Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 4

 

Subject:           

  Segment  reporting.1

A.  Facts  of  the  Case

 

1.  A  public sector company has operations  which are spread all over India and is engaged in the business of refining, transportation and marketing of  various  petroleum products.  The  company  owns  and  operates  seven refineries and also has the country’s largest network of crude and product pipelines which is being used for transportation of crude oil and products. The petroleum products are being marketed in bulk as well as through an extensive retail network of over 21,000 sales points spread throughout the country.

 

2. The querist has stated that in addition to sourcing the imported crude oil for internal consumption, the company is also authorised to import crude oil on  behalf  of  other  public  sector  companies  including  subsidiaries  as  a canalising agency. Some companies are paying nominal service charges for importing crude oil on their behalf.  These transactions are shown as crude oil sales under the head ‘turnover’.  The total sales of the company for the year ended March 31, 2001 was Rs. 1,13,327 crore which includes crude oil sales of Rs. 15,270 crore and the balance is on account of sale of petroleum products. As per the querist, government has allowed public sector companies to import crude oil directly for their own requirements with effect from 01.04.2002.

 

3. The crude oil is purchased based on the requirements of the concerned company. The original bill of lading is in the name of the respective company and the amount is deposited by the company on the due date for payment. As regards the crude oil sale, there is no risk to the company.

 

4. The  querist  has  stated  that  there  are  no  assets  other  than  office equipments being used for import of crude oil and the cost incurred for the import activity for the company’s own use and on behalf of other public sector companies is also not material as compared to the total operations of the company.

 

5. The  querist  has  stated  that  the  company also  has  three  subsidiary companies having activities of lube blending (100% subsidiary - not listed), refining (a listed company), and refining and petrochemicals (a listed company). The financial statements of the company shall be consolidated including subsidiaries in addition to the financial statements of the companies.  The businesses of other subsidiaries are similar except in case of one subsidiary company which is having the additional activity of petrochemicals.

 

B .  Query

 

6. The querist has sought the opinion of the Expert Advisory Committee with regard to the applicability of Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of Chartered Accountants of India, on the following issues:

 

        (a)  Whether the activity of crude oil sales to other public sector companies on which there is no risk to the company shall form a reportable segment.

      (b)  In case of consolidation of financial statements including subsidiary companies whether the threshold limit of 10% for identification of repo rtable segment shall be appli cable o n the b asis of the consolidated financial statements or with reference to the segments reported by each of the company in its respective financial statements.

   

C.Points  considered  by  the  Committee

 

7. The Committee notes that the issue raised by the querist is whether the crude oil sales to other public sector companies should be considered as a reportable  segment.   Accordingly,  the  opinion  of  the  Committee,  given hereinafter, is restricted only to this aspect and does not address the other activities performed by the company. The Committee has also not addressed the issue as to whether the accounting treatment followed by the company with regard to inclusion of crude oil sales under the head ‘turnover’ is proper or not, since this matter has not been raised.  In the absence of the relevant facts, the Committee presumes that the aforesaid treatment is in accordance with the principles laid down in Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India.

 

8. The Committee notes definition of the term ‘business segment’ contained in paragraph 5 of AS 17, which is reproduced below:

 

        “A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or 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. Factors that should be considered in determining whether products or  services  are  related  include:

 

(a)        the nature of the products or services;

 

(b)        the nature of the production processes;

 

(c)        the type or class of customers for the products or services;

 

(d )       the methods used to distribute the products or provide the  services;  and

 

(e )       if applicable, the nature of the regulatory environment, for  example,  banking, insurance, or public utilities.”

9. The Committee notes from the facts of the case that the company is in the business of refining, transportation and marketing of various petroleum products and the activity of importing crude oil as a canalising agency for sale to other public sector companies. The Committee is of the view that the nature of the activity of crude oil sale to other public sector companies is different  from the  business of  refining,  transportation  and  marketing  of petroleum  products.  The  Committee  is,  accordingly,  of  the  view  that, apparently, the risks and returns of these two businesses would be different. In case of import of crude oil and its sale although the risk may be nil as indicated by the querist, but still it is different from the other business because apparently, the other business has some risks. In the view of the Committee, therefore,  crude  oil  sale  to  other  public  sector  companies  is  a  separate reportable segment subject to the threshold criteria for identifying a reportable segment, e.g., those mentioned in paragraph 27 of AS 17.

 

10. The Committee notes paragraph 4 of AS 17 which is reproduced below:

 

        “ 4 .   If  a  single  financial  report  contains  both  consolidated financial statements and the separate financial statements of the parent, segment information need be presented only on the basis of the consolidated financial statements.  In the context of reporting of segment information in consolidated financial statements, the references in this Statement to any financial statement items should construed to be the relevant item as appearing in the consolidated financial  statements.”

 

1.  On the basis of the above, the Committee is of the view that the threshold limit of 10% for identification of reportable segment shall be applicable on the basis of consolidated financial statements.

 

D.  Opinion

 

12. On the basis of the above, the Committee is of the following opinion, read with paragraph 7 above, on the issues raised in paragraph 6:

 

            (a)   The activity of crude oil sale to other public sector companies should form a separate reportable segment subject to the threshold criteria specified in AS 17, e.g., criteria stated in paragraph 27.

 

            (b)  In case of consolidation of financial statements, the threshold limit of 10% for identification of reportable segment is applicable on the basis of consolidated financial statements

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1Opinion finalised by the Committee on 26.3.2002.