CA Shaifali Mathur, School of Business and Management, JNU, Jaipur

Introduction

Large business houses diversify their businesses in order to cope with the volatile economic conditions in the economy. This diversification can be in the form of creating businesses in different industries, customer groups, or widely scattered markets. The results of the business are reported in the form of consolidated financial statements. The preparation of consolidated financial statements, however, poses a problem for investors. It becomes difficult for them to gauge the future profitability of the company. For example, a large conglomerate has segments spanning various industries from textiles to construction, etc and the success of the organization will depend on the constitution and performance of the various segments. Here is where segmental reporting is very useful, especially for investors.

Segmental Reporting and its Benefits:

Segmental reporting involves reporting by corporate on the performance of each of its segments, in addition to providing the consolidated data of the group as a whole.

Financial Accounting Standards Board of the USA states “The purpose of the (segment) information is to assist financial statement users in analyzing and understanding the enterprise’s financial statements by permitting better assessment of the enterprises’ past performance and future prospects”.

Segmental reporting offers the following benefits:

 

• Information about various products and services of a company and its performance on operations in different segments can be as certain which is not possible to as certain from the consolidated accounting statements. 
• Segmental reporting offers more transparency in reporting of financial data.
• Helps the stakeholders like lenders, investors, government, etc to take more informed decisions with respect to the company as a whole.
• Facilitates better analysis of the risk and returns of the organization.
• Helps to analyze the most profitable or loss-making segments.

 

Keeping in mind the various advantages of segmental reporting, it was made mandatory for companies in India via Accounting Standard 17. Provisions of AS 17 are applicable with effect from 1stApril2001, for all companies that are listed on an Indian Stock Exchange or that are in

the process of listing and also on other commercial, industrial, and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50crores.Institute of Chartered Accountants of India ( ICAI) expanded the scope of applicability of AS 17 on Banking, Insurance, and other companies with effect from 2004.

The companies are required to make disclosures with respect to

 

• Segment wise revenues
• Segment-wise expenses,
• Segment-wise profit before tax,
• Segmental assets and
• Segmental liabilities.

 

Guidelines are provided in the AS17 with respect to the calculation and disclosure of each of the above. Business and Geographical segments:

A business segment is a distinguishable part of a business enterprise, that is subject to risks and returns that are different from those of other business segments. For example, the chief business segments of Reliance Industries are Reliance Retail, Digital services, Refining and marketing, petrochemicals and Oil and Gas. Each segment is important and contributes the profitability of the company and the performance of each segment affects the overall performance of the company. Similarly IT Climited provides supplementary segmental disclosures for the following 6 segments

 

• FMCG-cigarettes
• Hotels
• Agri. business
• Paperboards
• Paper and packaging
• others

 

The geographical segment is distinguishable unit of an enterprise engaged in providing products or services within a particular economic environment. It is subject to risks and returns that are different from units operating in other economic environments.