The Hindu Business Line : Segment reporting by banks

While most of the public sector banks have been following the RBI directions on classification of business segments, a few private sector banks have been reporting as per the AS-17.

When it comes to segment reporting by banking companies, there is a clash of norms — that is, between Accounting Standard (AS-17) stipulated by the Institute of Chartered Accountants of India and those issued by the Reserve Bank of India.

Accounting Standard 17 deals with accounting, presentation and disclosure in financial statements of reportable segments of an enterprise which could be a business segment (that is, a product, a division, a unit, a process or a class of products or services or a business classified as a distinguishable business segment) or a geographic segment based upon geographic boundaries, locations, nature of risks associated with businesses, regulations, operations in different locations, etc (for example, exports, imports, domestic, international and regional segmentation).

AS-17 should be applied in presenting general purpose financial statements, and it should be applied fully, not selectively. For consolidated statements, segment reporting is necessary in the consolidated financial statement only. AS-17 will also apply to quarterly disclosures as per SEBI guidelines for listed companies.

AS-17 on segment reporting is mandatory, and is specified in the accounting standard itself. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product, service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The factors which should be considered in determining whether products and services are related include:

the nature of the products or services

the nature of the production processes

the type or class of customer for the products or services; and

the methods used to distribute the products or provide the services.

A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and this is subject to risks and returns that are different from those of components operating in other economic environments.

The factors which should be considered in identifying geographical segments include: a) similarity of economic and political conditions; relationships between operations in different geographical areas; b) proximity of operations; c) special risks associated with operations in a particular area; d) exchange control regulations; and e) the underlying currency risks.

A reportable segment is either a business or a geographical segment identified on the basis of the aforementioned definitions for which segment information is required to be disclosed in the financial statements.

Reportable segments

A segment (business/geographic) should be identified as a reportable segment if its revenue from sales is 10 per cent or more of total revenue or its segment results are 10 per cent or more of the results of the all segments combined or its segment assets are 10 per cent or more of the total assets of all segments.

If total external revenue attributable to reportable segment constitutes less than 75 per cent of the total enterprise revenue, additional segments should be identified as reportable segment, even if not meeting 10 per cent limit, until at least 75 per cent of the total enterprise revenue is included in the reportable segments.

A segment identified as a reportable segment in the immediately preceding period (as it satisfied the relevant 10 per cent threshold) should continue to be a reportable segment in the current period, notwithstanding that it no longer meets the requirements.

The preceding period segment data must be given for comparison, unless it is impracticable to do so.

Identification of reportable segment

The management should use its judgment in determining the composition of business or geographical segment based on factors such as risk and returns and internal organisation and management structure. Risks and returns are influenced by geographic location, location of customers' price and demand volatility or product risks.

If the risks and returns of an enterprise are affected predominantly by differences in the products or services it produces, its primary format reporting segment should be business segments, with secondary segments reported geographically and vice versa.

It is also necessary to observe the enterprise's internal organisational and management structure and system of internal reporting to board/chief executive officer in deciding the dominant source of risk and return.

Disclosure requirements of AS-17

According to AS-17, segment reporting should cover 75 per cent or more of total enterprises revenue. The segments could be business or geographic. The information can also be presented in a matrix form. The following disclosures should be made by reporting enterprise:

Reporting requirements: Primary reporting format — an enterprise should disclose the following for each reportable segment: i) segment revenue, classified into revenue from sales to external customers and revenue from transactions with other segments; ii) segment result; iii) total carrying amount of segment assets; iv) total amount of segment liabilities; v) total cost incurred during the period to acquire segment assets; vi) total amount of expense included in the segment result for depreciation and amortisation; and vii) total amount of significant non-cash expense, included in segment expense.

An enterprise should present reconciliation between the information disclosed for reportable segments and the aggregated information in the enterprise financial statements.

Secondary segment information: (a) if the primary format of an enterprise for reporting segment information is business segment, it should also report the following information: i) segment revenue from external customers by geographical area, based on the geographical location of its customers for each geographical segment, whose revenue from sales to external customers is 10 per cent or more of the enterprise revenue; ii) the total carrying amount of segment assets by geographical location of assets, for each such geographical segments; and iii) the total cost incurred during the period to acquire segment assets, by geographical location of assets, for each geographical segment.

(b) If the primary format of an enterprise for reporting segment information is geographical segment, it should also report the following segment information for each business segment, which meets the threshold criteria: i) segment revenue from external customers; ii) total carrying amount of segment assets; and iii) total cost incurred during the period to acquire segment assets.

Reporting format should be as suggested by the ICAI, and the primary format could be one of the following: a) business segment; b) geographic segment with: i) classification by location of assets; and ii) classification by location of customers.

Depending on the type of primary segment, the secondary disclosures are accordingly worked out.

Compliance by banks

Listed banks are required to mandatorily comply with all the accounting standards issued by the ICAI from time to time, but banks are facing compliance difficulties owing to the absence of uniform disclosure formats, absence of appropriate MIS to support the comprehensive disclosures and the likely impact on their regulatory compliances, keeping in view the nature of operation of banks and the need to ensure uniformity in regulatory requirements.

In 2003, the Reserve Bank of India had directed the banks to disclose three business segments — treasury, other banking business and residual business as the uniform business segments and the domestic and international segments as the uniform geographic segments for the purpose of AS-17.

It was also indicated that such segmentation was the minimum requirement and banks were expected to initiate measures to move towards greater disclosures.

Selection of primary business segments

While most of the public sector banks have been following the RBI directions on classification of business segments, there are few banks, of course private sector ones, which have been bold enough to report segmental reporting as per the true spirit of AS-17, issued by the ICAI on disclosures relating to segment reporting. The segments so reported give a much clearer picture than that followed by public sector banks. Not only aiming at better disclosure, these new banks have gone to the extent of disclosing the composition of such segments.

Other banking operations: These include corporate relationships, corporate advisory services, placements and syndication, management of public issue, project appraisals, depository and capital-market-related services, cash management services, retail assets and liability products, card services, Internet banking, ATM services, financial advisory services and NRI services.

Secondary segments

Almost all banks have considered geographic segments as secondary for the purpose of segment reporting. Accordingly, segmental reporting has been done as follows: a) domestic operations; and b) foreign or international operations.

On global operations, depending upon risks, returns and business size and profile, one can even bifurcate foreign operations into those in Asia (or even South-East Asia), Europe and rest of world.

Those banks which do not have foreign operations have ignored secondary segment reporting while some have considered it appropriate to disclose this by way of a note. For example, `entire operations of the bank are Indian operations, hence, disclosure of secondary segment is not considered necessary.' Or, `as the bank operates only in the domestic segment, there are no geographic segments.'

Almost all banks consider entire domestic operations (Indian) as one single segment. However, if one considers different segments within domestic operations, based on risks, returns, organisation structure or reporting system, there may not seem to be any anomaly in the same. For example, a regional bank (say, a south Indian bank) may consider the South and rest of India as two geographic segments.

Secondary segments

On global operations, depending upon risks, returns and business size and profile, one can even bifurcate foreign operations into those in Asia (or even South-East Asia), Europe and rest of world.

More Stories on : Accountancy | Accounting Standards | Banking

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Can iPhone upset the mobile cart?

Leverage management accounting for productivity

Segment reporting by banks

State Govt urges Centre to rewrite Constitution afresh

Just Do IT

The law on declaring dividends

`Complete the toughest and most boring work first'

Look into the true mirror