Introducing Ind AS 108: Operating Segments
Ind AS 108, also known as “Operating Segments,” is an Indian Accounting Standard that mandates public entities to report financial and descriptive information about their operating segments. The core purpose of this standard is to enable users of financial statements (like investors, analysts, and creditors) to better understand the entity’s past performance, assess its prospects for future cash flows, and make more informed judgments about the entity as a whole. It requires companies to present financial information disaggregated by segment, mirroring the internal reporting used by the company’s chief operating decision maker (CODM).
The Genesis of Segment Reporting: Why Ind AS 108 Exists
The concept of segment reporting originated from the recognition that consolidated financial statements, while providing an overall picture, often lack the granular detail necessary for comprehensive analysis of a diversified entity. Investors and other stakeholders benefit greatly from understanding the different types of business activities an entity engages in and the economic environments in which it operates.
Ind AS 108 is largely converged with IFRS 8 “Operating Segments,” issued by the International Accounting Standards Board (IASB), and ASC 280 “Segment Reporting” under US GAAP. Its adoption in India is part of the country’s broader move towards convergence with global accounting standards, aiming to enhance the comparability and transparency of financial reporting for Indian companies on a global scale. The standard was introduced to replace the older AS 17 “Segment Reporting,” bringing Indian practices in line with the ‘management approach’ to segment reporting, which focuses on internal reporting used for decision-making rather than a prescribed external reporting format.
Decoding the Requirements: Identifying and Reporting Segments
Ind AS 108 adopts a “management approach” to segment reporting. This means that the information to be reported about operating segments is the information that the CODM uses to allocate resources to the segments and assess their performance. This approach provides users of financial statements with a view of the entity “through the eyes of management.”
Key Principles and Mandates:
- Operating Segment Definition: An operating segment is a component of an entity:
- 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),
- whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and
- for which discrete financial information is available.
Not every part of an entity is necessarily an operating segment or part of an operating segment. For example, corporate headquarters or functional departments may not be operating segments.
- Identifying the Chief Operating Decision Maker (CODM): The CODM is a function, not necessarily a single manager, that allocates resources to and assesses the performance of the operating segments. This function could be performed by the CEO, COO, or a group of executives.
- Reportable Segments: An entity must report separately information about each operating segment that:
- Exceeds certain quantitative thresholds: its reported revenue (internal and external) is 10% or more of the combined revenue of all operating segments; or its reported profit or loss is 10% or more of the greater, in absolute amount, of the combined reported profit of all operating segments that did not report a loss, and the combined reported loss of all operating segments that reported a loss; or its assets are 10% or more of the combined assets of all operating segments.
- Management believes information about the segment would be useful to users of financial statements, even if it does not meet the quantitative thresholds.
Operating segments that do not meet the quantitative thresholds may be aggregated if they share similar economic characteristics and meet specified criteria.
- Information to be Disclosed: For each reportable segment, entities must disclose:
- General information about the segment (e.g., factors used to identify the segments, types of products/services).
- Measures of profit or loss, assets, and, if regularly provided to the CODM, liabilities.
- Specific revenue and expense items, such as interest revenue, interest expense, depreciation, amortisation, material non-cash items, and income tax expense/revenue.
- A reconciliation of total segment revenues, segment profit or loss, segment assets, segment liabilities, and other material segment items to the corresponding amounts in the entity’s consolidated financial statements.
- Enterprise-Wide Disclosures: Even if an entity has only one reportable segment, it must still provide certain enterprise-wide disclosures, including information about:
- Products and services.
- Geographical areas (revenues from external customers attributed to the entity’s country of domicile and to foreign countries, and non-current assets located in the entity’s country of domicile and in foreign countries).
- Major customers (revenues from a single external customer that amount to 10% or more of the entity’s total revenues).
The Business Impact: Why Ind AS 108 Matters to Your Company
Ind AS 108 is crucial for businesses for several reasons, primarily revolving around transparency, decision-making, and stakeholder confidence. By providing disaggregated financial information, the standard offers deeper insights into the company’s various operational facets. This allows external stakeholders to:
- Assess Performance: Understand which parts of the business are performing well, and which are struggling.
- Evaluate Risk: Gauge the concentration of risks across different segments, markets, or product lines.
- Inform Investment Decisions: Make more informed decisions about allocating capital to entities by understanding the underlying drivers of growth and profitability.
- Enhance Comparability: Compare the performance of different segments within a company or across similar segments in different companies.
For internal management, while the standard primarily relies on internal reporting, the process of preparing Ind AS 108 disclosures can also reinforce a disciplined approach to internal performance measurement and resource allocation, ensuring alignment between internal and external reporting perspectives.
Practical Applications: Where Ind AS 108 Comes Alive
Ind AS 108 disclosures are fundamental in various business scenarios:
- Investor Relations: Providing detailed segment information in annual reports and investor presentations to attract and retain investors. For instance, a conglomerate with interests in manufacturing, IT services, and retail will show separate revenue, profit, and asset figures for each, allowing investors to analyze the contribution and health of each distinct business.
- Mergers & Acquisitions (M&A): Prospective buyers use segment information to identify attractive business units within a target company, assess their standalone value, and understand the synergies or risks associated with specific segments.
- Credit Ratings: Credit rating agencies utilize segment data to evaluate the financial health and risk profile of different parts of a business, influencing the company’s cost of borrowing.
- Strategic Planning: Internally, the process of defining and reviewing segments for Ind AS 108 can prompt management to critically evaluate their strategic business units and their contribution to overall corporate goals.
- Competitive Analysis: Analysts use segment data to benchmark a company’s performance against its competitors within specific industries or markets. For example, comparing the profitability of a consumer electronics segment of one company against another.
Connecting the Dots: Ind AS 108 and Other Standards
Ind AS 108 is closely related to and influenced by international accounting frameworks. Its direct international equivalent is IFRS 8 Operating Segments, issued by the IASB. Most of its provisions are converged with IFRS 8. Similarly, in the United States, the corresponding standard is ASC 280 Segment Reporting. Understanding these global counterparts is essential for companies with international operations or investors who look at global benchmarks.
Furthermore, Ind AS 108 interacts with other Indian Accounting Standards, particularly those related to revenue recognition (e.g., Ind AS 115 Revenue from Contracts with Customers), where segment-level revenue disclosures become crucial. It also links to Ind AS 36 Impairment of Assets, as cash-generating units are often aligned with operating segments.
Staying Current: Recent Developments in Segment Reporting
The core principles of Ind AS 108 (and IFRS 8/ASC 280) have remained stable for several years due to the standard’s reliance on the “management approach.” However, discussions and focus areas often revolve around practical application and interpretation, especially regarding:
- Aggregating Segments: Companies and regulators continually debate the appropriate level of aggregation of operating segments, ensuring that useful information is not obscured while avoiding excessive detail.
- Consistency of CODM Information: Ensuring that the information disclosed externally truly reflects what the CODM uses internally to make decisions and that there isn’t selective reporting.
- Non-GAAP Measures: The increasing use of non-GAAP (Generally Accepted Accounting Principles) measures in internal and external reporting has led to discussions on how these align or diverge from the segment profit/loss reported under Ind AS 108. Regulators often scrutinize these to ensure they don’t mislead users.
- Impact of Digital Transformation: As business models evolve with digital transformation, identifying distinct operating segments can become more complex, especially for entities with integrated digital platforms spanning multiple traditional business lines.
Internal Stakeholders: Understanding Ind AS 108’s Reach
A successful implementation and continuous compliance with Ind AS 108 requires collaboration across various departments:
- Finance and Accounting: This department is primarily responsible for identifying operating segments, gathering the required financial data, preparing the disclosures, and ensuring compliance with the standard’s requirements.
- Executive Management (especially the CODM): Crucial for providing clarity on how the business is managed, how resources are allocated, and how performance is assessed. Their insights define the operating segments.
- Investor Relations: Uses the segment information to communicate the company’s strategy and performance to investors and analysts.
- Legal and Compliance: Ensures that all disclosures meet regulatory standards and legal requirements.
- Internal Audit: Reviews the processes and controls related to segment identification and reporting to ensure accuracy and compliance.
- Strategy and Business Development: Can leverage segment reporting insights to refine business strategies, identify growth opportunities, and assess potential divestitures or acquisitions.
Anticipating Change: What’s Next for Segment Disclosures?
While Ind AS 108 itself is relatively stable, the broader landscape of financial reporting is always evolving. Future trends that could indirectly influence segment disclosures include:
- ESG Reporting Integration: As Environmental, Social, and Governance (ESG) factors become increasingly material, there might be a future push for segment-specific ESG disclosures, allowing stakeholders to assess sustainability performance at a more granular level.
- Digital Reporting Formats (e.g., XBRL): Further adoption and refinement of digital reporting mandates will require companies to tag segment data more accurately, enhancing data accessibility and comparability through technology.
- Focus on Intangible Assets: With the growing importance of intangible assets in the knowledge economy, there could be future discussions on how to better allocate and report these assets at a segment level, especially for highly integrated digital businesses.
- Increased Granularity Demands: As data analytics capabilities grow, users may demand even finer granularity in segment disclosures, pushing the boundaries of what is considered practicable and useful.
Ultimately, Ind AS 108 remains a cornerstone of transparent financial reporting, providing essential insights into the complex operations of modern businesses and bridging the gap between internal management views and external stakeholder needs.