Operating Segment Reporting under Ind AS 108: What CAs Must Know

Segment reporting is financial disclosure, particularly for organizations with diverse business activities or operating in multiple economic conditions. The purpose is to equip the users of financial statements like investors, analysts, and regulators with detailed information on the major constituents of an organization, beyond what is available in consolidated financial statements.

Under Indian GAAP, AS 17 requires segment reporting based on products/services and geographical areas, identifying primary and secondary segments depending on which best reflects risks and returns.

In contrast, Ind AS 108 (Operating Segments) adopts a management approach, requiring segment information based on the entity’s internal organisation and reporting structures. This allows users to see the entity through the eyes of management, improving insights into future cash flows and decision-making processes.

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What is Operating Segment

Ind AS 108 defines an operating segment as a component of an entity that engages in business activities from which it may earn revenues and incur expenses, including transactions with other components of the same entity.

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The operating results of the segment must be regularly reviewed by the entity’s Chief Operating Decision Maker (CODM) to make decisions about resource allocation and to assess the segment’s performance. Additionally, discrete financial information for the segment must be available.

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Who is a Chief Operating Decision Maker (CODM)

The Chief Operating Decision Maker (CODM) is the highest-level function responsible for reviewing segment results and determining resource allocation. An entity must identify its CODM to properly define its operating segments.

The CODM is a function, not necessarily a specific manager, and is often the CEO, COO, a group of executive directors, or others responsible for resource allocation and performance assessment of operating segments.

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Principle of Operating Segment Reporting under Ind AS 108

The principle of Ind AS 108 is that an entity must disclose information enabling users to evaluate the nature and financial effects of its business activities and the economic environments in which it operates. It follows the management perspective approach, ensuring users receive a disaggregated view of operations, helping them make better investment decisions.

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In entities engaged in diverse industries or operating across different economic environments (e.g., India, Africa, Middle East), detailed segment disclosures help users understand performance, assess future cash flows, and make informed judgments. Economic environments cover dynamic factors like political systems, trade cycles, and industrial growth rates.

If a financial report includes both consolidated and separate financial statements of a parent entity, segment information is required only in the consolidated financial statements.

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Advantages of the management approach under Ind AS 108

• An ability to see an entity “through the eyes of management” enhances a user’s ability to predict actions or reactions of management that can affect the entity’s prospects for future cash flows.
• Information about those segments is generated for management’s use and hence the incremental cost of providing information for external reporting would be relatively low.
• Segments based on an existing internal structure would be less subjective compared to segments identified under AS 17.

Reportable Segments

Ind AS 108 requires entities to report both financial and descriptive information about their reportable segments. These segments are operating segments identified according to Ind AS 108 or aggregated segments that exceed the quantitative thresholds specified in the standard.

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Aggregation Criteria

Ind AS 108 allows two or more operating segments to be aggregated into a single segment if the following criteria are met:

• aggregation is consistent with the core principle of Ind AS 108, that is to 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;
• segments have similar economic characteristics; and
• the segments are similar in terms of product/service nature, production processes, customer type, distribution methods, and, if applicable, the regulatory environment.

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Quantitative Thresholds

An entity must report information separately for an operating segment that meets any of the following quantitative thresholds:

(1) its reported revenue (including both external and inter-segment sales) is 10% or more of the combined revenue of all operating segments;

(2) its reported profit or loss is 10% or more of the greater of the combined profit of profitable segments or the combined loss of loss-making segments;

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(3) its assets are 10% or more of the combined assets of all operating segments.

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Operating Segments that Do Not Meet the Quantitative Thresholds

Operating segments that do not meet the quantitative thresholds may still be reportable if management believes the segment's information is useful to users:

• If management believes that information about the segment would be useful to users of the financial statement.
• Two segments can be combined to produce operating segments only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria listed above.
• If the total external revenue reported by operating segments constitutes less than 75 percent of the entity’s revenue, additional operating segments shall be identified as reportable segments until at least 75 percent of the entity’s revenue is included in reportable segments.
•  If management judges that an operating segment identified as a reportable segment in the immediately preceding period is of continuing importance.

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Disclosures

An entity must disclose information to help users evaluate the nature and financial effects of its business activities and economic environments. For each period, this includes:

(1) general information about factors used to identify reportable segments and the types of products/services generating revenue;

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(2) segment profit or loss, including revenues and expenses reviewed by the chief operating decision maker (CODM), as well as segment assets, liabilities, and measurement basis;

(3) reconciliations of segment totals (revenues, profit/loss, assets, liabilities) to corresponding items in the entity’s financial statements.

As per paragraph 19 of Ind AS 108, there is no limit on the number of reportable segments. However, it does state that if the number of reportable segments identified exceeds ten, an entity should consider whether a practical limit has been reached.

It does not provide an exemption from disclosures on the ground that the board or management deems such disclosures prejudicial to the interests of the entity. Even if management of an entity concludes that disclosure of certain segment information will be prejudicial to the interests of the entity, the entity is required to make necessary disclosures.

Entity-wide Disclosures

Ind AS 108 requires all entities, including those with a single reportable segment, to provide entity-wide disclosures. These disclosures are made for the entire entity rather than by segment. Entity-wide disclosures are necessary when business activities are not organized by product/service differences or geographical areas.

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For instance, segments may report revenue from a wide range of products or services, or operate in the same geographical area. These disclosures are provided only if not already covered in segment information and include: (1) information about products and services, (2) geographical areas, and (3) major customers.

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What a CA must know

• Determine Operating Segments: Chartered Accountants have to determine distinct business components that are separate operating segments. This is done according to the nature and substance of an entity's operations, the internal organisation of the business, and the reporting of information to the Chief Operating Decision Maker (CODM).

• Identify Reportable Segments: CAs can assist in identifying those operating segments that are large enough to qualify as reportable based on quantitative criteria (e.g., revenue, profit/loss, assets).

• Making Disclosures: CAs should confirm that the entity provides disclosures as necessary regarding its reportable segments in the financial statements, such as revenues, profit/loss, assets, etc. They also assist in the formulation of this information according to the needs of Ind AS 108.

• Avoid Assumptions: Chartered Accountants must not assume the identity of the Chief Operating Decision Maker (CODM) based merely on job titles like CEO or CFO. Instead, they should carefully verify whether the CODM is an individual or a group of people who are actually responsible for allocating resources and assessing the performance of the operating segments.

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• Review Segments Periodically: Chartered Accountants need to ensure that segment reporting is not an annual ritual. Companies change; they can venture into new geographies, introduce new products, combine divisions, or alter their organizational structure.

• Thus, CAs need to periodically review and update the operating and reportable segments to correspond to any such organizational changes. When there are changes in the manner of running the business or the way the CODM examines information, the segment disclosures should be re-written accordingly.

• Compliance and Auditing: CAs have an important role in making sure that the company follows Ind AS 108 while preparing and auditing its financial statements. 

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