In our previous blogs we covered how to identify business segments, geographical segments, and reportable segments under AS 17 Segment Reporting. Now we move to the next critical topic — understanding exactly what goes into calculating segment revenue, segment expense, segment assets, and segment liabilities.
This is one of the most important topics for students and professional because the exam frequently tests whether a student knows what to include and what to exclude from each of these four figures. Getting these definitions wrong leads to wrong segment result calculations and wrong answers in practical problems.
In this blog we will go through each definition carefully with inclusions, exclusions, and solved examples.
Why These Definitions Matter
Before we jump into the definitions, it is important to understand why segment accounting India standards are so specific about inclusions and exclusions.
The purpose of AS 17 is to give users a true picture of how each segment is performing on its own. If you include items like income tax or head office borrowings in the segment figures, the segment results become distorted and misleading. That is why AS 17 draws a very clear line between what belongs to a segment and what belongs to the enterprise as a whole.
What is Segment Revenue?
Segment revenue is the aggregate of the following three components:
- The portion of enterprise revenue that is directly attributable to a segment
- The relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment
- Revenue from transactions with other segments of the enterprise
The third component — revenue from inter-segment transactions — is important. When one segment sells goods or services to another segment within the same enterprise, that revenue is included in the selling segment's segment revenue. However, these inter-segment revenues are eliminated at the consolidated level.
What is Excluded from Segment Revenue?
Segment revenue does not include the following items:
- Extraordinary items as defined in AS 5
- Interest or dividend income, including interest earned on advances or loans to other segments, unless the operations of the segment are primarily of a financial nature
- Gains on sales of investments or on extinguishment of debt, unless the operations of the segment are primarily of a financial nature
The exception for financial segments is important. If a segment is a bank, an insurance company, or a financial services division, then interest income and dividend income are core operating revenues and must be included in segment revenue.
What is Segment Expense?
Segment expense is the aggregate of the following three components:
- The expense resulting from operating activities of a segment that is directly attributable to the segment
- The relevant portion of enterprise expense that can be allocated on a reasonable basis to the segment
- Expenses relating to transactions with other segments of the enterprise
What is Excluded from Segment Expense?
Segment expense does not include the following items:
- Extraordinary items as defined in AS 5
- Interest expense, including interest incurred on advances or loans from other segments, unless the operations of the segment are primarily of a financial nature
- Losses on sales of investments or losses on extinguishment of debt, unless the operations of the segment are primarily of a financial nature
- Income tax expense
- General administrative expenses, head office expenses, and other expenses that arise at the enterprise level and relate to the enterprise as a whole
The last point has an important exception. Sometimes costs are incurred at the enterprise level on behalf of a specific segment. Such costs are part of segment expense if they relate to the operating activities of that segment and can be directly attributed or allocated to it on a reasonable basis.
What is Segment Result?
Segment result is simply segment revenue minus segment expense.
Segment Result = Segment Revenue minus Segment Expense
This is the profit or loss of an individual segment from its operating activities. It does not include interest income, interest expense, income tax, or head office costs unless they are specifically attributable to the segment.
Treatment of Interest in Segment Expense
This is a topic that often confuses students. The general rule is that interest expense relating to overdrafts and other operating liabilities of a segment should not be included as segment expense unless:
- The operations of the segment are primarily of a financial nature, or
- The interest is included as part of the cost of inventories as required by AS 16 read with AS 2
If interest is capitalised into inventory cost under AS 16 and those inventories are part of segment assets, then such interest becomes part of segment expense. In this case the amount of such interest and the fact that the segment result has been arrived at after including such interest must be disclosed by way of a note.
What are Segment Assets?
Segment assets are those operating assets that are employed by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.
If the segment result of a segment includes interest or dividend income, its segment assets include the related receivables, loans, investments, or other interest or dividend generating assets.
Segment assets are determined after deducting related allowances and provisions that are reported as direct offsets in the balance sheet of the enterprise.
What is Excluded from Segment Assets?
Segment assets under AS 17 definitions ICAI do not include:
- Income tax assets including deferred tax assets
- Assets used for general enterprise or head office purposes
This exclusion of deferred tax assets is very important for solving practical problems under segment accounting India standards. Many students forget to remove deferred tax assets before applying the 10% asset threshold test.
What are Segment Liabilities?
Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.
If the segment result includes interest expense, the related interest-bearing liabilities are also included in segment liabilities.
Examples of segment liabilities include:
- Trade and other payables
- Accrued liabilities
- Customer advances
- Product warranty provisions
- Other claims relating to the provision of goods and services
What is Excluded from Segment Liabilities?
Segment liabilities do not include:
- Income tax liabilities including deferred tax liabilities
- Borrowings and other liabilities incurred for financing rather than operating purposes
An important rule is that assets and liabilities that relate jointly to two or more segments should be allocated to those segments only if their related revenues and expenses are also allocated to those segments.
Allocation of Revenues and Expenses to Segments
An enterprise looks to its internal financial reporting system as the starting point for identifying items that can be directly attributed or reasonably allocated to segments. There is a presumption that amounts already identified with segments for internal reporting purposes are directly attributable or reasonably allocable for external segment reporting purposes as well.
However there are two situations where the internal allocation may need to be adjusted:
First, an internal allocation may be based on a method that is understood by management but considered arbitrary by external users. In this case the allocation should follow the definitions in AS 17 definitions ICAI.
Second, an enterprise may have chosen not to allocate some item internally even though a reasonable basis for doing so exists. In this case the item should be allocated to segments for external segment accounting India purposes if it meets the definitions of segment revenue, segment expense, segment assets, or segment liabilities.
Segment revenue, segment expense, segment assets, and segment liabilities are all determined before intra-enterprise balances and transactions are eliminated, except where such transactions are entirely within a single segment.
Solved Example 1: Calculation of Segment Result
Calculate the segment result of a manufacturing organisation from the following information (figures in ₹):
Directly attributed revenue: A = 5,00,000 | B = 3,00,000 | C
= 1,00,000 |
Total = 9,00,000
Enterprise revenue allocated in 5:4:2 ratio
Total = 1,10,000
Revenue from transactions with other segments
Transaction from B to A = 1,00,000
Transaction from B to C = 50,000
Transaction from C to A = 10,000
Transaction from C to B = 50,000
Transaction from A to B = 25,000
Transaction from A to C = 1,00,000
- Operating expenses: A = 3,00,000 | B = 1,50,000 | C = 75,000 | Total = 5,25,000
- Enterprise expenses allocated in 5:4:2 ratio: Total = 77,000
- Expenses on transactions with other segments:
- Transaction from B to A = 75,000 | Transaction from B to C = 30,000
- Transaction from C to A = 6,000 | Transaction from C to B = 40,000
- Transaction from A to B = 18,000 | Transaction from A to C = 82,000
Solution
Segment Revenue Calculation:
Segment A:
Directly attributed revenue = 5,00,000
Enterprise revenue allocated (5/11 of 1,10,000) = 50,000
Revenue from B = 1,00,000
Revenue from C = 10,000
Total Segment Revenue of A = 6,60,000
Segment B:
Directly attributed revenue = 3,00,000
Enterprise revenue allocated (4/11 of 1,10,000) = 40,000
Revenue from C = 50,000
Revenue from A = 25,000
Total Segment Revenue of B = 4,15,000
Segment C:
Directly attributed revenue = 1,00,000
Enterprise revenue allocated (2/11 of 1,10,000) = 20,000
Revenue from B = 50,000
Revenue from A = 1,00,000
Total Segment Revenue of C = 2,70,000
Segment Expense Calculation:
Segment A:
Operating expenses = 3,00,000
Enterprise expenses allocated (5/11 of 77,000) = 35,000
Expenses from B = 75,000
Expenses from C = 6,000
Total Segment Expense of A = 4,16,000
Segment B:
Operating expenses = 1,50,000
Enterprise expenses allocated (4/11 of 77,000) = 28,000
Expenses from C = 40,000
Expenses from A = 18,000
Total Segment Expense of B = 2,36,000
Segment C:
Operating expenses = 75,000
Enterprise expenses allocated (2/11 of 77,000) = 14,000
Expenses from B = 30,000
Expenses from A = 82,000
Total Segment Expense of C = 2,01,000
Segment Result:
Segment A = 6,60,000 minus 4,16,000 = ₹2,44,000
Segment B = 4,15,000 minus 2,36,000 = ₹1,79,000
Segment C = 2,70,000 minus 2,01,000 = ₹69,000
Total Segment Result = ₹4,92,000
Solved Example 2: Nathan Ltd. — Deferred Tax and Segment Assets
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
Under AS 17, segment assets do not include income tax assets. Therefore deferred tax assets must be removed.
Revised Segment Assets:
- Segment P = 4 minus 1 = ₹3 crores
- Segment Q = 6 minus 0.90 = ₹5.10 crores
- Segment R = 5 minus 0.80 = ₹4.20 crores
- Revised Total = ₹12.30 crores
This revised figure of ₹12.30 crores is the correct base for applying the 10% asset threshold test under segment accounting India requirements.
Solved Example 3: Inter Segment Transfer Pricing
A company has an inter-segment transfer pricing policy of charging at cost less 10%. Market prices are generally 25% above cost. Is this policy correct under AS 17 definitions ICAI?
Answer: Yes, the policy is correct. AS 17 requires that inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change in that basis must be disclosed in the financial statements.
The enterprise can have its own policy — cost based, below cost, or market price — for pricing inter-segment transfers. However, whichever policy is followed must be disclosed and applied consistently. Therefore the policy of charging at cost less 10% is acceptable under segment reporting standards as long as it is followed consistently and disclosed properly.
Key Differences: What Goes In and What Stays Out
Items included in segment figures:
- Directly attributable revenues and expenses — included in segment revenue and segment expense
- Reasonably allocated enterprise revenues and expenses — included in segment revenue and segment expense
- Inter-segment revenues and expenses — included before elimination
- Operating assets directly attributable to segment — included in segment assets
- Operating liabilities directly attributable to segment — included in segment liabilities
Items excluded from segment figures:
- Extraordinary items — excluded from both segment revenue and segment expense
- Interest income and dividend income — excluded from segment revenue unless financial segment
- Interest expense — excluded from segment expense unless financial segment
- Income tax assets and liabilities — excluded from segment assets and segment liabilities
- Head office assets and liabilities — excluded from segment assets and segment liabilities
- Borrowings for financing purposes — excluded from segment liabilities
- Gains or losses on investments — excluded from segment revenue and segment expense unless financial segment
Frequently Asked Questions
Q1. What is the difference between segment revenue and enterprise revenue?
Segment revenue includes only the revenue directly attributable or reasonably allocable to a specific segment plus inter-segment revenues. Enterprise revenue is the total combined revenue of the entire enterprise. Segment revenue excludes extraordinary items, interest income, and investment gains unless the segment is primarily financial in nature.
Q2. Are inter-segment sales included in segment revenue?
Yes. Revenue from transactions with other segments is included in segment revenue of the selling segment. However these inter-segment revenues are eliminated when preparing the consolidated enterprise financial statements.
Q3. Why is income tax excluded from segment assets and segment liabilities?
Income tax is managed at the enterprise level, not at the individual segment level. Including it would distort the true picture of how each segment uses its operating assets and manages its operating obligations. This is a key principle in segment accounting India standards.
Q4. Can head office expenses ever be included in segment expense?
Yes, but only if those head office expenses were incurred specifically on behalf of a segment, relate to the operating activities of that segment, and can be directly attributed or reasonably allocated to it. General head office expenses that relate to the enterprise as a whole are always excluded from segment expense.
Q5. What is the treatment of interest on inventory under AS 17 definitions ICAI?
If interest is capitalised into the cost of inventories under AS 16 and those inventories are part of segment assets, then such interest becomes part of segment expense. The amount of such interest must be disclosed separately as a note to the segment result.
Q6. How are jointly held assets allocated between segments?
Assets and liabilities that relate jointly to two or more segments should be allocated to those segments only if their related revenues and expenses are also allocated to those segments. If you cannot allocate the revenues and expenses, you cannot allocate the jointly held assets either.
Q7. What is the correct base for the asset threshold test — before or after removing deferred tax?
Always after removing deferred tax assets. Segment assets under AS 17 exclude income tax assets including deferred tax assets. The revised asset figures after removal must be used as the base for the 10% segment revenue threshold asset test.
Conclusion
Understanding what is included and excluded from segment revenue, segment expense, segment assets, and segment liabilities is the foundation of every practical segment reporting problem. The rules may seem detailed at first but they follow a simple logic — include only what belongs to the operating activities of the segment and exclude everything that is managed at the enterprise level.
For CA students, the most common exam mistakes in this area are including income tax assets in segment assets, including head office expenses in segment expense, and forgetting to remove deferred tax assets before the threshold test. Keep these exclusions in mind and your segment accounting India problems will become much easier to solve.
