Operating Segment (Ind AS 108) Scope, Definitions, Discontinued operations, Disclosures

Ind AS 108, “Operating Segments,” prescribes the requirements for the disclosure of financial information about an entity’s operating segments. It is aimed at enhancing the transparency of financial reporting and helping users of financial statements to better understand the performance of an entity, assess its prospects for future net cash inflows, and make more informed judgments about the entity as a whole.

Key Principles

• Reportable Segments:

Ind AS 108 requires entities to report financial and descriptive information about their reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria concerning their revenue, profit or loss, or assets.

• Identification of Operating Segments:

Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. This approach is known as the ‘management approach’, where the identification of operating segments is based on the way that financial information is organized and reported to the CODM within the entity.

• Segment Reporting:

The standard requires entities to disclose specific information about each reportable segment, including revenue from external customers and intersegment revenue, a measure of segment profit or loss, segment assets, and the basis of segmentation and the types of products and services from which each reportable segment derives its revenues.

• Measurement:

The amounts reported for each operating segment are measured on the same basis as those used by the CODM for making decisions about allocating resources to the segment and assessing its performance. The standard allows a certain degree of flexibility in measurement, acknowledging that the information reviewed by the CODM may not always be prepared in line with the accounting policies applied for the consolidated financial statements.

• Entity-wide Disclosures:

Besides segment information, Ind AS 108 also requires entity-wide disclosures that give information about the entity’s products and services, the geographical areas in which it operates, and its major customers. This is to ensure that even if entities have a single reportable segment or do not allocate some items to segments, users of the financial statements still receive a level of information about the entity’s different revenue streams, the geographical spread of its operations, and its reliance on major customers.

Ind AS 108’s requirements ensure that an entity discloses information about its operating segments in a manner that reflects the internal reports that are regularly reviewed by its CODM. This approach is intended to provide users of financial statements with information that is used by management to evaluate the performance of the entity’s business and make decisions about the allocation of resources.

Scope Inclusions:

• Publicly Traded Entities:

The standard primarily targets entities with public accountability, defined by their engagement in trading equity or debt instruments in public markets or being in the process of issuing such securities. This includes companies listed on stock exchanges and companies in the process of going public.

• Entities Preparing Financial Statements under Ind AS:

It applies to entities that are required to, or choose to, prepare their financial statements according to Ind AS, providing a framework for segment reporting that aligns with international financial reporting standards.

Scope Exclusions:

• Non-public Entities:

While the standard is primarily aimed at publicly traded entities, non-public entities are not expressly excluded. However, the emphasis on public accountability means its requirements are most relevant to entities with securities traded in public markets. Non-public entities may still find the principles of segment reporting useful for internal management purposes and may voluntarily apply Ind AS 108 to their financial reporting.

• Consolidated Financial Statements:

The requirements of Ind AS 108 are applied in the context of consolidated financial statements of a group with a public accountability focus. However, the principles could also be informative for the separate financial statements of individual entities within a group, particularly if those entities have public accountability.

Entities not within the scope of Ind AS 108, such as private companies without public trading of their securities and not in the process of issuing such securities in public markets, are not required to apply the standard’s segment reporting requirements. However, adopting some of its principles could enhance the transparency and usefulness of financial information provided to owners and other stakeholders.

Discontinued Operations Disclosures

For disclosures specifically related to discontinued operations, entities should refer to Ind AS 105, which requires detailed disclosures that enable users to assess the financial effects of disposals and discontinued operations. These disclosures:

• The description of the discontinued operation and the facts leading to the expected disposal.
• The financial performance of the discontinued operation, including revenue, profit or loss before tax, the income tax expense, and the gain or loss recognized on the re-measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.
• The segment in which the discontinued operation was reported as per Ind AS 108, if applicable.

Operating Segments Disclosures under Ind AS 108

Within the context of operating segments as defined in Ind AS 108, the standard requires entities to disclose:

• Factors used to identify the entity’s operating segments.
• Types of products and services from which each operating segment derives its revenues.
• The amounts of segment revenue, segment profit or loss, segment assets, segment liabilities, and other significant items. These amounts are measured on the basis used by the chief operating decision maker for making decisions about allocating resources to the segment and assessing its performance.
• Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities, and other significant items to corresponding entity amounts.
• Information about major customers, if applicable.
• Information regarding the geographical areas in which the entity earns revenues and holds assets, as well as information about major customers.

If an entity has reported a discontinued operation as per Ind AS 105, the implications for segment reporting under Ind AS 108 would involve ensuring that the disclosures for operating segments reflect the changes in the entity’s structure, including the impact of any discontinued operations. This might include adjusting the segment information presented in prior periods for comparability purposes or disclosing the effects of discontinued operations on the reported segment data if significant.