In our previous blogs, we covered what AS 17 Segment Reporting is and how to identify business segments and geographical segments. Now comes the most important and most exam-relevant part — how do you decide which segments are large enough to be reported separately?
This is where the concept of a reportable segment comes in. Not every segment that a company identifies needs to be separately disclosed. Only those segments that cross certain size thresholds qualify as reportable segments under AS 17. These thresholds are tested using quantitative rules known as the 10% materiality test and the 75% overall test.
In this blog, we will explain both tests in simple language and work through fully solved examples.
What is a Reportable Segment?
A reportable segment is a business segment or geographical segment identified on the basis of the definitions in AS 17 for which segment information is required to be disclosed separately in the financial statements.
In other words, once you have identified all your business and geographical segments, you run them through the quantitative threshold tests. Only those that pass at least one test become reportable segments and require full disclosure.
The Two-Step Process to Identify Reportable Segments
AS 17 uses a two-step process:
- Step 1 — Apply the 10% materiality test to each segment
- Step 2 — Apply the 75% overall test to check if enough revenue is covered
Let us understand each step in detail.
Step 1: The 10% Materiality Test
Under the 10% materiality test, a segment qualifies as a reportable segment if it meets at least one of the following three criteria:
Revenue Test
A segment qualifies if its total revenue — including both external sales and inter-segment sales — is 10% or more of the combined revenue of all segments.
Segment Revenue Threshold = 10% of Total Revenue of All Segments
Profit and Loss Test
A segment qualifies if its profit or loss is 10% or more of the greater of:
- The combined profit of all profitable segments, or
- The combined loss of all loss-making segments
The key word here is "greater in absolute amount." You do not net the profits and losses. Instead you add up all profits separately and all losses separately, then take whichever figure is larger in absolute terms. The segment revenue threshold for the profit test is 10% of that larger figure.
Asset Test
A segment qualifies if its total assets are 10% or more of the combined assets of all segments.
Asset Threshold = 10% of Total Assets of All Segments
A segment only needs to pass one of these three tests to qualify as a reportable segment. It does not need to pass all three.
Step 2: The 75% Overall Test
After applying the 10% materiality test, you must check whether the reportable segments identified so far cover at least 75% of the total external revenue of the enterprise.
If the external revenue of all identified reportable segments is less than 75% of total enterprise revenue, you must keep adding more segments as reportable segments — even if they did not pass the 10% thresholds — until the 75% coverage is reached.
This ensures that the segment disclosures cover a substantial portion of the enterprise and are not misleading.
Additional Rules to Remember
There are two additional rules under AS 17 quantitative test that are important for exams:
Rule 1 — If a segment was a reportable segment in the immediately preceding period because it satisfied the 10% thresholds, it should continue to be reported in the current period even if it no longer meets the thresholds. This ensures consistency in segment reporting.
Rule 2 — If a segment becomes a reportable segment in the current period for the first time, the comparative figures for the previous period should also be restated to show that segment separately, unless it is impracticable to do so.
Also, management has the discretion to designate any segment as a reportable segment even if it does not pass the 10% materiality test, if they feel disclosure would be useful to users.
Solved Example 1: Sports Ltd.
The Chief Accountant of Sports Ltd. provides 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 believed only M and N should be reported. Is he correct?
Applying the Revenue Test
Total revenue of all segments = ₹1,200 lakhs Segment revenue threshold = 10% of ₹1,200 = ₹120 lakhs
- Segment M — ₹300 lakhs — Qualifies ✅
- Segment N — ₹620 lakhs — Qualifies ✅
- Segment O — ₹80 lakhs — Does not qualify ❌
- Segment P — ₹60 lakhs — Does not qualify ❌
- Segment Q — ₹80 lakhs — Does not qualify ❌
- Segment R — ₹60 lakhs — Does not qualify ❌
Applying the Profit and Loss Test
Total profit of profitable segments (M, O, P, R) = 50 + 10 + 10 + 30 = ₹100 lakhs
Total loss of loss-making segments (N, Q) = 190 + 10 = ₹200 lakhs
Greater in absolute terms = ₹200 lakhs
Threshold = 10% of ₹200 = ₹20 lakhs
- Segment M — ₹50 lakhs profit — Qualifies ✅
- Segment N — ₹190 lakhs loss — Qualifies ✅
- Segment O — ₹10 lakhs profit — Does not qualify ❌
- Segment P — ₹10 lakhs profit — Does not qualify ❌
- Segment Q — ₹10 lakhs loss — Does not qualify ❌
- Segment R — ₹30 lakhs profit — Qualifies ✅
Applying the Asset Test
Total assets of all segments = ₹200 lakhs
Threshold = 10% of ₹200 = ₹20 lakhs
- Segment M — ₹40 lakhs — Qualifies ✅
- Segment N — ₹80 lakhs — Qualifies ✅
- Segment O — ₹30 lakhs — Qualifies ✅
- Segment P — ₹20 lakhs — Qualifies ✅
- Segment Q — ₹20 lakhs — Qualifies ✅
- Segment R — ₹10 lakhs — Does not qualify ❌
Final Result
- Segment M — passes revenue, profit, and asset test — Reportable ✅
- Segment N — passes revenue, profit, and asset test — Reportable ✅
- Segment O — passes asset test — Reportable ✅
- Segment P — passes asset test — Reportable ✅
- Segment Q — passes asset test — Reportable ✅
- Segment R — passes profit test — Reportable ✅
Conclusion: All six segments are reportable segments under AS 17. The Chief Accountant was wrong. Every segment passed at least one of the three quantitative threshold tests.
Solved Example 2: XYZ Ltd. — Profit and Loss Test Only
XYZ Ltd. has 5 business segments. Profit and loss for the year ended 31st March 20X2 (figures in ₹ lakhs):
- Segment A: Profit 225
- Segment B: Profit 25
- Segment C: Loss (175)
- Segment D: Loss (20)
- Segment E: Loss (105)
Identify reportable segments based on the profitability test only.
Solution
- Total profit of profitable segments = 225 + 25 = ₹250 lakhs
- Total loss of loss-making segments = 175 + 20 + 105 = ₹300 lakhs
- Greater in absolute terms = ₹300 lakhs
- Threshold = 10% of ₹300 = ₹30 lakhs
- Segment A — ₹225 lakhs profit — Qualifies ✅ — Reportable
- Segment B — ₹25 lakhs profit — Does not qualify ❌ — Not reportable on this test
- Segment C — ₹175 lakhs loss — Qualifies ✅ — Reportable
- Segment D — ₹20 lakhs loss — Does not qualify ❌ — Not reportable on this test
- Segment E — ₹105 lakhs loss — Qualifies ✅ — Reportable
Based on the profitability test alone, Segments A, C, and E are reportable segments.
Solved Example 3: ABC Ltd. — Mixed Profits and Losses
ABC Ltd. has 5 segments with the following profit and loss figures (₹ in crores):
- Segment A: Profit 780
- Segment B: Profit 1,500
- Segment C: Loss (2,300)
- Segment D: Loss (4,500)
- Segment E: Profit 6,000
- Total: Net Profit 1,480
Solution
- Total profit of profitable segments (A, B, E) = 780 + 1,500 + 6,000 = ₹8,280 crores
- Total loss of loss-making segments (C, D) = 2,300 + 4,500 = ₹6,800 crores
- Greater in absolute terms = ₹8,280 crores
- Threshold = 10% of ₹8,280 = ₹828 crores
- Segment A — ₹780 crores — 9.4% — Does not qualify ❌
- Segment B — ₹1,500 crores — 18.1% — Qualifies ✅ — Reportable
- Segment C — ₹2,300 crores — 27.8% — Qualifies ✅ — Reportable
- Segment D — ₹4,500 crores — 54.4% — Qualifies ✅ — Reportable
- Segment E — ₹6,000 crores — 72.5% — Qualifies ✅ — Reportable
Segments B, C, D, and E are reportable segments. Segment A does not pass the profitability test. However, it may still qualify as a reportable segment if it passes the segment revenue threshold test or the asset test.
Solved Example 4: Nathan Ltd. — Asset Test with Deferred Tax
Nathan Ltd. has three segments — P, Q, and R. Total assets of the company are ₹15 crores.
- Segment P: Total assets ₹4 crores, Deferred tax assets ₹1 crore
- Segment Q: Total assets ₹6 crores, Deferred tax assets ₹0.90 crores
- Segment R: Total assets ₹5 crores, Deferred tax assets ₹0.80 crores
The accountant says all three segments are reportable segments. Is he correct?
Solution
Under AS 17, segment assets exclude income tax assets including deferred tax assets.
- Revised assets after removing deferred tax:
- Segment P = 4 - 1 = ₹3 crores
- Segment Q = 6 - 0.90 = ₹5.10 crores
- Segment R = 5 - 0.80 = ₹4.20 crores
Revised total assets = 15 - (1 + 0.90 + 0.80) = ₹12.30 crores
Threshold = 10% of ₹12.30 = ₹1.23 crores
- Segment P — ₹3 crores — Qualifies ✅ Segment Q — ₹5.10 crores — Qualifies ✅ Segment R — ₹4.20 crores — Qualifies ✅
All three segments are reportable segments. The accountant is correct. However the important learning here is that deferred tax assets must always be removed before applying the AS 17 quantitative test on assets.
Solved Example 5: Heavy Goods Ltd. — All Three Tests Together
Heavy Goods Ltd. has 6 segments (figures in ₹):
- Segment L: Inter-segment sales 4,200, External sales 12,300, Profit 3,000, Assets 37,500
- Segment M: Inter-segment sales 3,500, External sales 7,750, Profit 1,500, Assets 23,250
- Segment N: Inter-segment sales 1,000, External sales 3,500, Loss (1,500), Assets 15,750
- Segment O: Inter-segment sales 0, External sales 5,250, Loss (750), Assets 10,500
- Segment P: Inter-segment sales 500, External sales 5,500, Profit 900, Assets 10,500
- Segment Q: Inter-segment sales 1,200, External sales 1,050, Profit 600, Assets 5,250
- Total: Inter-segment 10,400, External 35,350, Profit 3,750, Assets 1,02,750
Revenue Test
Total revenue = 10,400 + 35,350 = ₹45,750
Threshold = 10% of ₹45,750 = ₹4,575
- Segment L — 4,200 + 12,300 = 16,500 — Qualifies ✅
- Segment M — 3,500 + 7,750 = 11,250 — Qualifies ✅
- Segment N — 1,000 + 3,500 = 4,500 — Does not qualify ❌
- Segment O — 0 + 5,250 = 5,250 — Qualifies ✅
- Segment P — 500 + 5,500 = 6,000 — Qualifies ✅
- Segment Q — 1,200 + 1,050 = 2,250 — Does not qualify ❌
Profitability Test
Total profit of profitable segments (L, M, P, Q) = 3,000 + 1,500 + 900 + 600 = ₹6,000
Total loss of loss-making segments (N, O) = 1,500 + 750 = ₹2,250
Greater in absolute terms = ₹6,000
Threshold = 10% of ₹6,000 = ₹600
- Segment L — ₹3,000 — Qualifies ✅
- Segment M — ₹1,500 — Qualifies ✅
- Segment N — ₹1,500 — Qualifies ✅
- Segment O — ₹750 — Qualifies ✅
- Segment P — ₹900 — Qualifies ✅
- Segment Q — ₹600 — Qualifies ✅
Asset Test
Total assets = ₹1,02,750
Threshold = 10% of ₹1,02,750 = ₹10,275
- Segment L — ₹37,500 — Qualifies ✅
- Segment M — ₹23,250 — Qualifies ✅
- Segment N — ₹15,750 — Qualifies ✅
- Segment O — ₹10,500 — Qualifies ✅
- Segment P — ₹10,500 — Qualifies ✅
- Segment Q — ₹5,250 — Does not qualify ❌
Final Result
- Segment L — passes revenue, profit, and asset test — Reportable ✅
- Segment M — passes revenue, profit, and asset test — Reportable ✅
- Segment N — passes profit and asset test — Reportable ✅
- Segment O — passes revenue, profit, and asset test — Reportable ✅
- Segment P — passes revenue, profit, and asset test — Reportable ✅
- Segment Q — passes profit test only — Reportable ✅
All six segments are reportable segments under the AS 17 quantitative test. Every segment passed at least one of the three tests.
Frequently Asked Questions
Q1. What is the 10% materiality test under AS 17?
The 10% materiality test has three parts — revenue test, profit and loss test, and asset test. A segment needs to pass at least one of these three tests to qualify as a reportable segment. The threshold in each case is 10% of the respective combined total of all segments.
Q2. How does the profit and loss test work when some segments have profits and others have losses?
You add up the profits of all profitable segments separately and the losses of all loss-making segments separately. You then take the greater of the two figures in absolute terms. The threshold is 10% of that figure. This is the correct approach under segment reporting ICAI guidelines.
Q3. What is the 75% overall test and why is it important?
The 75% overall test ensures that the external revenue covered by all identified reportable segments is at least 75% of total enterprise revenue. If it falls short, more segments must be added as reportable segments even if they did not pass the 10% materiality test.
Q4. Should deferred tax assets be included in segment assets for the asset test?
No. Under AS 17, segment assets exclude all income tax assets including deferred tax assets. You must always remove deferred tax assets from the segment asset figures before applying the AS 17 quantitative test.
Q5. Can a segment that failed the 10% test still be a reportable segment?
Yes, in two situations. First, if the 75% overall test has not been met and more segments need to be added. Second, if management exercises its discretion and designates the segment as a reportable segment despite it not passing the segment revenue threshold or other tests.
Q6. What happens to a segment that was reportable last year but is not this year?
It should continue to be treated as a reportable segment in the current year to maintain consistency in segment reporting ICAI requirements, unless management decides otherwise.
Q7. Does a segment need to pass all three tests to be a reportable segment?
No. A segment only needs to pass at least one of the three tests — revenue test, profit and loss test, or asset test — to qualify as a reportable segment under the 10% materiality test.
Conclusion
Identifying reportable segments using the 10% materiality test and the 75% overall test is one of the most frequently tested topics in CA exams. The process looks complex at first but becomes straightforward once you understand the logic.
Always remember — a segment only needs to pass one test. Calculate all three thresholds carefully, check each segment against each test, and then verify that the 75% overall test is satisfied. Also remember to remove deferred tax assets before applying the asset test, as this is a common mistake in segment reporting ICAI problems.
