Accounting Standard (AS) 17 - Segment Reporting

[Accounting Standards]

Accounting Standard (AS) 17

(issued 2000)

Segment Reporting

(This Accounting Standard includes paragraphs set in

bold italic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should be
read in the context of its objective and the Preface to the Statements of
Accounting Standards1.)

Accounting Standard (AS) 17,

‘Segment Reporting’, issued by the Council
of the Institute of Chartered Accountants of India, comes into effect in
respect of accounting periods commencing on or after 1.4.2001.
This Standard is mandatory in nature2 in respect of accounting periods
commencing on or after 1-4-20043 for the enterprises which fall in any one
ormore of the following categories, at any time during the accounting period:
(i) Enterprises whose equity or debt securities are listed whether in
India or outside India.
(ii) Enterprises which are in the process of listing their equity or debt
securities as evidenced by the board of directors’ resolution in
this regard.

[Accounting Standards]

Accounting Standards Interpretation (ASI) 22

Treatment of Interest for determining Segment Expense

Accounting Standard (AS) 17, SegmentReporting

[Pursuant to the issuance of this Accounting Standards Interpretation,
General Clarification (GC)

– 14/2002, issued in October 2002, stands
withdrawn.]

ISSUES

1. Whether interest expense relating to overdrafts and other operating
liabilities identified to a particular segment should be included in the segment
expense or not.
2. Another issue is that in case interest is included as a part of the cost of
inventories where it is so required as per Accounting Standard (AS) 16,
Borrowing Costs, read with Accounting Standard (AS) 2, Valuation of
Inventories, and those inventories are part of segment assets of a particular
segment, whether such interest would be considered as a segment expense.

[Accounting Standards]

Accounting Standards Interpretation (ASI) 20

(Revised)

Disclosure of Segment Information

Accounting Standard (AS) 17, SegmentReporting

ISSUE

1. Whether an enterprise, which has neither more than one business
segment nor more than one geographical segment, is required to disclose
segment information as per AS 17.

CONSENSUS

2. In case by applying the definitions of

‘business segment’ and

‘geographica

l segment’, contained in AS 17, it is concluded that there is
neither more than one business segment nor more than one geographical
segment, segment information as per AS 17 is not required to be disclosed.
However, the fact that there is only one ‘business segment’and ‘geographical

segment

’ should be disclosed by way of a note.

[Accounting Standards]

ANNOUNCEMENT

Disclosure of corresponding previous year figures in the first year of application of Accounting Standard (AS) 17, Segment Reporting

The Institute has issued Accounting Standard (AS) 17, Segment Reporting (published in the October, 2000, issue of the Institute's Journal 'The Chartered Accountant'). AS 17 has come into effect in respect of accounting periods commencing on or after 1-4-2001 and is mandatory in nature, from that date, in respect of the following: Enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India as evidenced by the board of directors' resolution in this regard. All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs. 50 crores.

The Council, at its 224th meeting, held on March 8-10, 2002, considered the matter relating to disclosure of corresponding previous year figures in respect of segment reporting in the first year of application of AS 17. The Council decided that in the first year of application of AS 17, corresponding previous year figures in respect of segment reporting need not be disclosed.

[Answer]

A. Facts of the Case

1. A public sector undertaking was formed by an Act of Parliament (The Warehousing Corporations Act, 1962) for the purpose of warehousing of agricultural produce and certain other commodities and for other matters connected therewith. Accordingly, the undertaking has been resorting to construction, hiring and operation of warehouses throughout the length and breadth of the country for storage of goods. Since the storage requirements, both in covered space and in open, vary from commodity to commodity and depositor/customer to depositor/customer, the corporation, for the purposeof convenience and also to meet the requirements of other agencies, viz., the Customs, has categorized the warehouses as below:

(a) General Warehouses: All indigenous/duty paid commodities are warehoused/ stored in these warehouses other than those mentioned at (b), (c) and (d) below.

(b) Bonded Warehouses: These warehouses are for warehousing / storage of imported consignments (as per the provisions of the Customs Act, 1962) till such time the importer (bonder) deposits the customs duty and seeks release of the consignment. The undertaking gets a licence from the Customs for this purpose.

(c) CFS/ICD Warehouses: These are known as Container Freight Stations (CFS) and Inland Clearance Depots (ICD) wherein exportable/imported commodities transported through ISO containers are warehoused/stored.

(d) Management Warehouses: In respect of these warehouses, the undertaking acts as a warehouse keeper/custodian within the premises of the importer/customer and goods are released from the custodianship of the undertaking to the user as per their demand.

2. Irrespective of the nature of commodity stored and the type of warehouse in which it is stored, the line of activity performed by the undertaking is nothing but warehousing. Insofar as other ancillary services are concerned, it also undertakes marketing facilitation operations in the form of loading, unloading, book-keeping and transportation of goods offered for storage, on the request of depositors, who choose not to undertake such services on their own.

3. The operations of the corporation are being managed by 17 Regional Offices and 16 Construction Cells all over the country. The Regional Offices look after the administrative control/marketing operations and the Construction Cells look after the construction/repairs and maintenance of warehouses.

4. The querist has stated that since the line of activity of the corporation is warehousing and ancillary activities in terms of the Act, the works performed by the corporation are inter-related. Even though the corporation is in a position to maintain accounts of income separately, the expenditure as well as assets and liabilities cannot be separated/ allocated judiciously until and unless it resorts to arbitrary allocations which, according to the querist, are not permitted as per the provisions of Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of Chartered Accountants of India

Since the same warehouse premises, establishment and other facilities are being used for warehousing, be it general goods warehousing, customs bonded goods warehousing and CFS/ICD warehousing, it is not possible to segregate the operation-wise expenditure, assets and liabilities as required by AS 17.

5. The querist has stated that in compliance with AS 17, however, the corporation has given a note in the audited accounts for the year 2001-02 in

‘Notes forming part of accounts’ as under:

"The Corporation has only one line of business which it is performing in only one geographical location and as such has no separate reportable segment".

However, C&AG of India, during the course of their audit for the year ending 31.3.2002, have observed that this disclosure is not in conformity with AS 17 on the following grounds:

(a) Since the business of Container Freight Stations/Inland Container Depots is being governed by the provisions of the Customs Act and other regulated authorities of Government of India, and the business of warehousing agricultural produce and other commodities is governed by the Warehousing Act, the above two are different segments in terms of the requirements of AS 17.



(b) As the revenue from General Warehouses, Bonded Warehouses/ CFS & ICD exceeds 10% individually, they are Reportable Segments as per AS 17 and, as such, segment-wise results should h a ve b e e n s e p a r at e l y d is c l o s ed i n t er ms o f ma n d at o r y requirements of AS 17.

6. As per the querist, insofar as C&AG’s observation at paragraph 5(a) above is concerned, the undertaking is engaged in providing ‘Warehousing and Ancillary Services’, which is within the purview of provisions of the Warehousing Corporations Act, 1962. The fact that commodities warehoused are being categorized as General/Bonded/Containerised cargo does not change the basic concept of warehousing and is not subject to varying risks and returns. The querist has emphasised that the Container Freight Stations/ Inland Clearance Depots/Bonded warehouses are operated by the corporation as warehouses. However, some of the warehouses are notified by the Customs to be operated as such, for purposes of storage of cargo and collection of customs duty thereon, prior to release. By invoking provisions of the Customs Act, 1962, the basic concept of warehousing does not change.

7. The querist has further stated that, insofar as the C&AG’s observation at paragraph 5(b) above is concerned, it is of the view that the intention of AS 17 is to broadly report on distinguishable business segments in totality by indicating clearly:

(a) Segment Revenue

(b) Segment Result

(c) Segment Assets

(d) Segment Liabilities

The querist is of the view that keeping in view the fact that the nature of activity in all cases remains as warehousing only, i.e., the corporation has only one line of business, the provisions of AS 17, relating to business segment, are not applicable.

B . Query

8. The querist has sought the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India, in the light of the afore- mentioned facts, on the following issues:

(a) Since the CFS/ICD warehouses operated by the undertaking, which is governed by the Warehousing Corporations Act, 1962, are under licence from Customs as custodian of goods, whether

it would be appropriate to treat it as a separate reportable segment as defined in AS 17, especially in view of the fact that the activity performed at these units is warehousing only.

(b) Whether it is mandatory for the undertaking to present segment report despite the fact that the corporation has only one line of business, i.e., warehousing, wherein expenditure, assets and liabilities are indistinguishable, unless arbitrary allocations are resorted to.

(c) Since the corporation is presently operating regional offices at 17 places within the country, whether their operation would invite the applicability of segment reporting based on geographical location. The querist has stated that it may be pertinent to mention that the number of regional offices may increase or decrease depending upon the need of the corporation

D. Opinion

On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 8 above:

(a) It would not be appropriate to treat CFS/ICD warehouses operated by the undertaking, which is governed by the Warehousing Corporations Act, 1962, and are under licence from customs as custodian of goods, as a separate business segment from general/ containerised warehouses since as stated by the querist the services rendered by them are not subject to differing risks and returns, presumably, as per the criteria laid down in the definition of the term ‘business segment’ in AS 17. However, insofar as the ‘management warehouses’ are concerned, the criteria prescribed in the definition should be considered for deciding whether the risks and returns of such warehouses differ from other warehouses. Similarly, the criteria prescribed in the definition of the term ‘business segment’ should be applied in determining whether the risks and returns pertaining to the warehousing business differ from the risks and returns pertaining to the ancillary business.

(b) In case it is concluded, as per (a) above, that the corporation has only one business segment, the corporation is not required to present segment information as per AS 17. However, in case it is concluded that the corporation has more than one business segment, segment information is required to be given as per the various requirements of AS 17.

(c) The mere fact that the corporation is operating regional offices at 17 places within the country does not mean that the regional offices would constitute separate geographical segments within the meaning of AS 17 unless the risks and returns pertaining thereto differ from each other.



1 Opinion finalised by the Committee on 28.5.2003.

2 This GC has now been issued in the form of Accounting Standards Interpretation
(ASI) 20, ‘Disclosure of Segment Information’.

[Answer]

A. Facts of the Case

1. A multi-state co-operative society was incorporated in April 1980, as a national level co-operative society to manufacture and distribute a chemical fertiliser, i.e., urea. The society has two phases of ammonia plant of 1,350 MTPD capacity each and two phases of urea plant of 2,200 MTPD capacity each, each phase of urea plant consisting of two streams of 1,100 MTPD, with an annual capacity to produce 14.52 lakh MT of urea. The society commenced its commercial production from March 1986. The society manufactures urea at its only plant located at Hazira in Surat. The plant of the society is a continuous process plant.

2. The equity of the society is substantially owned by the Government of India and is under the administrative control of Department of Fertilisers, Ministry of Chemicals and Fertilisers. The rest of the equity of the society is held by other co-operative societies. The shares of the society are neither listed nor traded on any stock exchange and are not governed by any of the regulations of stock exchanges. Also, there is an express provision in the Multi-State Co-operative Societies Act, 1984, that the provisions of the Companies Act, 1956, shall not apply to multi-state co-operative societies. The Multi-State Co-operative Societies Act, 1984, does not provide any specific format for presenting the annual accounts of the society.

3. The Government of India, through the Essential Commodities Act, 1955, and the Fertiliser (Control) Order, 1985, as amended from time to time, regulates the movement of fertiliser and its price. The present pattern of regulation is enumerated as under:

(i) The Central Government allocates the quantity of urea to be sold by each manufacturing unit in the states indicated by the Central government for every season, i.e., Kharif and Rabi season of the year. No manufacturer is allowed to sell beyond the limit prescribed by the Central Government. The allocation fixed by the Central Government for each manufacturer is based on the requirement of urea for every season by the respective state and total production of all the urea manufacturers available in the country. The individual allocation is done so as to cover the entire production.

(ii) Similarly, the price of urea is also controlled by the Central Government, i.e., the price at which various manufacturers can sell the urea in the country is fixed by the Central Government and this price is uniform throughout the country for all manufacturers. No variation is permitted by the Central Government.

(iii) The Central Government also reimburses a uniform amount as freight subsidy for each unit irrespective of the allocation given to various states. Even in this respect, uniformity is maintained by the Central Government.

(iv) The society distributes its product through state government agencies such as Apex Co-operative Marketing Federations, district and primary level co-operative societies, etc.

4. The society does not sell its products beyond the shores of the country. The society has State Marketing Offices in various states and these offices supervise the work of receipt of material from the factory, delivery to various purchasers such as Apex Co-operative Marketing Federations, etc., arrange invoices on the customers, arrange storing/warehousing of the material, lifting

of the material and collection of payment from the respective customers. The State Marketing Offices are not permitted to utilise the sale proceeds and the sale proceeds are directly transferred to Central Collection Accounts

at Delhi/Noida. To meet the day-to-day expenditure for maintaining the office, salary, storage charges, transportation charges, handling charges, etc., the required funds are transferred from Delhi/Noida to the respective State Marketing Offices. The sales terms are uniform in all the States. The respective State Marketing Offices maintain accounts relating to stock transfer from plant to the State, invoice accounting, debtors accounting, expenses accounting, etc., and these are consolidated for preparation of final accounts of the society. These offices are treated as branches and operate for marketing of product of the society within the assigned territorial jurisdiction. The closing stock valuation is done centrally at the Central Marketing Office.

5. In addition to urea, the society sometimes also deals in other products such as bio-fertilisers, seeds, chemicals, other fertilisers including imported fertilisers which are not predominant products

As per the querist, since the revenue from the sale of these products is less than 10% of the total revenue, these products by themselves do not constitutea reportable segment as per paragraph 27 of Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of Chartered Accountants ofIndia.

6. The querist has referred to the ‘Objective’ paragraph of AS 17, which,inter alia, provides as follows:

".... Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks. ...."

7. The querist has also referred to the definition of the term ‘geographical segment’ contained in paragraph 5 of AS 17 which provides as below:

"A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. Factors that should be considered in identifying geographical segments include:

(a) similarity of economic and political conditions;

(b) relationships between operations in different geographical areas;
(c) proximity of operations;

(d) special risks associated with operations in a particular area;

(e) exchange control regulations; and

(f) the underlying currency risks."

8. According to the querist, the society is of the view that it is providing products or services within the same economic environment of the country. Its products, production, distribution and pricing are controlled by the Central Government. The risks and returns in respect of operations in each state are the same. The geographical location of its State Marketing Offices does not affect the risks and returns of the society. The society is not operating in different countries; no special risks are associated with operations in a particular area. The society is not governed by exchange control regulations and there are no currency risks. The officials incharge of respective State Marketing Offices are not allowed to vary the sales terms, product distribution or allocation of material to that state. Sales terms, product distribution, and allocation of material to the states are duly controlled by the Central Government and are uniform throughout the country. The society has only one plant-factory located at Hazira, Surat. Freight subsidy paid to the society by the Central Government is uniform for all the states.

9. According to the querist, in view of the above uniqueness of operations of the society and factual position stated above, wherein total operations are in the same economic environment and risks and returns are same, it is felt that segment reporting under geographical segments is not applicable in the case of the society.

B . Query

10. The querist has sought the opinion of the Expert Advisory Committee as to whether, in the light of the circumstances explained above, the society needs to comply with AS 17 while presenting its general purpose financial statements, i.e., balance sheet and profit and loss account.

D. Opinion

On the basis of the above, the Committee is of the opinion that in the circumstances of the case, the society should present segment information in its financial statements as per AS 17.

Opinion finalised by the Committee on 25.3.2003.