In our previous blogs we covered how to identify business segments, geographical segments, and reportable segments, and how to calculate segment revenue, segment expense, segment assets, and segment liabilities. Now we move to the final and most practical part of AS 17 Segment Reporting — how to actually present the segment information in financial statements.
This is where the concept of primary segment reporting format and secondary segment reporting format becomes important. Understanding which format applies to your enterprise and what disclosures are required under each format is critical for both real world application.
What is a Segment Reporting Format?
A segment reporting format simply means the structure in which an enterprise presents its segment information in its financial statements. AS 17 requires every enterprise to have one primary format and one secondary format.
The primary segment reporting format carries more detailed and comprehensive disclosures. The secondary segment reporting format carries limited disclosures.
The choice between business segment primary format and geographical segment secondary format — or the other way around — depends entirely on where the dominant risks and returns of the enterprise come from.
How to Decide Which Format is Primary
The dominant source and nature of risks and returns of an enterprise governs whether its primary segment reporting format will be business segments or geographical segments.
If the risks and returns of an enterprise are affected predominantly by differences in the products and services it produces, its primary format should be business segments with secondary information reported geographically.
If the risks and returns are affected predominantly by the fact that it operates in different countries or geographical areas, its primary format should be geographical segments with secondary information reported for groups of related products and services.
In simple terms, ask yourself this question — what is the bigger source of risk for this enterprise, the type of products it makes or the countries it operates in? The answer tells you which format is primary.
Primary Reporting Format: What Must Be Disclosed?
The primary segment reporting format requires the most detailed disclosures. For each reportable segment, an enterprise must disclose all of the following:
1. Segment Revenue
Segment revenue must be disclosed separately as:
- Revenue from sales to external customers
- Revenue from transactions with other segments
This split is important because it shows how much of the segment's income comes from real external customers versus internal inter-segment transfers.
2. Segment Result
The segment result — that is segment revenue minus segment expense — must be disclosed for each reportable segment. This shows the operating profit or loss of each individual segment.
3. Segment Assets
The total carrying amount of segment assets must be disclosed. This tells users how much of the enterprise's asset base is deployed in each segment.
4. Segment Liabilities
The total amount of segment liabilities must be disclosed. This gives users an idea of the operating obligations of each segment.
5. Capital Expenditure
The total cost incurred during the period to acquire segment assets that are expected to be used during more than one period — that is tangible and intangible fixed assets — must be disclosed. This is sometimes called capital expenditure of the segment.
6. Depreciation and Amortisation
The total amount of depreciation and amortisation expense included in the segment result in respect of segment assets for the period must be disclosed separately.
7. Significant Non Cash Expenses
The total amount of significant non-cash expenses other than depreciation and amortisation that were included in segment expense and therefore deducted in measuring segment result must also be disclosed.
An important exception applies here — an enterprise that reports cash flows from operating, investing, and financing activities of a segment does not need to separately disclose depreciation, amortisation, and non-cash expenses. The cash flow disclosure is considered sufficient.
Reconciliation Requirement Under Primary Format
One of the most important AS 17 disclosure requirements under the primary segment reporting format is the reconciliation statement. An enterprise must present a reconciliation between the segment information and the aggregated information in the enterprise financial statements.
The reconciliation must cover four items:
Segment revenue must be reconciled to enterprise revenue. Segment result must be reconciled to enterprise net profit or loss. Segment assets must be reconciled to enterprise assets. Segment liabilities must be reconciled to enterprise liabilities.
This reconciliation ensures that users can trace the segment figures back to the overall financial statements and understand what items — such as head office costs, inter-segment eliminations, and unallocated items — account for the difference.
Secondary Reporting Format: What Must Be Disclosed?
The secondary segment reporting format requires much more limited disclosures compared to the primary format. What needs to be disclosed depends on which format is primary.
When Business Segments are Primary
If the business segment primary format applies, the enterprise must also report the following geographical information as secondary disclosures:
- Segment revenue from external customers by geographical area based on the location of customers, for each geographical segment whose revenue from external customers is 10% or more of total enterprise revenue
- The total carrying amount of segment assets by geographical location of assets, for each geographical segment whose assets are 10% or more of total assets of all geographical segments
- The total cost to acquire segment assets during the period by geographical location, for each geographical segment whose assets are 10% or more of total assets of all geographical segments
When Geographical Segments are Primary
If the geographical segment secondary format applies — meaning geographical segments are the primary format — the enterprise must report the following business segment information as secondary disclosures for each business segment whose revenue from external customers is 10% or more of enterprise revenue or whose assets are 10% or more of total assets of all business segments:
- Segment revenue from external customers
- The total carrying amount of segment assets
- The total cost to acquire segment assets during the period
Segment Accounting Policies
Under AS 17 disclosure requirements, an enterprise must also disclose its segment accounting policies. Segment information must be prepared using the same accounting policies as those used for the enterprise financial statements as a whole.
However, AS 17 does not prohibit an enterprise from disclosing additional segment information prepared on a different basis, provided:
- The information is reported internally to the board of directors and the CEO for resource allocation and performance assessment decisions
- The basis of measurement for this additional information is clearly described in the financial statements
Inter Segment Transfer Pricing Disclosure
When measuring and reporting segment revenue from transactions with other segments, inter-segment transfers must be measured on the basis the enterprise actually uses to price those transfers. The basis of pricing inter-segment transfers and any change in that basis must be disclosed in the segment report India financial statements.
The enterprise can choose any consistent basis — cost, cost plus margin, or market price — but whatever it chooses must be disclosed and applied consistently from period to period.
Changes in Accounting Policies for Segment Reporting
If an enterprise changes its accounting policies for segment reporting and those changes have a material effect on segment information, the changes must be disclosed. The disclosure must include:
- A description of the nature of the change
- The financial effect of the change if it is reasonably determinable
Examples of changes that specifically affect segment report India disclosures include:
- Changes in the identification of segments
- Changes in the basis for allocating revenues and expenses to segments
Such changes can significantly impact reported segment information without changing the aggregate enterprise figures. That is why AS 17 requires disclosure of both the nature and financial impact of such changes.
Composition Disclosure
An enterprise must also indicate:
- The types of products and services included in each reported business segment
- The composition of each reported geographical segment, both primary and secondary, if not otherwise disclosed in the financial statements
This helps users understand exactly what each segment represents and makes the segment report India more meaningful and transparent.
Solved Example: Diversifiers Ltd. Segmental Report
Prepare a segmental report for Diversifiers Ltd. from the following data:
Forging Shop Division:
Sales to Bright Bar Division = ₹4,575 thousand
Other Domestic Sales = ₹90 thousand
Export Sales = ₹6,135 thousand
Total = ₹10,800 thousand
Bright Bar Division:
Sales to Fitting Division = ₹45 thousand
Export Sales to Rwanda = ₹300 thousand
Total = ₹345 thousand
Fitting Division:
Export Sales to Maldives = ₹270 thousand
Other data (₹ thousands):
Pre-tax operating result: Forging Shop 240, Bright Bar 30, Fitting (12)
Head office cost reallocated: Forging Shop 72, Bright Bar 36, Fitting 36
Interest costs: Forging Shop 6, Bright Bar 8, Fitting 2
Fixed assets: Head Office 75, Forging Shop 300, Bright Bar 60, Fitting 180
Net current assets: Head Office 72, Forging Shop 180, Bright Bar 60, Fitting 135
Long term liabilities: Head Office 57, Forging Shop 30, Bright Bar 15, Fitting 180
Segmental Report of Diversifiers Ltd. (₹ thousands)
Segment Revenue:
Forging Shop — Domestic Sales 90, Export Sales 6,135, External Sales 6,225, Inter-Segment Sales 4,575, Total Revenue 10,800
Bright Bar — Export Sales to Rwanda 300, External Sales 300, Inter-Segment Sales 45, Total Revenue 345
Fitting — Export Sales to Maldives 270, External Sales 270, Inter-Segment Sales nil, Total Revenue 270
Inter-Segment Eliminations = (4,620)
Consolidated Total External Revenue = 6,795
Segment Result:
Forging Shop = 240
Bright Bar = 30
Fitting = (12)
Total Segment Result = 258
Less: Head Office Expenses = (144)
Operating Profit = 114
Less: Interest Expense = (16)
Profit Before Tax = 98
Note: Head office costs of ₹144 thousand (72 + 36 + 36) are excluded from segment result as they are enterprise level expenses. Interest costs of ₹16 thousand (6 + 8 + 2) are also excluded from segment result as they are financing costs and not operating costs of the segments.
Segment Assets:
Forging Shop — Fixed Assets 300 + Net Current Assets 180 = 480
Bright Bar — Fixed Assets 60 + Net Current Assets 60 = 120
Fitting — Fixed Assets 180 + Net Current Assets 135 = 315
Total Segment Assets = 915
Unallocated Corporate Assets (Head Office Fixed Assets 75 + Net Current Assets 72) = 147
Total Enterprise Assets = 1,062
Segment Liabilities:
Forging Shop = 30
Bright Bar = 15
Fitting = 180
Total Segment Liabilities = 225
Unallocated Corporate Liabilities (Head Office Long Term Liabilities) = 57
Total Enterprise Liabilities = 282
Sales Revenue by Geographical Market (Secondary Format):
Home Sales = 90
Export Sales by Forging Shop = 6,135
Export to Rwanda = 300
Export to Maldives = 270
Consolidated Total = 6,795
Key Observations from This Example
The segment result of 258 does not include head office expenses of 144 or interest costs of 16 because these are enterprise level items excluded from segment expense under AS 17 disclosure requirements.
Head office assets of 147 are shown separately as unallocated corporate assets and not included in any segment assets figure.
Head office long term liabilities of 57 are shown separately as unallocated corporate liabilities and not included in any segment liabilities figure.
The geographical secondary information shows sales broken down by market — domestic, Rwanda, and Maldives — as required under the geographical segment secondary format disclosures.
Reconciliation Statement
The reconciliation between segment figures and enterprise figures for Diversifiers Ltd. is as follows:
Segment Revenue 6,795 reconciles to Enterprise Revenue 6,795 — no difference as inter-segment sales of 4,620 have been eliminated.
Segment Result 258 reconciles to Enterprise Profit Before Tax 98 after deducting Head Office Expenses 144 and Interest Expense 16.
Segment Assets 915 plus Unallocated Corporate Assets 147 reconciles to Total Enterprise Assets 1,062.
Segment Liabilities 225 plus Unallocated Corporate Liabilities 57 reconciles to Total Enterprise Liabilities 282.
Frequently Asked Questions
Q1. What is the difference between the primary segment reporting format and the secondary segment reporting format?
The primary segment reporting format requires full and comprehensive disclosures including segment revenue, segment result, segment assets, segment liabilities, capital expenditure, depreciation, and non-cash expenses for each reportable segment. The secondary segment reporting format requires only limited disclosures — mainly segment revenue from external customers, segment assets, and capital expenditure for qualifying segments.
Q2. How does an enterprise decide whether to use business segment primary format or geographical segment secondary format?
The decision is based on the dominant source of risks and returns. If risks come mainly from the type of products and services, business segments are primary. If risks come mainly from operating in different geographical areas, geographical segments are primary.
Q3. Is reconciliation mandatory under AS 17 disclosure requirements?
Yes. Reconciliation is mandatory under the primary segment reporting format. An enterprise must reconcile segment revenue to enterprise revenue, segment result to enterprise net profit or loss, segment assets to enterprise assets, and segment liabilities to enterprise liabilities.
Q4. Are inter-segment sales included in the segment report India reconciliation?
Yes. Inter-segment sales are included in individual segment revenues but are eliminated in the reconciliation column to arrive at the consolidated enterprise revenue figure. This ensures that the same revenue is not counted twice.
Q5. What happens to head office assets and liabilities in the segment report India?
Head office assets and liabilities are not allocated to any individual segment. They are shown separately as unallocated corporate assets and unallocated corporate liabilities in the reconciliation and are added to the total segment figures to arrive at enterprise totals.
Q6. Can an enterprise disclose additional segment information beyond what AS 17 disclosure requirements mandate?
Yes. AS 17 does not prohibit additional disclosures. An enterprise can disclose additional segment information prepared on a different basis if the information is used internally by the board and CEO, and the basis of measurement is clearly described.
Q7. What must be disclosed when an enterprise changes its segment reporting policies?
The enterprise must disclose the nature of the change and the financial effect of the change if it is reasonably determinable. Examples include changes in segment identification or changes in the basis of allocating revenues and expenses to segments.
Conclusion
The primary segment reporting format and secondary segment reporting format together form the complete disclosure framework under AS 17 Segment Reporting. The primary format gives users a detailed picture of each reportable segment while the secondary format provides additional context through either geographical or business breakdowns.
The Diversifiers Ltd. example in this blog is one of the most important practical problems to master. It covers every aspect of segment presentation — segment revenue with inter-segment eliminations, segment result with head office exclusions, segment assets and segment liabilities with unallocated corporate items, and the geographical secondary format for sales by market.
Make sure you understand why certain items like head office costs, interest expense, and income tax are excluded from segment figures and shown only at the enterprise level. This understanding is what separates a good answer from an excellent answer in segment reporting exam questions.
