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In the realm of accounting standards, IND AS 108 holds significant importance as it provides guidance on how entities should identify, report, and disclose information about their operating segments. By understanding the objective and key aspects of IND AS 108, entities can enhance transparency, decision-making, and accountability in their financial reporting.
Objective:-
The objective of this article is to delve into the intricacies of IND AS 108, shedding light on its purpose and the core principles it encloses. By exploring the key concepts and requirements outlined in the standard, readers will gain a comprehensive understanding of how operating segments are identified, evaluated, and presented in financial statements.
What is an Operating Segment:-
According to Ind AS 108, an operating segment is defined as a component of an entity that engages in business activities from which it can generate revenues and incur expenses, and for which discrete financial information is available. The standard focuses on the identification of operating segments within an entity to provide meaningful information to users of financial statements.
Here are the key characteristics of an operating segment:-
Engages in Business Activities:-
An operating segment is having business activities that are subject to risks and returns, for example, production, sale, or delivery of goods or services or the management of resources.
Generates Revenues and Incurs Expenses:-
The operating segment generates revenues from external customers or from transactions with other segments of the same entity.
Separate Financial Information:-
The operating segment has separate financial information that is regularly reviewed by the entity’s chief operating decision-maker (CODM).
Segment Identification:-
Under IND AS 108, entities are required to identify their operating segments based on the “management approach.” The management approach involves internal reporting and decision-making processes, focusing on the way an entity’s management evaluates performance and allocates resources. Segments are identified if they meet specific quantitative and qualitative thresholds, ensuring that significant segments are appropriately disclosed.
Understanding the Process of Identifying Reporting Segments:-
- Step 1: Evaluate the Business Activities
- Step 2: Assess Economic Factors
- Step 3: Review Internal Organization and Management Structure
- Step 4: Evaluate the Internal Reporting System
- Step 5: Assess Segment Size and Significance
- Step 6: Determine Aggregation Criteria
- Step 7: Document the Segmentation Process
Segment Reporting:-
Once the operating segments are identified, entities must report segment information in their financial statements. This includes disclosing segment revenue, segment result (profit or loss), segment assets, segment liabilities, and other relevant financial and descriptive information. The aim is to provide users with a clear understanding of the financial performance and position of each operating segment.
Aggregation of Operating Segments:-
In some cases, entities may need to aggregate operating segments into reportable segments if they have similar economic characteristics and satisfy certain criteria outlined in the standard. The decision to aggregate segments should be based on factors such as the nature of products or services, the regulatory environment, and the economic significance of the segments.
Primary and Secondary Reporting Formats:-
Entities must present segment information in both primary and secondary reporting formats. The primary format reflects the entity’s internal organization and management structure, while the secondary format is based on the nature of products or services, geographical areas, or a combination of both. These formats enable users to assess the entity’s performance from different perspectives.
Management Approach:-
The standard adopts a management approach to segment reporting, focusing on how the entity’s management makes strategic decisions based on internal reports. It highlights the significance of aligning the internal management structure with the reporting of operating segments to facilitate meaningful analysis and decision-making.
Significance and Benefits:-
Adhering to the principles of this standard offers several benefits to both entities and users of financial statements. It facilitates a better understanding of an entity’s business operations, assists in assessing its performance, enables more accurate forecasting, and supports effective decision-making. Additionally, it enhances transparency and comparability across different entities, promoting a fair and comprehensive financial reporting framework.
Disclosure Requirements:-
IND AS 108 lays down comprehensive disclosure requirements to provide users with complete and relevant information about the entity’s operating segments. These disclosures include explanations of the basis for segmentation, the nature of products and services, geographical areas of operation, major customers, and information about segment assets and liabilities.
Conclusion:-
IND AS 108 plays a vital role in improving the transparency and comparability of financial statements by providing guidance on the identification, evaluation, and disclosure of operating segments. By complying with the requirements of this standard, entities can present a clear and comprehensive picture of their business operations, enabling users of financial statements to make informed decisions.
Understanding the objective and key aspects of this standard empowers entities to accurately identify and report their operating segments, contributing to a more transparent and reliable financial reporting framework. By adhering to the principles outlined in this standard, entities can enhance their accountability, facilitate meaningful analysis, and foster investor confidence in their financial statements.