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A. Facts of the Case
1. A company is a public sector enterprise under the administrative control of the Ministry of Mines, Government of India, and is engaged in mining of bauxite, manufacturing of alumina and aluminium, generation of power at captive power plant for use in Smelter, and selling of alumina and aluminium both in domestic and international markets. The company has four production units (i) a fully mechanised open cast Bauxite Mine having excavation capacity of 48,00,000 tonnes per annum (ii) Aluminium Refinery having production capacity of 15,75,000 tonnes per annum (iii) Captive Power Plant having 8 units of 120 MW each to generate power and (iv) Smelter Plant of 3,45,000 M.T. per annum capacity.
2. Mines Division, which is located on hills, serves feed-stock to the Alumina Refinery located 16 KM downhill. The Refinery provides alumina to the company’s Smelter Plant which is about 600 KM away by a specially designed alumina wagon by rail transport. For production of 1 MT of Alumina at Smelter, 13,600 KWH of power is required, which is met by generation of power at Captive Power Plant situated at a distance of 4 KM. Cost of power constitutes about 30% of cost of production of aluminium. Captive Power Plant is set up exclusively to supply uninterrupted power to Smelter. It is also connected to State Grid to take care of the supply of emergency power to Smelter in case of any break-down or failure at Captive Power Plant. Any surplus power after meeting the requirement of Smelter is automatically transmitted to State Grid and treated as sale, as per agreement with company ‘G’, which is a State Government undertaking.
3. The company has identified the following three reportable segments on the basis of the type of products:
(i) Chemical Segment – For Bauxite Mining and Alumina Plant
(ii) Power Segment – For Captive Power Plant
(iii) Aluminium - For Smelter Plant
4. The querist has stated that the company has identified the reportable segments in line with the provisions of paragraph 27 (a), (b) and (c) of Accounting Standard (AS) 17, ‘Segment Reporting’.
5. The querist has referred to an earlier opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India on the subject, ‘Transfer price for the purpose of segment reporting’ (published as Query No. 16 of Volume XXIX of the Compendium of Opinions), issued to the querist. Paragraph 15 of the said opinion, inter alia, states as below:
“The Committee is of the view that as per AS 17, an enterprise is free to choose any appropriate pricing policy for inter-segment transfers, for example, at cost, or cost plus a fixed return, or market price of the product, etc.”
6. The querist has further stated that the Captive Power Plant segment of the enterprise is on the verge of completion of its second phase expansion consisting of two more units (9th & 10th) of 120 MW. On completion of 9th and 10th units, the company will have surplus power of 100 MW. Though third party sale of power is legally permitted, the State Government generally discourages sale of power to third parties. However, in the instant case, as per formal discussion, company G has agreed not to raise any objection in case the company agrees to sell minimum fixed 40 MW of surplus power to company G. Accordingly, balance 60 MW can be sold to third parties at a higher rate.
B. Query
7. In the light of the above facts and the fact that as regards power segment, it has already been opined that the management is free to choose any appropriate pricing policy for inter-segment transfer, the querist has sought the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India on the issue as to whether, after completion of 2nd phase expansion, i.e., 9th and 10th units of Captive Power Plant, the company can identify and treat some of the units of Captive Power Plant (Power Segment) as part of Smelter Plant and the remaining units as part of independent power producer company so that the transfer price of power to aluminium Smelter can be at cost price of Captive Power Plant units attached to Smelter. If yes, whether the segment report will be prepared only for the units treated as part of independent power producer company. The querist has clarified that the company does not have the intent of creating a separate legal entity for units identified as part of independent power producer company.
C. Points considered by the Committee
8. The Committee notes that the basic issue raised in the query relates to treatment of some of the units of Captive Power Plant which supply power to Smelter plant as part of the Segment relating to Smelter Plant so that the transfer price of power to Smelter Plant can be at cost, and treatment of remaining units as a separate segment (power segment) so as to use market price of power for those units for the purpose of segment reporting. The Committee has, therefore, considered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, any issue that may arise from the Facts of the Case of the earlier opinion referred by the querist, etc.
9. The Committee notes the definition of the term ‘business segment’ as contained in AS 17, notified under the Companies (Accounting Standards) Rules, 2006, 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.”
The Committee notes that according to the definition of the term ‘busienss segment’ as per AS 17 reproduced above, if the various products of the company are subject to different risks and returns, these would constitute different business segments. However, if the products are not subject to different risks and returns, they would not constitute different business segments. The Committee notes from the Facts of the Case that the company has identified three reportable segments, viz., (i) Chemical Segment (for Bauxite Mining and Alumina Plant), (ii) Power Segment (for Captive Power Plant), and (iii) Aluminium (for Smelter Plant), on the basis of the type of products and in line with the provisions of paragraph 27(a), (b) and (c) of AS 17. Thus, the company itself recognises that the above are three separate segments for the purpose of reporting under AS 17. Accordingly, in the absence of any information to the contrary, the Committee presumes that the company has correctly determined the business segments, and, therefore, the three segments represent different risks and returns.
10. The Committee further notes from the Facts of the Case that it is upon completion of additional units of Captive Power Plant when the company will have surplus power for sale to external parties, that the company wishes to treat only some of the units whose product (i.e., power) will be sold to external parties as a separate segment, i.e., Power; and treat the units whose product (i.e. power) is being used for captive consumption for Smelter Plant as part of the segment constituting Smelter Plant, i.e., Aluminium. The Committee is of the view that determination of business segments depends on the different risks and returns associated with the different products produced by a company. The sale of a portion of a particular product to the external customers or the use of a portion of a particular product for captive consumption, does not alter the risks and rewards associated with that product. In this context, the Committee notes that paragraph 40 of AS 17 requires, inter alia, disclosure of the following for each reportable segment:
“(a) segment revenue, classified into segment revenue from sales to external customers and segment revenue from transactions with other segments”.
Accordingly, the Committee is of the view that in the case of the company, power segment should constitute all the units producing power irrespective of whether power is being used for captive consumption or being sold to external customers.
11. In respect of reporting of the segment result, the Committee notes the definitions of the terms ‘segment revenue’, ‘enterprise revenue’ and paragraph 53 of AS 17 which provide as follows:
“Segment revenue is the aggregate of
(i) the portion of enterprise revenue that is directly attributable to a segment,
(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, and
(iii) revenue from transactions with other segments of the enterprise”.
“Enterprise revenue is revenue from sales to external customers as reported in the statement of profit and loss.”
“53. In measuring and reporting segment revenue from transactions with other segments, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements.”
From the above, the Committee is of the view that in the case of the company, the segment revenue for power segment would comprise the revenue earned from sale of power to external customers and the revenue on account of inter-segment transfer of power at the price actually used to price those transfers. As far as the Smelter Plant is concerned, i.e., the segment which is receiving the product from the power segment, the price actually used to price the transfer of power consumed, would constitute cost for Smelter Plant segment (i.e., Aluminium segment).
D. Opinion
12. On the basis of the above, the Committee is of the opinion that in the case of the company, power segment should constitute all the units producing power irrespective of whether power is being used for captive consumption or being sold to external customers and accordingly, the company cannot identify and treat some of its units of Captive Power Plant as part of Smelter and remaining units as a separate segment. While reporting segment results under AS 17, the actual price that is charged from external customers (viz., sale price) and the actual price that is used for inter-segment transfers should be used.
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