If you have ever looked at the annual report of a large Indian company like Reliance Industries or Tata Motors, you may have noticed a section called "Segment Information." This section tells you how different parts of the business are performing individually, instead of just showing one big combined figure. This is exactly what AS 17 Segment Reporting is all about.
In this guide, we will walk you through everything about AS 17 in simple language. Whether you are a CA student preparing for your exam or an accountant trying to understand compliance requirements, this blog covers it all, including real examples.
What is AS 17 Segment Reporting?
AS 17 Segment Reporting is an Accounting Standard issued by the Institute of Chartered Accountants of India (ICAI). Its full name is Accounting Standard 17 — Segment Reporting. It lays down rules for how companies must report financial information about different parts of their business.
The core idea is simple. A large company may make refrigerators, run a hotel chain, and sell insurance, all under the same corporate umbrella. If you only look at the combined financial statements, you cannot tell which division is doing well and which one is struggling. AS 17 solves this problem by requiring companies to break down their financials by segment.
Note: AS 17 is mandatory for non-SMCs (non-Small and Medium Companies) and Level I non-corporate entities. Other entities are encouraged but not required to comply.
Objective of AS 17
Many enterprises provide groups of products and services or operate in geographical areas that are subject to different rates of profitability, opportunities for growth, future prospects, and risks. The objective of AS 17 Segment Reporting is to establish principles for reporting financial information about these different activities.
Segment information helps users of financial statements in three key ways:
- Better understand the performance of the enterprise
- Better assess the risks and returns of the enterprise
- Make more informed judgements about the enterprise as a whole
Scope: Who Must Follow AS 17?
AS 17 applies when an enterprise prepares general purpose financial statements. Two important points about its scope:
- An enterprise must comply with AS 17 fully, not selectively. It cannot pick and choose which parts to follow.
- If a single financial report contains both consolidated and separate financial statements, segment reporting information only needs to be presented on the basis of the consolidated financial statements.
Three-Step Process Under AS 17
Step 1 — Identify the Segments: Decide whether your segments are business segments or geographical segments based on where the dominant risks and returns come from.
Step 2 — Identify the Reportable Segments: Apply the quantitative tests — the 10% and 75% rules — to decide which reportable segments are large enough to report separately.
Step 3 — Prepare the Segmental Report: Disclose all required information for each reportable segment and reconcile with the overall enterprise figures.
What is a Business Segment?
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.
Factors considered to identify a business segment include:
- The nature of the products or services
- The nature of the production processes
- The type or class of customers for the products or services
- The methods used to distribute the products or provide the services
- The nature of the regulatory environment, for example banking, insurance, or public utilities
Practical Example: Microtech Ltd.
Microtech Ltd. produces batteries for scooters, cars, trucks, and specialised batteries for invertors and UPS. How many business segments should it have?
Answer: Two segments. Even though the basic product is batteries, the risks and returns are driven by very different factors. Automobile batteries are affected by government policy, road conditions, and quality of vehicles. Batteries for invertors and UPS are affected by power conditions and standard of living. Therefore, Microtech Ltd. has two business segments: Automobile Batteries and Batteries for Invertors and UPS.
What is a Geographical Segment?
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 considered to identify a geographical segment include:
- Similarity of economic and political conditions
- Relationships between operations in different geographical areas
- Proximity of operations
- Special risks associated with operations in a particular area
- Exchange control regulations
- The underlying currency risks
A geographical segment may be a single country, a group of two or more countries, or even a region within a single country. The standard allows geographical segments to be based either on where the enterprise has its production facilities or on where its customers are located.
Can Geographical Segments Exist Within the Same Country?
Yes. AS 17 clearly states that a geographical segment can be a region within a country. For example, Company A sells its products only in India but through rural and urban markets that have significantly different pricing, credit policies, and resource deployment. If these two markets face significantly different risks and returns, Rural India and Urban India can each be treated as separate geographical segments.
Primary and Secondary Reporting Formats
AS 17 Segment Reporting introduces the concept of primary and secondary segment reporting. The dominant source of risks and returns decides which format is primary.
- If risks and returns are mainly driven by the types of products and services produced, then business segments form the primary format and geographical segments are secondary.
- If risks and returns are mainly driven by the different countries or regions where the enterprise operates, then geographical segments form the primary format and business segments are secondary.
Important Definitions Under AS 17
Segment Revenue is the aggregate of revenue directly attributable to a segment, revenue that can be reasonably allocated to a segment, and revenue from transactions with other segments. It excludes extraordinary items, interest or dividend income unless the segment is primarily financial in nature, and gains on sales of investments.
Segment Expense is the aggregate of expenses directly attributable to a segment, expenses that can be reasonably allocated to a segment, and expenses from inter-segment transactions. It excludes income tax expense, interest expense, losses on investments, and general head-office expenses.
Segment Result is simply segment revenue minus segment expense.
Segment Assets are those operating assets employed by a segment in its operating activities, either directly attributable or reasonably allocated. They exclude income tax assets and assets used for general head-office purposes.
Segment Liabilities are those operating liabilities that result from the operating activities of a segment. They exclude income tax liabilities and borrowings incurred for financing rather than operating purposes.
Reportable Segment is a business or geographical segment for which segment information is required to be disclosed under AS 17.
Solved Example: Sports Ltd.
The Chief Accountant of Sports Ltd. provided the following data for six segments (figures in ₹ lakhs):
- Segment M: Assets 40, Result 50, Revenue 300
- Segment N: Assets 80, Result (190), Revenue 620
- Segment O: Assets 30, Result 10, Revenue 80
- Segment P: Assets 20, Result 10, Revenue 60
- Segment Q: Assets 20, Result (10), Revenue 80
- Segment R: Assets 10, Result 30, Revenue 60
- Total: Assets 200, Result (100), Revenue 1,200
The Chief Accountant was of the opinion that only segments M and N should be reported. Was he correct?
- Revenue Test — 10% of ₹1,200 = ₹120 lakhs is the threshold. Segments M (₹300) and N (₹620) qualify. Others do not.
- Profit/Loss Test — Total profit of profitable segments = ₹90 lakhs. Total loss of loss-making segments = ₹200 lakhs. The greater in absolute terms is ₹200 lakhs, so the threshold is ₹20 lakhs. Segments M (₹50), N (₹190), and R (₹30) qualify.
- Asset Test — 10% of ₹200 = ₹20 lakhs is the threshold. Segments M (₹40), N (₹80), O (₹30), P (₹20), and Q (₹20) qualify. Segment R (₹10) does not.
Conclusion: Since all six segments satisfy at least one of the three tests, all reportable segments must be reported under AS 17 Segment Reporting. The Chief Accountant was wrong.
Segment Accounting Policies
Segment information must be prepared using the same accounting policies adopted for the enterprise's financial statements as a whole. AS 17 does not prevent disclosure of additional segment reporting information prepared on a different basis, as long as the information is reported internally to the board of directors and CEO for resource allocation decisions, and the basis of measurement is clearly described.
Frequently Asked Questions
Q1. Is AS 17 Segment Reporting mandatory for all companies in India?
No. AS 17 is mandatory only for non-SMCs and Level I non-corporate entities. Other entities are encouraged to follow it voluntarily.
Q2. What is the difference between a business segment and a geographical segment?
A business segment is defined by the type of products or services and their associated risks. A geographical segment is defined by the economic environment in which the company operates, such as different countries or regions within a country.
Q3. Can a geographical segment exist within the same country?
Yes. AS 17 recognises that a geographical segment can be a region within a country if operations in that region face significantly different risks and returns compared to other regions.
Q4. What items are excluded from segment revenue?
Segment revenue excludes extraordinary items, interest or dividend income unless the segment is primarily financial in nature, and gains on sales of investments or extinguishment of debt.
Q5. What items are excluded from segment assets?
Segment assets exclude income tax assets and assets used for general enterprise or head-office purposes. Always remove deferred tax assets before applying the 10% asset threshold test.
Q6. What if a single financial report has both consolidated and standalone statements?
Segment reporting information only needs to be presented on the basis of the consolidated financial statements. There is no need to separately present segment data for the standalone statements.
Q7. Who decides whether risks are segment-specific?
The organisational structure of an enterprise and its internal financial reporting system are normally the basis for identifying reportable segments. Management uses judgement guided by AS 17 definitions, primarily relying on how information is reported to the board of directors and the CEO.
Conclusion
AS 17 Segment Reporting is a powerful tool that gives investors, analysts, and other stakeholders a much clearer picture of how a diversified enterprise is actually performing. By breaking down financial data by business segment or geographical segment, AS 17 prevents large companies from hiding poor performance of one division behind the strong numbers of another.
For CA students or professional, understanding the definitions, the three-step process, and the specific inclusions and exclusions for segment revenue, segment assets, and segment liabilities is absolutely critical.
