Corporate Segmental Reporting- A boon for the discerning investor.

To cope with the present-day dynamic business environments, companies diversify into different businesses, spanning different industries, sectors, customer groups or geographically scattered markets. The financial results of the business, as we are aware, are reported in the form of consolidated financial statements for the company in the form of its Profit and Loss A/c, Balance Sheet, Cash Flow statement etc.

The presentation of financials in the form of consolidated financial statements for the group, however, poses a problem for the investors. Investors find it difficult to make sense of the profitability of the enterprise.  With the financial results combined, and the differences in the expected performance of different sectors of the economy, it is difficult for them to gauge the future profitability of the company. For example, a large conglomerate may have businesses spanning various industries like textiles, construction, retail, petro-chemicals etc. and the success of the organization will depend on the constitution and the performance of each of its varying segments. Here is where segmental reporting is very useful for all stakeholders of the company, especially its investors.

A conceptual understanding of segmental reporting and its benefits:

Segmental reporting involves reporting by corporates on the performance of each of its segments, in addition to providing the consolidated data of the group. A business segment refers to a business component, generating its own revenues and creating its own products, product lines or service offerings.

Financial Accounting Standards Board of the USA states “The purpose of the (segment) information is to assist financial statement users in analyzing and understanding the enterprise’ financial statements by permitting better assessment of the enterprises’ past performance and prospects”.

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Segmental reporting offers the following benefits:

• Information about various products and services of a company and its performance on operations in different segments can be ascertained which is not possible to ascertain from the consolidated financial statements.
• Segmental reporting offers more transparency in reporting of financial data. It provides a clearer view of the company’s divisions, product lines, geographical units.

• It provides investment decision support- Segmental Reporting helps the stakeholders like lenders, investors, government, suppliers etc. to take more informed decisions with respect to the company.
• Facilitates better analysis of the risk and returns of the organization. With the breakup of information on different segments, investors can better assess the risks associated with their investments.

• Helps to analyze the most profitable or loss-making segments of the company.

Accounting Standard 17, the Indian regulation with respect to segment reporting:

Keeping in mind the various advantages of segmental reporting, it has been made mandatory for companies in India via Accounting Standard 17. Provisions of AS 17 are applicable with effect from 1^st April 2001, for all companies that are listed on an Indian Stock Exchange or that are process of listing and on other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50crores. Institute of Chartered Accountants of India (ICAI) expanded the scope of applicability of AS 17 on Banking, Insurance and other companies, with effect from 2004.

The companies are required to make disclosures with respect to

1. Segment wise revenues,
2. Segment wise expenses,
3. Segment wise profit before tax,
4. Segmental assets and
5. Segmental liabilities.

Guidelines are provided in the AS 17 with respect to the calculation and disclosure of each of the above.

Business and Geographical segments

A Business segment is a distinguishable part of a business enterprise, that is subject to risks and returns that are different from those of other business segments. Each segment is important and contributes the profitability of the company and the performance of each segment affects the overall performance of the company.

Geographical segment is a distinguishable unit of an enterprise engaged in providing products or services within a particular economic environment. It is subject to risks and returns that are different from units operating in other economic environments.

Reportable segment is a business or geographical segment for which segment information is required to be disclosed. In India a business segment or geographical segment is identified as a reportable segment if

1. Revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue of all its segments.
2. Segment result is 10% or more of the combined profit or loss of all segments or
3. Segment assets are 10% or more of the total assets.

However, a company may choose to report on a segment even if it does not fulfil above criteria, as per the discretion of its management.

The case of Reliance Industries Limited (RIL)

RIL is an Indian conglomerate with businesses the world over. With its headquarters in, Mumbai RIL has been ranked 155^th by the Fortune Global 500 list as the world’s largest corporations of 2021. Reliance contributes to 8% of India’s total merchandise exports. The company has 158 subsidiary companies and 7 associate companies. With such large transactions spread over various sectors, industries, geographical markets etc, it is an ominous task to provide information to the investor on the prospects of the company.  Therefore, Segmental reporting comes in handy by providing the revenues, profitability expenses, and prospects of each its sectors. For segmental Reporting purposes, RIL’s businesses have been segregated into the following segments- Reliance Retail, Petrochemicals, Digital Services, Refining and Marketing and Oil & Gas.

Similarly, the reporting segments of ITC limited and HDFC Bank are as follows:

Company	Segment 1	Segment 2	Segment 3	Segment 4	Segment 5
ITC Limited	FMCG	Hotels	Agri-business	Paper boards	Paper and packaging
HDFC Bank	Treasury	Retail banking	Wholesale Banking	Other banking operations	Unallocated

Challenges in Segmental Reporting

The primary challenges of segmental reporting are as follows-

Deciding the basis of segmentation: The criteria for defining segments may not be straightforward, leading to inconsistencies. Moreover, owing to the dynamic nature of business environment, over time, which may necessitate redefining segments which can complicate comparisons over different reporting periods.

Allocation of common costs, pricing of inter-segmental transactions can be an arduous task especially where there are significant inter segment transactions and where there are shared resources like corporate overhead where allocations might be subjective or based on assumptions.

Further, Companies may use varying approaches to segment reporting, making it difficult to benchmark and compare performance across companies within the same industry.

Conclusion

The challenges of segmental reporting can be addressed with a robust framework for segment identification, allocation methodologies, data management systems, and consistent application of the accounting reporting standards. The benefits of segmental reporting outweigh the challenges.  With the help of improved financial reporting as per segment reporting, offered by the large corporates, company stakeholders, get a chance to get a deeper look into the details and thereby make well-informed decisions. The investors in India are better off now than before in terms of availability of sectoral information of diversified companies helping them to take better investment decisions.