An order passed by National Financial Reporting Authority, on March 29, 2023, has raised several issues of far-reaching importance in the context of segment reporting by corporates. Interestingly, the initial outrage in some quarters was more to do with the circumstances (the context being a private complaint) leading to the order rather than the core issue itself. The sum and substance of the NFRA order is to that Mahindra Holiday and Resorts Ltd failed to disclose annual subscription fees as a separate operating segment as required under Ind AS 108, more so since this element constitutes significant revenues in the overall profit and loss account. The key question is: How do we determine and report ‘operating segments’?

Segment reporting in the form of AS 17 confronted Corporate India in 2001 amidst hue and cry that it would lead to sensitive information being divulged to competitors. At that time, the biggest mortgage loan lender HDFC announced that the company is in the business of financing and all financing, irrespective of risks and rewards, constituted one reportable segment. Others, notably in the financial services industry, followed suit and nobody raised an issue from then till now. In the manufacturing sector each company resorted to its own approach and there was a tendency to disclose only the barest minimum in the area of segmental information. The Standard also left this call entirely to the management, with the customary routine explanation via notes on accounts. However, much has happened from 2001 to 2023.

Granular details

Information flow on products and geography for internal purposes is now granular and detailed. Competitor information by and large is no longer classified , thanks to information explosion. Margins — both gross and net — in business are no longer trade secrets. Analysts and the investor community are able to dissect financials even if operating segments are not provided in detail. Therefore, is it not the right time to revisit the whole subject of operating segments based on the aforementioned NFRA order?

There is already a feeling that financial statements are cluttered and it’s time to prune annual reports. Overload of information on operating segments would lead to reducing the status of financial statements to internal MIS statements. For a company with multiple subsidiaries/products, the collation and presentation of such information will be a nightmare even with the support of the best technology.

Imagine an NBFC lending to tractors, light commercial vehicles, two-wheelers and agricultural equipment. It will have to present each vertical as a separate operating segment and, of course, the user would know the profit/loss from each segment. Likewise, an airline will have to report passenger revenue and that from sale of food products as separate operating segments.

In the field of automobile manufacturers and suppliers, will there be a need to showcase the electric vehicle portion and others as separate operating segments since the resources — both human and technological — as well as the market and risks are distinct? There is bound to be information overload and animated debates on efficiencies of the company vis-a-vis its competitors. Regulators will of course use this vital information for deep diving into specific cases for detailed scrutiny.

The need of the hour is to arrive at a solution that balances extreme propositions. It must be made crystal clear that internal MIS reporting should not be the determining factor to decide operating segments as made out in the NFRA order.

The writer is a chartered accountant

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