisions.
For eg:
- Two companies selling automobile components may have different methods of
segment reporting, on a regional basis (North, South, East, West) or on a product
line basis (clutch, engines, seats,etc.)
- A company may determine segments in India on product-line basis while same
company may determine its UK based branch on geographic basis
- Despite a lack of revenue, a start-up operation may qualify as an operating
segment.
- However, corporate activities would not generally qualify as operating segments
under Ind AS 108, because typically they are not business activities from which
the entity may earn revenues.
- In case of matrix forms of organization, judgement determines which are
operating segments.

3. Aggregate Operating Segments

Two or more operating segments may be aggregated when they have similar
characteristics and can be expected to have essentially same future prospects.

Aggregation is performed before determining which segments are reportable.

Therefore two segments that would otherwise be individually reportable (crossing
thresholds) can be aggregated into one.

It is inappropriate to aggregate an investee operating segment with the investor

operating segment even if they are of same category. Additionally it will be generally
inappropriate to aggregate an investee operating segment with another investee
operating segment.

If the effect of different regulatory environments is that operating segments are not
similar, then they cannot be aggregated.

When determining whether the nature of the product or service is similar,

judgement will be required. An entity with a relatively narrow product range may
consider two products not to be similar, whereas an entity with a broad product
range may consider those same two products to be similar.
 Eg: When a company caters to different classes of customers, then other factors such
as marketing/promotion method/distribution channel, etc. need to be considered.

The production processes of two or more operating segments may be considered

similar if they have common or interchangeable manufacturing facilities, employees
and raw materials. However, all the other aggregation criteria still need to be met to
aggregate the two operating segments.

4. Determine Reportable Segments

In case an entity uses different measures for segment profitability and segment
assets, a consistent basis of measurement should be developed by the entity to
perform the 10% test

5. Disclose Segment Information

The segment information to be disclosed for a reportable segment needs to be

consistent with the concept of the management approach and the core principle of
Ind AS 108. Therefore, the segment information that is disclosed is determined on
the same basis as it is reported to the CODM.

If the entity uses more than one measure, the reporting will be in such measure that
management determines are in most accordance with those used in the financial
statements.

If management judges that an operating segment identified as a reportable segment in the

immediately preceding year to be of continuing significance, information about that
segment should continue to be reported separately in the current period notwithstanding
that it no longer exceeds any of the 10 per cent thresholds.

There is no specific guidance on the meaning of 'continuing significance.' In the author's

view, an operating segment may be construed as having continuing significance for the
current financial statements when, for example (not an exhaustive list):

 Its decline below the 10 per cent thresholds is considered temporary and likely to
reverse;
 If the management considers the segment to be of strategic importance.

Ind AS 108 does not make any distinction between continuing and discontinued operations.
Accordingly, some, or all, of the operations included in an operating segment may be
presented as discontinued. When operations in a segment are being scaled down, that by
itself, will not impact whether it qualifies as an operating segment.

However, Ind AS 108 will not apply to a segment that consists entirely of discontinued
operations because of Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations, which states as follows. Ind AS 105 specifies the disclosures required in respect
of non-current assets (or disposal groups) classified as held for sale or discontinued
operations.

Case 1: Company has functional currency INR, but CODM is foreigner and segment
information is reported to him in USD. In case the CODM decides it is more useful for users
to disclose segment information in the financial statements in INR.
In such case explanatory note must be given

Case 2: Company provides cash incentives to customers exceeding the revenue. In P/L these
are included as negative revenue in accordance with IND AS 115. However, in segment
disclosures to CODM, these cash incentives are presented as an expense.
In such a case, segment information to be presented in the same manner as used by CODM.
Additionally it will result in reconciling items between the P/L and the segment disclosures.

Case 3: In case of an investee identified as a reportable segment, disclosure will be made as

reported by the investee’s financial statements.
If the information received for the investee is proportionate to the entity’s share, the entity
should disclose such proportionate amounts.

Case 4: A Parent and its subsidiary' have the same business. Do the operating segments
reported by the subsidiary need to be the same as those of parent company?
NO, as CODM for both can be different and thus segmentation will be decided by respective
CODM. For CFS purposes, segments should be determined as per CODM of parent co views.

Practical Guidance on Entity-wide Disclosures

Ind AS 108 requires an entity to provide breakup of revenue and non-current assets on the
basis of geographical areas, divided into country of domicile and foreign countries.

Generally, country of domicile is a country or registration of an entity where it has its legal
address or registered office, or which is considered in law as the centre of its corporate
affairs.

Entity wide disclosures are based on financial information used to produce financial
statements. Judgement is required to disclose revenue by county. Even if an entity
determines that it has only one single reportable operating segment, the entity wide
disclosures are required.

Revenues from a single external customer amount to 10% or more of the entity's total
revenues, the total revenues from each such customer and the identity of segments
reporting such revenues must be disclosed. However, names of such customers are not
required to be disclosed. A group of entities under common control are considered as a
single customer.
Ind AS 108 requires the use of APM's for segment disclosures, if that is how, the chief
operating decision maker evaluates the segment for internal purposes. The use of APMs in
segment disclosures, seems to be on the rise globally.