12 Segment Reporting Parameters Set

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The C B Bhave committee on continuous disclosure by corporates has suggested 12 parameters for segment reporting. According to the report forwarded by the committee recently, segment reporting will ensure that investors are in a position to be more informed about the company's future prospects on the basis of such disaggregated information since the areas of growth and profit-making lines of business are better identified.

The committee has set out certain parameters for segment reporting.

* Segment reporting must be with reference to the complete set of published financial statements.

* Segment information should be prepared in accordance with the accounting policy adopted for preparing and presenting the relevant financial statements. The following items of information should be provided in respect of each reportable segment - sales or other operating revenue( distinguishing between external and internal sales or revenue), segment result, segment assets employed, basis of inter-segment pricing or segment liabilities, capital additions and depreciation or amortisation expense and non-cash expenses other than depreciation or amortisation.

* The organisational and management structure of a company, and its system of internal financial reporting to the board of directors should normally be the basis for identifying the dominant source and nature of risks and rewards facing the company.

* It should be ensured that each business segment should be a distinguishable component of the company engaged in providing a product or service or a group of related products or services which is subject to risks and returns that are different from those of other business segments.

* In grouping products and services into business segments, the factors to be considered would include the nature of products or services, technology of production processes, types of markets, classes of customers, distribution channels or methods for products, unique environment relating to any part of the business and geographical location of plants.

* Information in respect of a business segment so identified is reportable, provided more than 50 per cent of the operating revenue of that segment is earned from sales to external customers, and further provided any one or more of the following conditions are statisfied. These include revenue from sales to external customers and from transactions with other segments is 10 per cent or more of the total revenue, external and internal, of all segments, its segment result whether profit or loss, is 10 per cent or more of the combined result of all segments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount or its assets are 10 per cent or more of the total assets of all segments.

* If identified segment does not qualify as reportable segment, then it should be included among the unallocated reconciling items.

* Reporting of vertically integrated activities as separate segments is necessary even if a majority of their revenue is not from sales to external customers.This is subject to conditions that the inter-segment transfers are priced at an external market based transfer price and the resulting information is meaningful to an understanding of the financial statements.