Posted on : 30-11-2010 | By : Anantha Krishnan | In : BFS and Insurance, Company, Enterprise Applications & Services, Industries, Oracle Economy of Products, Oracle e-Business Suite, Services
Yes, I am back again this time keeping up my promise for a deep dive (shall I say neck deep!) into specific areas for IFRS transition. Just thought it would perhaps interest the readers (if any!) if some ‘hot’ topics laced with factors behind formulating policies falling in ‘Accounting’ / ‘Information Systems’ (our narrow interest is Enterprise Applications!) are provided.
With the above background, let me get into ‘Segmental Reporting’ – a very common area (even without IFRS!). At the outset, it is good to note that IAS 14 deals with this subject and AS17 – is the corresponding Indian Accounting Standard already in force for certain companies. Also, much to the relief of ‘Accountants’ broadly there are no major variances between IAS14 and AS17 – On the lighter side, feel – if one reads through the accounting standards – hardly 10% will be understood in the first few readings! (10 times taxing to first understand and xx??[God knows how many?] Times for implementation!!). However at the end, there is a larger intent to analyze financials to proactively assess if the health or intended moves of an enterprise are in the right direction adding investor value.
Now here is what IAS14 mandates – Looks pretty simple, till one has to implement!
- An entity reports information for ‘Business Segments’ and for ‘Geographical Segments’, indicating the types of products and services included in each reported business segment and the composition of each reported geographical segment. (One of these segments will be ‘Primary’ and the other ‘Secondary’)
- A set of reporting requirements – listed below for ‘Primary’ / ‘Secondary’ Segments so identified.
|Primary Segment||Secondary Segment|
|Revenue - separately disclosing sales to External Customers and Inter-Segment Revenue. The basis of inter-segment pricing is also disclosed||Revenue – separately disclosing sales to External Customers and Inter-Segment Revenue.|
|Profit or Loss – (Before Interest and Taxes) from continuing operations and discontinued operations separately.||— Not Applicable –|
|Carrying amount of segment Assets||Carrying amount of segment Assets|
|Segment Liabilities.||— Not Applicable –|
|Cost incurred in the period to acquire property, plant and equipment, and intangibles.||Cost incurred in the period to acquire property, plant and equipment, and intangibles.|
|Depreciation and amortization charges, and other significant non-cash expenses||— Not Applicable –|
|Aggregate share of the profit or loss of associates, joint ventures, or other investments||— Not Applicable –|
Already panting? Ok! Understand – here are a few breathers:
- Standard (mercifully!) applies only to entities whose shares are listed in Stock Exchange(s) or which are in the process of issuing the same for eventual listing:
- Don’t be overjoyed!! – Indian Accounting Standard is much more extensive in its coverage as it prescribes some additional class of companies or criteria for coverage (Ex. Banks and Insurance Companies, Entities having a Turnover of more than Rs. 50 Crores – (Approx. $10 Million). Borrowings in excess of Rs. 10 Crores (Approx. $2 Million), Holding / Subsidiary of any of the companies covered by AS17.
- Disclosure requirements arise only when the segment revenues earned from external customers are in excess of the prescribed threshold limit of 10% of the Total Revenue (Both internal and external). – A minimum of 75% of the total revenue should be covered by segment reporting failing which additional segmental classification needs to be included until this limit is met!
I can already hear a few loud voices – how to identify ‘Business Segments’ or ‘Geographical Segment’ –
- IAS14 in my view lacks clarity [“The source and nature of the entity’s risks and rates of return determine whether the primary reporting format is business segments or geographical segments. This is usually identified by the entity’s internal organizational and management structure and its system of internal financial reporting to senior management.]
- AS17 provides some more guidelines for ‘Business’ classification based on Nature of Products and Services, Production Process, Type of Customers, Distribution Channels, Regulatory Environment and for ‘Geography’ based on Similarity of Economic and Political Conditions, Relationship between Geographies, Proximity, Specific risks associated with a Region, Exchange control regulations etc.,
I am aware that this article has probably crossed reasonable limits. However, all the erudite readers will be quick to realize:
- Aspects related to classification of ‘Business’ / ‘Geography’ segments (and possibly additional segments!), how to deal with financial elements that can’t be directly ascribed to specific segments (what kind of allocation rules etc., can be logically followed) are all matters which are internal to any organization in which Professional Audit and Accounting Firms are best positioned to assist in formulation of proper accounting framework for transition and then to ongoing compliance.
- IT Service providers like Sierra Atlantic Inc., – on the other hand can consider the inputs for ongoing compliance arrived in Step 1 , evaluate gaps in the existing ‘Enterprise Applications’ configurations and come up with a sequence of steps for best possible fulfillment – i.e.:
- Upgrade to Release 12 Vs Re implement – Examine the flexible ‘Sub Ledger Accounting’ [SLA’ framework provided], other options [Ex. Multiple transaction types, Capturing mandatory additional information during transactions, organization structuring etc.]
Hopefully, readers now see the difference that I briefly dwelt upon in my first dialogue on the subject! Before I conclude, here is another compliance rider of IAS14 – Once a segment is reportable, in the next year even if it goes below the threshold limit it continues to be reported and likewise if you have new reportable segment information that emerges in one year then you better provide previous year comparison as well !! – Accountants always on the receiving side! Icing on the cake, I suppose??
By for now, and hope to be back soon with insights into yet another topic.