Ind-AS 108: Accounting for Operating Segments Gets Overhaul
By Tracie Sloop Frost
Earlier this year, the Indian Ministry of Corporate Affairs notified the Companies Rules 2015, otherwise known as the Indian Accounting Standards (Ind-AS).
The rules adopt accounting standards that closely align with the International Accounting Standards Board’s International Financial Reporting Standards (IFRS). India’s adoption of IFRS will bring Indian companies in line with other global companies, perhaps increasing global marketability in terms of foreign investment.
However, not everyone is excited about the upcoming changes.
One standard that has businesspeople concerned is the rule governing the disclosure of operating segments, which is known as Ind-AS 108. Ind-AS 108 replaces old Indian Generally Accepted Accounting Principles (GAAP) Standard 17.
Operating segments are components of a company. In general, the purpose of segment disclosures is to provide information that enables users of the financial statements to evaluate the nature and financial effects of business activities and the economic environment.
The identification of an entity’s operating segments is the key factor in determining the level of information included in the segment disclosures. Under the old rule, entity-wide disclosures are required based on business and geographical reporting. Segments are classified as either primary or secondary, and disclosure requirements for secondary reporting segments are less detailed than those for primary reporting segments.
Under the new rule, segments are identified based on the breakout of information contained in the internal reports that the company’s chief officers use to determine resource allocation and performance. This means that companies will have to explain their segment reporting to users of financial statements in the same way that management looks at the functioning of its segments for internal decision-making purposes. For those segments that must be disclosed, Ind-AS 108 requires disclosure of three categories of potentially sensitive information:
- External revenues from each product or service,
- Revenues from customers in the country of domicile and from foreign countries,
- Geographical information on non-current assets located in the country of domicile and foreign countries.
In addition, information on major customers including total revenues from each major customer must be disclosed if the revenue from that customer is 10 percent or more of total segment revenues. While the company is not required to disclose the identity of such customers, there is some concern among companies that these disclosures could lead to inadvertent release of commercially sensitive information.
A Major Change
The size and scale of differences between Indian GAAP and Ind-AS is immense. Companies required to use Ind-AS will have to devote significant amounts of time and effort to the transition.
In addition to segment disclosure, most companies will also need to devote their attention to revenue recognition, consolidation, business acquisition, taxes and financial instruments. Ind-AS will be applied in a phased manner from April 1, 2016, beginning with companies whose net worth is equal to or exceeding 500 crore Rupees (US $7.8 million).
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