SEGMENTAL REPORTING

SEGMENTAL REPORTING

GROUP MEMBERS • ANKIT PURI • MOHAMMED SAUD • NAMAN JOSHI • SHIRISH PORWAL • BRIJESH DAYANAND • ANCHAL SINGH BHARADWAJ • KUMAIL MURTAZA • RAVEESH SRIVASTAV

WHAT IS SEGMENT REPORTING? • Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements

NEED FOR SEGMENT REPORTING • Many conglomerates have expanded into more diversified businesses and some have entered overseas markets. As a result, their operations have become too sophisticated to allow financial performance to be analyzed from the profit-and-loss statement and balance sheet alone. So, how do shareholders or investors know which businesses are making money and which are losing money

BACKGROUND • Airlines face a lot of difficulties in determining and reporting segment information • Differing disclosures lead to difficulties in making meaningful comparisons • Areas of difficulties are • Determination of segments of business • Meaningful allocation of assets, costs and revenues to those segments

OBJECTIVES OF THE AIRLINE ACCOUNTING GUIDELINE • Set out practical guidance for airlines in preparing segmental disclosures • Present a set of disclosures that, if consistently prepared, will allow greater comparability of airline reporting • The Accounting Policy Task Force recognizes the different approaches to segmental reporting adopted by • IASC (segments represent activities(split by geography or business • FASB(segments are derived from the information used by senior management

INTERNATIONAL STANDARD BACKGROUND • IAS 14 (revised) Segment Reporting is effective for accounting periods beginning on or after 1st July, 1998

IDENTIFICATION OF SEGMENTS • Seeks to segment on the basis of business and geography • It defines as both being subject to risks and returns that are different to other segments • Every organization should consider one primary and the other secondary • Determination is based on • Risks and returns are affected by differences in its products and services or • Differences in the location of its customers or production facilities

It further suggests that determination is best made by reference to the structure of the organization • AS14 does not require the segments which trade predominantly internally to be disclosed separately

US STANDARD BACKGROUND • FAS 131 disclosures about segments of an enterprise and related information was issued in June 1997 and its effective for financial years beginning after 15 December 1997.

IDENTIFICATION OF SEGMENTATION • It requires organizations to segment according to the information used by the “Chief operating decision maker’ (CODM) • Segment may either be business or geography

PARTICULAR ISSUES FACED BY AIRLINES AND RECOMMENDATIONSINBASIS OF SEGMENTATION

ISSUE • The Accounting Task Force considers that the • IASC (segments represent activities(split by geography or business) will have the same consequences as the • FASB(segments are derived from the information used by senior management)

Consideration for those airlines reporting under IASC which source to consider primaryand which to consider secondary • Check whether the dominant source and nature of its risks and returns relates to • the geographic location • or its operations • or its component business of the operation • or indeed to the operation as a whole

RECOMMENDATION • The basis of segmentation under IASC of primary and secondary is based on airlines individual circumstances • The Accounting Policy Task Force considers that segmentation of an airline’s business should be on viewed as a function of product or service rather than geography

The Accounting Policy Task Force has taken the view that • although revenue is managed and reported on a geographical basis, airlines usually consider their cost on a functional rather than geographic basis • Further, the risks and returns faced by the airline are dominated by the nature of products and services offered rather than where the products and services are offered

BUT for those airlines having clearly identifiable business areas which are managed and reported upon internally • For those more than one segmented has to be reported • EXAMPLE: low cost airlines which operates as a business separate from the rest of the airlines • Cargo operation • Maintenance and catering where there is significance level of involvement of third party

CERTAIN LIMITS AND THRESHOLDS • Segmentation is required of least 75% of the total revenues • Disclosure is not required of any business segment where that segments share of revenue, profit and total assets is less than 10% of the entity’s total • Conversely, of course business or geographic reasons that are considered to be separate segments and that meet the 10% test are required to be disclosed

Example: 10% Revenue Test A segment is reportable if its total revenue ≥ 10% of combined segment revenue. Threshold = 10%(1,500) = $150 Transportation ($360) and Oil refining ($885) are reportable segments.

Example: 10% Asset Test A segment is reportable if its identifiable assets ≥ 10% of combined segment assets. Threshold = 10%(3,000) = $300 Transportation, Oil refining, and Financing are reportable segments.

Example: 10% Profit or Loss Test Separate profitable and unprofitable segments. A reportable segment's |profit or loss| ≥ 10% of the greater of |combined profits or combined losses|. $270 is greater than $100. Threshold = 10%(270) = $27. Transportation, Oil refining and Finance are reportable segments.

Allocation of Assets, Cost and Revenues Between Segments • International Standard utilizes 2 bases for categorizing sales by Geographic region. -- Origin Method (U.K. , U.S.) -- Destination Method

ORIGIN METHOD • Depends on the location of an entity’s assets that manufacture the goods /services. • For airlines key revenue generating assets is Aircraft Fleet. • So from Airline perspective this method is meaningless as : -- Fleet is Deployed flexibly across the entire route network . -- Revenue systems are unable to analyze the flight data unless all legs fall under same flight number • However some airlines having regional basis may find merit in this method.

Destination Method • Depends on the location of entity’s customers and allocates its sales. • Most practical approach to segmentation. • This is easier but there is no uniform definitions of regions/continents and Classification of feeder service

Allocation of Assets, Cost and Revenues Between Segments (Contd..) • Revenue from feeder service can be segmented as part of trunk revenue or in its own right. • Eg: Consider flight from LAX-JFK-LON . Here all revenue are considered as a part of Atlantic Segment consisting of North America and Europe Sectors . • All the end sectors are considered as discreet flights for segmental report. Where revenue is split by pro-ration basis

ALLOCATION OF ASSESTS AND FLEET COST • Allocation of fleet is a complicated process. • This is because airlines deploy their fleets across the network. • Thus, according to Accounting Policy Task Force ,the Airlines adopting geographic basis of segmentation are requried to make : -- Extensive Disclosure of Asset , -- Cost allocation by geographic region.

DISCLOSURES Summary of guideline under both International and US Standards Many National standards are moving into line with International standards, it is likely that the disclosures illustrates will also satisfy local requirements in many other Jurisdictions.

Assumptions • The airline is managed by business segment rather than by geographic region and that risks and rewards of the airline are driven principally by business rather than by geography • The airline operates only passenger, cargo or mail services(other businesses are immaterial) • Geographic segmentation is analyzed by destination

Contd… • Management use an operating profit figure (PBIT) to review • Segment result

Disclosure of segmentation of Revenue should comprise • Passenger revenue • Scheduled services • Charter • Cargo revenue • Other income

SEGMENTAL REPORTING