Post on 14-Jun-2015
SAAB MARFIN MBA
“SEGMENT REPORTING IN A
FOUNDRY”
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Executive Summary
TITLE
Segment Reporting in a Foundry (Alucast Foundries Belgaum Pvt. Ltd.)
NEED FOR THE STUDY
Many enterprises provide groups of products and services or operate in
geographical areas that are subject to differing rates of profitability, opportunities
for growth, future prospects, and risks. Information about different types of
products and services of an enterprise - often called segment information - is
relevant to assessing the risks and returns of a diversified and/or multi-location
enterprise but may not be determinable from the aggregated data. Therefore,
reporting of segment information is widely regarded as necessary for meeting the
needs of users of financial statements.
OBJECTIVES OF THE STUDY
To study the foundry (Alucast Foundries Belgaum Pvt. Ltd.)
To study and understand AS 17 and its applicability to a foundry
To segment P&L account as per AS17
To calculate profitability of each segment
SCOPE OF THE STUDY
The study is confined to Alucast Foundries Belgaum Pvt. Ltd. It is a study
describing the Segment Reporting system, wherein the profit and losses generated
by every segment would be studies to provide a detailed segment report in order
to understand which of the product categories is actually doing well.
SAMPLE DESIGN
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The study of the Segment reporting technique with regards to Alucast Foundries
Pvt. Ltd. is based on Secondary data. The secondary data is taken from published
material.
METHODOLOGY
Calculate investment, cost and revenue for major product categories
Identify segments in the set up
Calculate profitability on each of the segments
Conclude
- Which of the product categories is actually doing well and which is not
- If segment reporting is beneficial for such organizations as Alucast
LIMITATIONS
1. The time allotted to undergo the concurrent project was not sufficient to study
all the aspects of the organization.
2. There is no compulsion to maintain the books of accounts with regards to
costing records according to the law for small scale industries, therefore the
study got limited to available raw information.
3. The Accounting Standard 17 is not mandatory for the organization hence data
regarding different segments got limited to the available information.
4. The quantity details obtained are approximated values as the accurate quantity
details at different stages are difficult to asses without the maintenance of
records at every stage of the process of casting.
5. The study done in the project is purely for academic purpose only.
RESULTS
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As per the PAT values in the segment report the first segment Ventilated Disc
appears to be performing better than the other two segments. Alucast needs to do
some analysis on the Flywheel segment in order to see that all the segments are
performing as per their plans.
SUGGESTIONS
Segment reporting system should be installed in the day to day accounting of
companies irrespective of whether it is mandatory or not.
FUTURE SCOPE
THE SYSTEM OF SEGMENT REPORTING HAS BEEN EXPERIMENTED
ON ONLY ONE OF THE LOCATIONS OF ALUCAST INDUSTRIES. THE
STUDY MAY BE CONTINUED TO INCLUDE ALL THE GEOGRAPHIC
SEGMENTS
INDEX
CHAPTER PARTICULARSPAGE
NO.
Acknowledgement
Executive Summary
I A brief history of metal forming 1
II Foundry Industry 3
III Company Profile 4IntroductionShare holdersEsteemed customersRegistered office and worksPlant and Machinery usedHours and environmentSkills and personal qualities
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IV Process flow for the production of casting 8CastingSand CastingDesignPattern makingMould makingMachine mouldingHand mouldingCore makingMelting and pouringPouringShot blasting, fettling and painting
V Cost Accounting 17IntroductionScope of cost accountingObjectives of cost accountingAdvantages of cost accountingLimitations of cost accountingTraditional costing todayJob Costing
VI Accounting Standard and Financial Statements 27IntroductionObjectives of Accounting StandardsAdvantages of Accounting StandardsDisadvantages of Accounting StandardsObjectives and funtions of the Accounting Standards BoardRationale of Accounting StandardsInternational harmonization of Accounting StandardsAccounting Standards setting in IndiaComposition of Accounting Standards BoardThe Accounting Standards setting process
Present status of Accounting Standards in India in harmonization with the International Accounting StandardsCompliance with Accounting Standards Objective of Financial StatementsFinancial Position, Performance and Cash
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Notes and Supplementary SchedulesElements of Financial StatementsFinancial PositionAssetsLaibilitiesEquityPerformanceIncomeExpensesCapital maintenance adjustmentsRecognition of the elements of financial statementsThe probability of future economic benefitsReliability of measurementRecognition of AssetsRecognition of LiabilitiesRecognition of IncomeRecognition of Expenses
VII Accounting Standard (AS-17) 50Segment ReportObjectivesScopeDefinitionIdentifying reportable segmentsBusiness and Geographical SegmentsReportable SegmentsSegment accounting policyDisclosurePrimary reporting formatSecondary segment informationIllustrative segment disclosures (Other Disclosures)Illustrative I (Determination of Reportable Segments)Illustrative II (Segment Report)Illustrative III (Summary of Required Disclosure)A diagrammatic representation of segment reporting
VIII Calculations and Segment Report 85Cost SheetCalculation of Profit after Tax
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Segment Report
IX Conclusion 88
References and Bibliography 89
CHAPTER I
A Brief History of Metal Forming
The earliest human being inhabited the earth over 100,000 years ago.
Archaeological studies have revealed that he had already discovered the
phenomenon of fire and learnt to use it for his own benefit. Surprisingly it took
him another 95 thousand years before he discovered how to use fire to extract
metal from the earth’s crust and put it to use. Initially metals were used for
adornment – combs, necklaces and bracelets for example, which were made from
gold and silver, the easiest of metals to extract from their ores. Then he
discovered the more common and useful copper, which he learned to harden by
alloying it with other metals to form bronze. The Greeks and the Romans in the
centuries immediately before Christ became the first true masters of the art of
casting metal; their beautiful bronze sculptures, coins, ornaments and utensils are
the legacies we continue to admire. Last of all came iron, the most common metal
but the most difficult to work, Unlike the other metals whose relatively low
melting points allowed them to be cast in moulds, iron had to be forged, that is
heated to make it soft and then beaten into the necessary shapes. It was to be
several hundred years before the discovery of a method of attaining temperatures
sufficiently high to keep iron molten long enough to cast into shapes.
Nevertheless the Iron Age was truly the beginning of history. When man learned
to shape this metal he began to transform life. For the first time he had made
himself materials that could perform miracles in providing tools, utensils and
weapons and, in the distant future, machines.
In 1709 Abraham Darby developed coke at Coalbrookdale, very often regarded as
the birthplace of the industrial revolution. In fact if it were not for coal and the
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skill of iron casting it may not have been a revolution – just a prolonged
evolution. It was the coke used to smelt iron that gave the great inventors the
material from which they could make their machines, the most revolutionary
being the steam engine developed by James Watt in the 1760’s. In 1780 the world
saw its first iron bridge made from cast material; then over the turn of the century
the great iron works really came into their own as steam was harnessed to power
iron locomotives and ships. Thousands of miles of cast iron railways were laid
and scores of iron bridges were built across rivers and straits. Steel, which had
been made in relatively small amounts since 1733 when Benjamin Huntsman
developed his crucible process, suddenly became freely available when Sir Henry
Bessemer invented his famous converter in 1855 which made large scale
production possible.
Electric motors, motor cars, diesel engines, underground railways, photography,
the wireless, the computer; all appeared in this most inventive of centuries, On the
domestic front vacuum cleaners, water closets, bicycles and scores of other
products were invented. And the men of metal contributed their skills to them all.
The twentieth century opened up with the first successful powered flight and the
introduction of the mass production of motor cars. Techniques of metal casting
changed to cater for the enormous demands of these new industries and more so
when, within a few years, both modes of transport were being used in the first all-
metal war between 1914 and 1918. Aluminium, introduced to the metal industry
in 1909, provided the strong lightweight material that was to satisfy man’s long
time universal yearning to fly. Ultimately its derivatives opened up the very
heavens for him. Space exploration commenced in the 1950’s, man landed on the
moon in 1969 and countless satellites and space probes were projected into the
universe. Once again the art of metal molding came into its own as an essential
part of the aerospace industry.
Today the casting industry contributes to information technology, food
production, telecommunications, nuclear power and world finance. It can be
confidently predicted that as the human race continues its progress, whatever new
materials are utilized, the casting industry will be there to serve it. Whoever enters
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the metal casting business today will doubtless help to take it into its seventh
millennium as possibly man’s oldest and most essential skill.
CHAPTER II
Foundry Industry
Since the days of the first horseless carriage, engineers have relied upon the
metal-casting process to power, control and stabilize their ever-demanding
vehicles. The automobile depends on castings, from the engine to the brakes. It
also presents a platform for casting design to shine.
The ability of fluid to assume the shape of its container is exploited by casting
processes, which involve melting and pouring liquid metal into a sand or metal
mould and allowing it to solidify, yielding a shape close to that of the desired
product. Metal casting continues to be the preferred process for intricate shapes of
any size and weight with varying wall thickness and internal features. The flow of
molten metal in the mould and subsequent solidification affect casting quality.
This can be controlled by appropriate design of the mould, including the cavities
corresponding to the casting, gating channels and feeders.
The Indian Foundry Industry occupies a special place in shaping the country’s
economy. India is currently among the 10 largest producers of ferrous and non-
ferrous castings and has over 6500 foundries in the small, medium, and large
scale sectors. Approximately 90% are in the small scale. India exports annually
above Rs.700/- crores worth of castings to countries like USA, U.K., Canada,
Germany etc.
The future holds great promise for the metal casting industry. New advances have
allowed the industry to employ materials such as aluminum, magnesium,
titanium, zinc, advanced copper- based, and advanced ferrous alloys to produce
thin wall, high-strength castings with higher precision castings and more complex
shapes. But to remain competitive and maintain a viable domestic industry,
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challenges must be overcome in industry recognition, casting design, processing
efficiency, and employment attractiveness.
CHAPTER III
Company Profile
INTRODUCTION
Alucast Foundries Belgaum Pvt. Ltd. Established in 1996. Alucast Foundries is
the major driving force behind the smooth and trouble free wheeling of the
country’s passenger cars. One of the largest and specialized manufacturers of
brake discs for passenger cars. Alucast Foundries specializes in the high precision
product. The Brake discs are of the solid and ventilated type and are supplied in
either fully finished or semi-finished forms. The proved technology for porosity
free castings has been put to use, along with less than 5% Ferrite control and
absence of carbides. Advanced CNC machines provide a fine finish to all
castings. Fly Wheels and Pressure Plates for Clutches, ranging from 4 to 40 kgs.
in weight, are the other major products in this category. Alucast Foundries
supplies different grades of brake discs viz. fG 250, GH 190, GGG25 stc.
This specialized field of casting has, off late, become a routine- part and parcel –
of the product range of Alucast foundries. With the best technology and expert
manpower, a wide range of products in the category have been instrumental in the
smooth operations of many a core sector. Alucast Foundries maintain a
modularity of more than 85 % well formed nodules and controlled proportions of
Pearite and Ferrite in the available matrix, are the basic of this flawless quality
castings.
Various grades such as 400/12, 400/15, 450/15, 500/7, 600/3 and 700/2 are among
the casting manufactured. A wide product range pertaining to international
standards is a silent feature of Alucast Foundries. Hubs, End Collars and other
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castings for Earth moving machinery, adhering to DIN, BS, IS and ASTM have
been making their mark in the domestic as well as the overseas markets.
Area covered: 4 acres; Built up area: 30,000 sq. feet
Power consumption: 650 kilo watts
Installed capacity: 3000 MT
Working capital: 1,20,00,000; Export credit: 80,00,000
ISO: July 2000; ISO Technical Specification certificate: September 2004
Total share holding: 52,00,000
SHARE HOLDERS
1. Mr. Sanjay Bichu (MD)
2. Mrs. Purnima Bichu (DIR)
3. Mr. V.G. Kulkarni (DIR)
4. Mr. Gopal Bichu
5. Mrs. Sudha B. Bichu
6. Dr. Mrs. Hema Kulkarni
7. Mr. Nikhil Kulkarni
ESTEEMED CUSTOMERS
Kalyani Brakes Ltd.
BCSIL, Jalagaon
Axletech, UK
ITM
L&T Komatsu
NGEF
ILJIN Automotive Pvt. Ltd.
REGISTERED OFFICE AND WORKS
Office: Works:
B/16 KSSIDC Ind. Estate, 664/2 Waghwade Road,
Angol Belgaum Village Mache, Belgaum
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India – 590008 India – 590014
Phone No.: 2440967, 5202029 Phone No.: 2411491
Fax No. : 2441098
Email : alucast@sanharnet.in
PLANT AND MACHINERY USED
Sand mixer & Muller
Molding machine
Sand cooler
Conveyer
Core making machine & core oven
Cupola
Spectrometer (Alloy Testing meter)
Induction furnace
Automatic pouring machine
Shot blasting
CNC lathe
HOURS AND ENVIRONMENT
Foundry process operators usually work 48 hours a week, often on a shift system,
which can include evenings and weekends. Overtime is likely to be available.
Foundries are not the dirty, dusty places they used to be and most have fume and
dust extractors. However, the furnace area is hot, and some processes still cause a
certain amount of dust. The use of lifting equipment has taken some of the hard
physical effort out of the work. Foundries can be dangerous places, and foundry
process operatives wear safety clothing including overalls, safety shoes, hard hats,
eye shields, earplugs and gloves.
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SKILLS AND PERSONAL QUALITIES
Foundry process operators need
to be good with their hands
good hand-to-eye co-ordination
a steady hand to carry out delicate work
good communication skills
the ability to work under supervision
to work well as part of a team
a flexible attitude to do a range of different jobs
a serious attitude to safety issues
good physical fitness.
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CHAPTER IV
Process flow for the production of casting
CASTING
Casting is a method for creating one or more copies of an original piece of
sculptural (three-dimensional) artwork. Casting is a manufacturing process, in
which we pour molten metal in the pre-made mould; mould may be of sand or of
metal, and let it be solidified. After solidification and removal of the mould the
metal takes the desired shape. Four main elements are required in the process of
casting pattern, mold, cores, and the part. The pattern, the original template from
which the mold is prepared, creates a corresponding cavity in the casting material.
Cores are used to produce tunnels or holes in the finished mold, and the part is the
final output of the process.
SAND CASTING
Sand casting, which in a general sense involves the forming of a casting mold
with sand, includes conventional sand casting and evaporative pattern (lost-foam)
casting. In sand casting, re-usable, permanent patterns are used to make the sand
moulds. The preparation and the bonding of this sand mould are the critical step
and very often are the rate-controlling step of this process. Two main routes are
used for bonding the sand moulds:
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The "green sand" consists of mixtures of sand, clay and moisture.
The "dry sand" consists of sand and synthetic binders cured thermally or
chemically.
In conventional sand casting, the mold is formed around a pattern by ramming
sand, mixed with the proper bonding agent, onto the pattern. Then the pattern is
removed, leaving a cavity in the shape of the casting to be made. If the casting is
to have internal cavities or undercuts, sand cores are used to make them. Molten
metal is poured into the mold, and after it has solidified the mold is broken to
remove the casting. In making molds and cores, various agents can be used for
bonding the sand. The agent most often used is a mixture of clay and water.
Casting quality is determined to a large extent by foundry technique. Proper
metal-handling practice is necessary for obtaining sound castings. Complex
castings with varying wall thickness will be sound only if proper techniques are
used.
DESIGN
The first production step for all castings takes place in the design office where
ideas are converted into manufacturing drawings which guide the production team
to create the solid metal end products. Designers need a wealth of information
before they reach for their set squares. The specified shape and size of the final
product is obviously needed but with metal casting the designers needs to know
what stresses and conditions the products will have to withstand so that the
correct metal can be chosen. They will need to know how many castings are
needed. All these factors dictate which molding techniques to choose.
PATTERN MAKING
Once the customer and the rest of the production team have approved the design,
a pattern or model is made. This can be produced in wood, metal or plastic or
from a combination of all three. Patterns must be precise in their shape and finish,
for any mistakes are reproduced in the moulds which are made from them and
from which the final castings are formed. They must be made to allow for the
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shrinkage of the metal when it cools and they can include channels to allow metal
to flow into the casting shape. From the initial pattern a prototype or production
sample is usually made with which the customer can experiment to ensure that the
final casting will be exactly as required.
MOULD MAKING
The next manufacturing step is moulding in which the pattern is packed in a
moulding material, usually some type of sand, and then removed to leave the right
shape for the casting. Moulds can be made by hand, or machine. In one casting
process the mould is made from a heat resistant metal. Moulds are usually made
in at least two parts and for very large castings they may even start out as large
holes dug into the sand floor of the foundry. Different types of sand are used for
moulding with additives like water and clay and various chemicals, depending on
the size of the mould and the types of metal that are being cast. One important
feature of the mould is the running system which is a network of small channels
that leads the molten metal down into the casting shape. The shapes and sizes of
these channels have to be carefully calculated to ensure that the molten metal does
not solidify before it gets to the casting shape and to make sure that it does not
flow too fast when it could wear away the mould. Many castings are designed to
have cavities in them – engine blocks, for example. These voids, which have to be
as accurate as the outer moulds, are made by forming their shape in moulding
material. The shapes, or cores as they are known, are placed in the mould and
after the molten metal has solidified, the core material is removed leaving a
precisely shaped cavity behind.
For mould preparation as per production plan a mixture of sand charge which
contains system sand, new sand, bentonite, CL4 and dextrin is collected in the
bucket. The bucket is raised and the sand is unloaded into the muller. Sand is
mixed for two minutes in dry condition with 5-15 liters of water in the muller.
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Next the sand is mixed for three minutes in wet condition. After this process is
completed the sand sample is measured and once the sample is qualified as per the
required standards the mixture is dropped into the hopper.
MACHINE MOULDING
To make green sand moulds on the machine.
1. Take inspected pattern and moulding pins from pattern shop
2. Fit pattern on machine with moulding pins and clean the pattern with diesel
spray and plumbago powder.
3. Place first box on match plate and sieve on it. Take some initial system sand
and sieve it through sieve. Remove sieve.
4. Fill the half box with system sand and jolt. Place the spruce cup on position
(for top box moulding only).
5. Do jolting and ram the sand with pneumatic hand rammer.
6. Fill full box with sand and jolt. Squeeze the sand and do simultaneous
jolting.
7. Remove spruce cup from top box and do random venting.
8. Lift the box with lifting rods and remove it from machine with electrical
hoist.
9. Before keeping bottom box on pallet, clean pallets thoroughly. Clean the
bottom box mould with air. Place the stained core as specified and cores for
cored items.
10. Make proper venting for top box, clean it with air and close the box.
11. Insert the closing pins into box bushes.
12. Mark the box with heat number and serial number with chalk. Move the box
for pouring.
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HAND MOULDING
To make green sand moulds and CO2 sand moulds manually.
a) Green sand hand moulding
1. Take inspected pattern, propagating system for loose patterns and moulding
pins from pattern shop.
2. Select proper sized boxes and moulding pins.
3. Place pattern on ground and box on it. Clean the pattern with air and apply
diesel and plumbago powder.
4. Cover the patter with green sand mix upto 30-40 mm approximately an
dram it properly.
5. Cover this sand with baking sand and ram it properly till box fills
completely.
6. Make proper venting and scrape the surface to remove access sand if any.
7. Repeat the procedure for top box moulding. For loose pattern moulding turn
the bottom box moulded with pattern and then mould the top box on it.
8. Remove pattern from mould.
9. Close the boxes for pouring.
b) CO2 sand moulding
1. Take inspected pattern, propagating system for loose patterns and moulding
pins from pattern shop.
2. Select proper sized boxes and moulding pins.
3. Place pattern on ground and box on it. Clean the pattern with air and apply
diesel and plumbago powder.
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4. Cover the patter with green sand mix upto 30-40 mm approximately and
dram it properly.
5. Cover this sand with baking sand and ram it properly till box fills
completely.
6. Make proper venting and scrape the surface to remove access sand if any.
7. Pass CO2 gas through the vents for half minute approximately per vent.
8. Repeat the procedure for top box moulding. For loose pattern moulding, turn
the bottom box moulded with pattern and then mould the top box on it.
9. Remove pattern from mould.
10. Paint the moulds with spirit paint by spraying.
11. Heat the moulds with diesel or LPG burners.
12. After cooling close the boxes.
CORE MAKING
Good core making begins with high quality core sand preparation. The
preparation of cores from sand mixer consists of the following procedure
Preparation of sand mix for core making on compax machine:
Take 20 kgs. of dry sand of AFS number 50-55. Add 0.2 to 0.25 kg of Resin and
mix manually for 2-3 minutes. Add 0.2 to 0.25 kg. of binder and mix manually for
3-4 minutes. Feed the sand into hopper.
Preparation of sand mix for oil and CO2 core making:
Oil sand core: Take 140 kgs. of new sand of AFS number 60-65 in sand muller.
Add 4.5 to 5 liters of core oil and mix it for 6 minutes. Add 4.5 to 5 kgs. of
dextrin. 2.5 to 3 kgs. of Bentonite and mix for 6 minutes. Add 0.5 to 1.5 liters of
water in sand and mix for 3 minutes.
CO2 sand core: Take 140 kgs. of dry sand of AFS number 50-55. Add 10 kgs. of
sodium silicate and mix it for 12 minutes.
Preparation of cold box cores on compax machine:
Take the inspected core boxes from pattern shop. Install the core box on the
machine with proper fittings. Operate the cycle from control panel. Take out the
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core from the machine. The core hardness should be 5% with scratch hardness
tester, within 75 to 95.
To prepare CO2 and oil sand cores from sand mix:
a) Oil sand core:
1. Take the inspected core box from pattern shop.
2. Take the sand mix.
3. Fill core box with sand mix and ram with wooden rammer.
4. After ramming scrap the excess sand from top surface.
5. Make the proper venting in core.
6. Remove the core from core box and keep them batch wise.
7. Heat the cores batch wise in oven to remove moisture.
8. Paint the cores with spirit paint if applicable.
b) CO2 sand core:
1. Take the inspected core box from pattern shop.
2. Take the sand mix.
3. Fill core box with sand mix and ram with wooden rammer.
4. After ramming scrap the excess sand from top surface.
5. Make the proper venting in core.
6. Pass the CO2 gas from the vents for half minute per vent.
7. Remove the core from core box and keep them batch wise.
8. Paint the cores with spirit paint by spray painting.
9. Heat the cores with the help of diesel/ LPG burner.
MELTING and POURING
To operate the furnace for MELTING metal:
1. Switch on the power supply to the furnace.
2. Take the furnace charge as per the charge sheet and melt it in furnace.
3. Slowly increase the power supply to full rating. Add the alloys into furnace
as per charge sheet for alloy addition add CI boring about 25-30 kgs. if
available.
4. Spread slag power over molten metal surface and remove slag.
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5. Pour the sample in CE cup for checking C and Si %.
6. Pour one sample in die for spectrometer analysis
7. Pour one chill before inoculation and another after inoculation.
8. Spread slag powder over molten metal surface and remove slag.
9. Mg. treatment for SG iron: add 5.5 kgs. of FeSiMg and 2-3 kgs. CRC
punching at the bottom of treatment ladle. Place cover and clamp it. Pour the
metal.
POURING
There are two ways of pouring metal. Manually pouring and poring with the help
of ladle. To prepare ladle for pouring scrap clean the ladle completely. Take
silicate 10 kgs., sand 140 kgs. and Bentonite 1 kg. Apply thin layer of sodium
silicate from inside ladle. Make the lining of sand approximately 25 mm. with flat
wooden rammer. Make spout of 25-30 mm on one side. Make spout mouth at the
bottom 40-50 mm in length, 15-20 mm in width. Spray sprit paint on lining. Heat
the ladle with diesel or LPG burner to remove moisture.
SHOT BLASTING, FETTLING & PAINTING:
Shot blasting: Load the castings on hanger 300 to 350 kgs. push the hanger inside
the machine and close the door tightly. Start the machine and timer. After time is
over, pull the hanger out from the machine. Remove castings and hand over to
fettling.
Fettling: Remove all the excess material from castings by chipping and grinding.
Painting: Apply rust preventive polymer paint to the non-machining areas of the
casting.
In today's competitive market, you can't afford to miss the savings and
technical advantages from reclamation.
Modern foundries demand optimized control over molding sand preparation in
order to minimize costs and maximize the performance of the molding sand
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preparation system. Tightly controlled sand properties allow for low-defect, high-
quality mold and casting production. For optimal performance, molding sand
control must begin long before final mulling. Molding sand at shakeout can have
wide variations in temperature, moisture content, and physical properties. Hot
sand leads to casting scrap, mixing inefficiency, material handling and
environmental problems. Precise control over final sand preparation demands
that between shakeout and final mulling, the return sand is lowered in temperature
and homogenized.
Sand is the largest foundry process waste, typically constituting about 70% of
total waste volume. Fortunately, most foundry sands are reclaimable and can be
effectively reused.
The basic reasons for reclaiming sand
It's Cost Saving: The costs of molding and core sand continue to increase
significantly and cut into foundry profitability. To lower the cost of producing a
casting foundries desire to reduce total sand cost which includes the purchase
cost, delivery cost, unloading, storing, handling and disposal costs including, in
some instances, ever more expensive landfill fees.
It's Environmentally Responsible: Environmentally, it's becoming increasingly
more difficult to dispose of great quantities of waste sand into a landfill.
It Has Technical Advantages: Technically, reclamation is of interest because
many foundries report that better castings can be made at lower costs, from
reclaimed sand
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CHAPTER V
Cost Accounting
INTRODUCTION
Cost Accounting is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for the
presentation of suitably arranged data for purposes of control and guidance of
management. It includes the ascertainment of the cost of every order, job,
contract, process, service or unit as may be appropriate. It deals with the cost of
production, selling and distribution, it is the provision of such analysis and
classification of expenditure as will enable the total cost of any particular unit of
production or service to be ascertained with reasonable degree of accuracy and at
the same time to disclose exactly how such total cost is executed so as to control
and reduce its cost.
Thus, Cost Accounting relates to the collection, classification, ascertainment of
cost and its accounting and control relating to the various elements of cost. It
establishes budgets and standard costs and actual cost of operations, processes,
departments or products and the analysis of variances, profitability and social use
of funds.
Cost Accounting is the application of costing and cost accounting principles,
methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of information derived
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there from for purposes of managerial decision-making. Thus ‘Cost Accountancy
is the science, art and practice of a cost accountant’. It is a science because it is a
body of systematic knowledge having certain principles which a cost accountant
should posses for proper discharge of his responsibilities. It is an art as it requires
the ability and skill with which a cost accountant is able to apply the principles of
cost accountancy to various managerial problems. Practice includes the
continuous efforts of a cost account in the field of cost accountancy. Such efforts
also include the presentation of information for the purpose of managerial
decision-making and keeping statistical records.
SCOPE OF COST ACCOUNTING
1. Cost Ascertainment: It deals with the collection and analysis of expenses,
the measurement of production of the different products at the different
stages of manufacture and the linking up of production with the expenses.
2. Cost Accounting: It is the process of accounting for cost which begins with
recording of expenditure and ends with the preparation of statistical data. It
is a formal mechanism by means of which costs of products and services are
ascertained and controlled.
3. Cost Control: Cost Control is the guidance and regulation by executive
action of the costs of operating and undertaking. It aims at guiding the actual
towards the line of targets; regulates the actuals if they deviate or vary from
the targets; this guidance and regulation is done by an executive action.
OBJECTIVES OF COST ACCOUNTING
The Objectives of cost accounting are ascertainment of cost, fixation of
selling price, proper recording and presentation of cost data to the management
for measuring efficiency and for cost control. The aim is to know the methods by
which expenditure on materials, wages and overhead is recorded, classified and
allocated so that the cost of products and services may be accurately ascertained;
these costs may be related to sales and profitability may be determined.
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a. To ascertain the cost per unit of the different products manufactured by a
business concern.
b. To provide a correct analysis of cost both by processes or operations and by
different elements of cost.
c. To disclose sources of wastage whether of material, time or expense or in
the use of machinery, equipment and tools and to prepare such reports which
may be necessary to control such wastage.
d. To provide requisite data and serve as a guide to price fixing of products
manufactured or services rendered.
e. To ascertain the profitability of each of the products and advise the
management as to how these profits can be maximized.
f. To exercise effective control of stocks of raw materials, work-in-progress,
consumable stores and finished goods in order to minimize the capital
locked up in these stocks.
g. To reveal sources of economy by installing and implementing a system of
cost control for materials, labor and overheads.
h. To advise management on future expansion policies and proposed capital
projects.
i. To prevent and interpret data for management planning, decision-making
and control.
j. To help in the preparation of budgets and implementation of budgetary
control.
k. To organize an effective information system so that different levels of
management may get the required information at the right time in right form
for carrying out their individual responsibilities in an effective manner.
l. To guide management in the formulation and implementation of incentive
bonus plans based on productivity and cost savings.
m. To supply useful data to the management to take various financial decisions
such as introduction of new products, replacement of labor by machine etc.
n. To help in supervising the working of punched card accounting or data-
processing through computers.
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o. To organize the internal audit system to ensure effective working of
different departments.
p. To organize cost reduction programs with the help of different-departmental
managers.
q. To provide specialized services of cost audit in order to prevent the errors
and frauds and to facilitate prompt and reliable information to the
management.
r. To find out costing profit or loss by identifying with revenues the cost of
those products or services by selling which the revenues have resulted.
ADVANTAGES OF COST ACCOUNTING
1. Helps in optimum utilization of men, material and machine.
2. Identifies the areas requiring corrective actions.
3. Helps management in formulation of policies.
4. Presents a tailor-made solution for the problem.
5. Helps management in making short-term decisions by use of techniques
like marginal costing, etc.
6. Provides useful data for final accounts by giving cost of closing stock of
raw-materials, work-in-progress and finished products.
7. Provides a data base for reference by government, wage tribunals and
trade unions.
8. Helps in formation of cost centers and responsibility centers to exercise
control
9. Helps to face increasing difficulties in setting prices and improving
efficiency.
10. Facilitates use of specialized techniques like cost reduction, value
analysis, operations research and management by exception.
11. Threads its way through every phase of business and influences the make-
up of the entire enterprises with regards to its products, its market and its
methods of operation.
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12. Focuses attention on the profitability of each product and service unlike
financial accounting, which presents profitability for company as a whole.
LIMITATIONS OF COST ACCOUNTING
The limitations of cost accounting system are -
1. It is not an exact science and involves inherent element of judgement.
2. Cost varies with purpose. Therefore, cost collected for one purpose will not
be suitable for another purpose.
3. Cost accounting presents the base for taking the best decision. It does not
give outright the solutions of the problems.
4. Most of the cost accounting techniques are based on some pre-assumed
notions.
5. The area most vulnerable to criticism is coat accounting is arbitary
apportionment of common costs.
6. Different views are held by different cost accountants about the items to be
included in cost.
Can cost professionals overcome cost accounting limitations?
The answer can be Yes and No depending upon what you are looking for.
The job of a cost professional is to dovetail cost accounting information to suit
management objective. There may be so many factors detailed above which can
limit quality of his information. However this does not mean that cost accounting
and cost professional fail in their objective to provide accurate cost estimation.
The role of cost professional is to identify, collect, measure, analyze,
prepare and interpret cost accounting information intended for specific use by the
management. There are so many different tools available in cost accounting,
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which over the period have helped industry to perform in a better way and base
their decisions on information generated by the cost professionals. It is the
selection of right mix of tools and experience which can be instrumental in
reducing impact of the limitations and optimize effectiveness of the cost
accounting in general and a cost professional in particular.
TRADITIONAL COSTING TODAY
Despite the fact that it is over 75 years old, most companies still use
standard cost systems both to value inventory for financial statement purposes and
for many other management purposes as well. While it has some advantages for
financial statement purposes (simplicity, consistency, well understood by
auditors), it is, at best, meaningless and, at worst, misleading as a tool to assist in
making effective management decisions. It’s because the business case for which
it is being used today is not the business case for which it was designed. Standard
cost accounting was designed for a company that had:
1) Homogeneous products,
2) Large direct costs compared to indirect costs,
3) Limited ability to collect data and
4) Low "below the line" costs.
Today’s company typically has:
1) A wide variety and complexity of products and services,
2) High overhead costs compared to direct labor,
3) An overabundance of data and
4) Substantial non product costs that can dramatically affect true product,
distribution channel and customer profitability.
The typical manufacturing company is still arbitrarily attaching overhead to
products using Direct Labor as the driver. They are often allocating the largest
cost (overhead) based on the smallest (direct labor). Because of product variety
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and product line complexity, one homogeneous overhead rate is no longer an
appropriate average.
Finally, today, we have high tech, high speed data collection and reporting tools.
With the proper system, gathering and manipulation of data in multiple complex
ways is no longer an issue. With these tools at the disposal of a business
organization, why still use a cost accounting system that was developed over 70
years ago? With the advent of certified financial statements, accounting systems
became more structured to comply with the demands of external stakeholders
(e.g. shareholders, governments, lenders, etc.) and the purpose of cost accounting
systems changed along with the rest of accounting. The primary purpose of cost
accounting in the financial accounting system today is to value inventory for
financial statement purposes, not, as it was in 1924, a tool to aid in sound business
decisions.
JOB-ORDER COSTING
Job-order costing is used when different types of products, jobs, or batches are
produced, typically over a rather short period of time. In a job-order costing
system, direct materials costs and direct labor costs are usually "traced" directly to
jobs. Overhead is applied to jobs using a predetermined rate. Actual overhead
costs are not "traced" to jobs. Examples of industries in which job-order costing is
used include special order printing, shipbuilding, construction, hospitals,
professional services such as law firms, and movie studios. Each job has its own
job cost sheet on which are recorded the costs that have been charged to the job.
The job cost sheet will have some code or descriptive data to identify the
particular job and will contain spaces to collect costs of materials, labor, and
overhead. When a job is started, materials that will be required to complete the
job are withdrawn from the storeroom. The document that authorizes these
withdrawals and that specifies the types and amounts of materials withdrawn is
called the materials requisition form. The materials requisition form identifies the
job to which the materials are to be charged. Care must be taken when charging
materials to distinguish between direct and indirect materials. Labor costs are
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recorded on a document called a time ticket or a time sheet. Each employee
records the amount of time he or she spends on each job and each task on a time
ticket. The time spent on a particular job is considered direct labor and its cost is
"traced" to that job. The cost of time spent on other tasks, not traceable to any
particular job, is usually considered part of manufacturing overhead.
Manufacturing overhead includes all of those costs incurred in the manufacturing
process which are not "traced" to a particular job. In practice, manufacturing
overhead usually consists of all manufacturing costs other than direct materials
and direct labor. Since manufacturing overhead costs are not traced to jobs, they
must be allocated to jobs if absorption costing is used.
Overview of Cost Flows
The basic flow of costs in a job-order system begins by recording the costs of
material, labor, and manufacturing overhead.
a. Direct material and direct labor costs are debited to the Work in Process
account. Any indirect material or indirect labor costs are debited to the
Manufacturing Overhead control account, along with any other actual
manufacturing overhead costs incurred during the period. Manufacturing
overhead is applied to Work in Process using the predetermined rate. The
offsetting credit entry is to the Manufacturing Overhead control account.
b. The cost of finished units is credited to Work in Process and debited to the
Finished Goods inventory account.
c. When units are sold, their costs are credited to Finished Goods and debited to
Cost of Good Sold.
The Manufacturing Overhead Control Account
Manufacturing Overhead is a temporary control account.
a. As stated above, actual overhead costs are recorded on the debit side of the
Manufacturing Overhead control account. Overhead costs applied to Work in
Process using predetermined rates are recorded on the credit side of the
account.
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b. Any discrepancy between overhead costs incurred and overhead costs applied
shows up as a balance in the Manufacturing Overhead control account at the
end of the period. A debit balance is called under applied overhead and a credit
balance is called over applied overhead.
Under- and over applied Overhead
Since the predetermined overhead rate is based entirely on estimated data, there
will almost always be a difference between the actual amount of overhead cost
incurred and the amount of overhead cost that is applied to the Work In Process
account. This difference is termed under applied or over applied overhead, and as
discussed above, can be determined by the ending balance in the Manufacturing
Overhead control account. An under applied balance occurs when more overhead
cost is actually incurred than is applied to the Work In Process account. An over
applied balance results from applying more overhead to Work In Process than is
actually incurred.
1. Cause of under- and over applied overhead. When a predetermined overhead
rate is used, it is implicitly assumed that the overhead cost is variable with (i.e.,
proportional to) the allocation base. For example, if the predetermined overhead
rate is $20 per direct labor-hour, it is implicitly assumed that the actual overhead
costs will increase by $20 for each additional direct labor-hour that is incurred. If,
however, some of the overhead is fixed with respect to the allocation base, this
will not happen and there will be a discrepancy between the actual total amount of
the overhead and the overhead that is applied using the $20 rate. In addition, the
actual total overhead can differ from the estimated total overhead because of poor
controls over overhead spending or because of inability to accurately forecast
overhead costs.
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2. Disposition of under- and over applied Overhead. Two approaches to
dealing with an under- or over applied overhead balance in the accounts are
illustrated in the text.
a. The simplest approach is to close out the under- or over applied overhead to
Cost of Goods Sold. This is the method that is used in most of the exercises
and problems because it is easiest for students to understand and master.
b. The second approach is to allocate the under- or over applied balance to Cost of
Goods Sold and to the Work in Process and Finished Goods inventory
accounts. The basis of allocation is the amount of overhead applied during the
period in the ending balance of each of these accounts. This method is
equivalent to waiting until the end of the period to allocate the actual overhead
costs based on the actual amount of the allocation base incurred.
3. The Effect of under- and over applied Overhead on Net Income.
a. If overhead is under applied, less overhead has been applied to inventory than
has actually been incurred. Enough overhead must be applied retroactively to
Cost of Goods Sold (and perhaps ending inventories) to eliminate this
discrepancy. Since Cost of Goods Sold is increased, under applied overhead
reduces net income.
b. If overhead is over applied, more overhead has been applied to inventory than
has actually been incurred. Enough overhead must be removed retroactively
from Cost of Goods Sold (and perhaps ending inventories) to eliminate this
discrepancy. Since Cost of Goods Sold is decreased, over applied overhead
increases net income.
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CHAPTER VI
Accounting Standard and Financial Statements
INTRODCUTION
Accounting Standards are written documents, policy documents issued by expert
accounting body or Government or other regulatories body covering the aspects
of recognition, measurement, treatment, presentation and disclosure of accounting
transaction in the financial statement. Accounting Standards in India are issued by
the Institute of Chartered Accountants of India (ICAI).
OBJECTIVES OF ACCONTING STANDARDS
Objective of Accounting Standards is to standardize the diverse accounting
policies and practices with the view to eliminate to the extent possible the non
comparability of financial statements and add the reliability to the financial
statements.
ADVANTAGES OF ACCOUNTING STANDARDS
Standards reduce to a reasonable extent or eliminate altogether confusion
variation in the accounting treatments used to prepare the financial statements.
There are certain areas where important information is not required by law to
be disclosed, standards may call for disclosure beyond that required by law.
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It facilitates comparison of financial statements of different companies
situated at different places.
DISADVANTAGES OF ACCONTING STANDARDS
There may be a trend towards rigidity and away from flexibility in applying
Accounting Standards.
Differences in Accounting Standards are bound to be because of differences in
the traditions and legal system from one country to another.
Accounting Standards cannot override the law. The standards are required to
be framed within the ambit of prevailing statute even though it is not an
acceptable standard.
OBJECTIVES AND FUNCTIONS OF THE ACCONTING STANDARDS
BOARD
1. The following are the objectives of the Accounting Standards Board
a. To conceive of and suggest areas in which Accounting Standards need to
be developed
b. To formulate Accounting Standards with a view to assisting the Council of
the ICAI in evolving and establishing Accounting Standards in India
c. To examine how far the relevant International Accounting
Standard/International Financial Reporting Standard (see paragraph 3
below) can be adapted while formulating the Accounting Standard and to
adapt the same
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d. To review, at regular intervals, the Accounting Standards from the point of
view of acceptance or changed conditions, and, if necessary, revise the
same
e. To provide, from time to time, interpretations and guidance on Accounting
Standards
f. To carry out such other functions relating to Accounting Standards
2. The main function of the ASB is to formulate Accounting Standards so that
such standards may be established by the ICAI in India. While formulating the
Accounting Standards, the ASB will take into consideration the applicable
laws, customs, usages and business environment prevailing in India.
3. The ICAI, being a full-fledged member of the International Federation of
Accountants (IFAC), is expected, inter alia, to actively promote the
International Accounting Standards Board’s (IASB) pronouncements in the
country with a view to facilitate global harmonization of accounting
standards. Accordingly, while formulating the Accounting Standards, the ASB
will give due consideration to International Accounting Standards (IASs)
issued by the International Accounting Standards Committee (predecessor
body to IASB) or International Financial Reporting Standards (IFRSs) issued
by the IASB, as the case may be, and try to integrate them, to the extent
possible, in the light of the conditions and practices prevailing in India.
4. The Accounting Standards are issued under the authority of the Council of the
ICAI. The ASB has also been entrusted with the responsibility of propagating
the Accounting Standards and of persuading the concerned parties to adopt
them in the preparation and presentation of financial statements. The ASB will
provide interpretations and guidance on issues arising from Accounting
Standards. The ASB will also review the Accounting Standards at periodical
intervals and, if necessary, revise the same.
RATIONALE OF ACCONTING STANDARDS
Accounting Standards are formulated with a view to harmonize different
accounting policies and practices in use in a country. The objective of Accounting
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Standards is, therefore, to reduce the accounting alternatives in the preparation of
financial statements within the bounds of rationality, thereby ensuring
comparability of financial statements of different enterprises with a view to
provide meaningful information to various users of financial statements to enable
them to make informed economic decisions.
INTERNATIONAL HARMONIZTION OF ACCONTING STANDARDS
Recognizing the need for international harmonization of accounting standards, in
1973, the International Accounting Standards Committee (IASC) was established.
The IASC has been restructured as International Accounting Standards Board
(IASB). The objectives of IASC include promotion of the International
Accounting Standards for worldwide acceptance and observance so that the
accounting standards in different countries are harmonized. In recent years, need
for international harmonization of Accounting Standards followed in different
countries has grown considerably as the cross-border transfers of capital are
becoming increasingly common.
ACCONTING STANDARDS SETTING IN INDIA
The Institute of Chartered Accountants of India (ICAI) being a member body of
the then IASC, constituted the Accounting Standards Board (ASB) on 21st April,
1977, with a view to harmonize the diverse accounting policies and practices in
use in India. After the avowed adoption of liberalization and globalization as the
corner stones of Indian economic policies in early ‘90s, the Accounting Standards
have increasingly assumed importance. While formulating accounting standards,
the ASB takes into consideration the applicable laws, customs, usages and
business environment prevailing in the country.
The ASB also gives due consideration to International Financial Reporting
Standards/ International Accounting Standards issued by IASB and tries to
integrate them, to the extent possible, in the light of conditions and practices
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prevailing in India. Although the Accounting Standards Board is a body
constituted by the Council of the Institute of Chartered Accountants of India, it is
independent in the formulation of accounting standards since in case the Council
considers it necessary that certain modifications be made in the draft accounting
standards formulated by the ASB, it can only be done in consultation with the
ASB.
COMPOSITION OF ACCONTING STANDARDS BOARD
The composition of the ASB is broad-based with a view to ensuring participation
of all interest-groups in the standard-setting process. These interest groups include
industry, representatives of various departments of government and regulatory
authorities, financial institutions and academic and professional bodies. Industry
is represented on the ASB by their apex level associations, viz., Associated
Chambers of Commerce (ASSOCHAM), Federation of Indian Chambers of
Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). As
regards government departments and regulatory authorities, Reserve Bank of
India, Ministry of Company Affairs, Central Board of Direct Taxes, Comptroller
& Auditor General of India, Controller General of Accounts, Securities and
Exchange Board of India and Central Board of Excise and Customs are
represented on the ASB. Besides these interest-groups, representatives of
academic and professional institutions such as Universities, Indian Institutes of
Management, Institute of Cost and Works Accountants of India and Institute of
Company Secretaries of India are also represented on the ASB. Apart from these
interest-groups, members of the Central Council of ICAI are also on the ASB.
THE ACCOUNTING STANDARDS SETTING PROCESS
The accounting standard setting, by its very nature, involves reaching an optimal
balance of the requirements of financial information for various interest groups
having a stake in financial reporting. With a view to reach consensus, to the extent
possible, as to the requirements of the relevant interest-groups and thereby
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bringing about general acceptance of the Accounting Standards among such
groups, considerable research, consultations and discussions with the
representatives of the relevant interest-groups at different stages of standard
formulation becomes necessary. The standard-setting procedure of the ASB, as
briefly outlined below, is designed in such a way so as to ensure such consultation
and discussions:
Identification of the broad areas by the ASB for formulating the Accounting
Standards.
Constitution of the study groups by the ASB for preparing the preliminary
drafts of the proposed Accounting Standards.
Consideration of the preliminary draft prepared by the study group by the
ASB and revision, if any, of the draft on the basis of deliberations at the ASB.
Circulation of the draft, so revised, among the Council members of the ICAI
and 12 specified outside bodies such as Standing Conference of Public
Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian
Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller
and Auditor General of India (C& AG), and Ministry of Company Affairs, for
comments.
Meeting with the representatives of specified outside bodies to ascertain their
views on the draft of the proposed Accounting Standard.
Finalization of the Exposure Draft of the proposed Accounting Standard on
the basis of comments received and discussion with the representatives of
specified outside bodies.
Issuance of the Exposure Draft inviting public comments.
Consideration of the comments received on the Exposure Draft and
finalization of the draft Accounting Standard by the ASB for submission to the
Council of the ICAI for its consideration and approval for issuance.
Consideration of the draft Accounting Standard by the Council of the
Institute, and if found necessary, modification of the draft in consultation with
the ASB.
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The Accounting Standard, so finalized, is issued under the authority of the
Council.
PRESENT STATUS OF ACCONTING STANDARDS IN INDIA IN
HARMONIZATION WITH THE INTERNATIONAL ACCONTING
STANDARDS
So far, 29 Indian Accounting Standards on the following subjects have been
issued by the Institute:
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 8 Accounting for Research and Development (withdrawn pursuant to the
issuance of AS 26)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Accounting for Retirement Benefits in the Financial Statements of
Employers (recently revised and titled as Employee Benefits)
AS 16 Borrowing Costs
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AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation
AS 32 Financial Instruments: Disclosures
COMPLIANCE WITH ACCONTING STANDARDS
Accounting Standards issued by the ICAI had got legal recognition through
insertion of sections 211(3A), (3B) and (3C) in the Companies Act, 1956, which
may be prescribed by the Central Government in consultation with the National
Advisory Committee on Accounting Standards. Recent development in this regard
is Accounting Standards 1to 7 and 9 to 29 as recommended by the ICAI, have
been prescribed by Ministry of Company Affairs, Government of India vide its
notification dated December, 7, 2006, in the Gazette of India. This notification
provides that every company and its auditor(s) shall comply with the notified
Accounting Standards. The Securities and Exchange Board of India (SEBI)
through the listing agreement requires that listed companies shall mandatorily
comply with all the Accounting Standards issued by ICAI from time to time.
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Also, the Insurance Regulatory and Development Authority (IRDA) requires
insurance companies to follow the Accounting Standards issued by the ICAI.
Apart from the corporate bodies, the Council of the Institute of Chartered
Accountants of India has made various accounting standards mandatory in respect
of certain non-corporate entities such as partnership firms, sole-proprietary
concerns/individuals, societies registered under the Societies Registration Act,
trusts, associations of persons, and Hindu Undivided Families, where financial
statements of such entities are statutorily required to be audited, for example,
under Section 44AB of the Income-tax, 1961. The Council has cast a duty on its
members to examine compliance with the Accounting Standards in the financial
statements covered by their audit in the event of any deviations therefrom, to
make adequate disclosures in their audit reports so that the users of the financial
statements may be aware of such deviations.
OBJECTIVES OF FINANCIAL STATEMENTS
The objective of financial statements is to provide information about the financial
position, performance and cash flows of an enterprise that is useful to a wide
range of users in making economic decisions.
Financial statements prepared for this purpose meet the common needs of most
users. However, financial statements do not provide all the information that users
may need to make economic decisions since (a) they largely portray the financial
effects of past events, and (b) do not necessarily provide non-financial
information.
Financial statements also show the results of the stewardship of management, or
the accountability of management for the resources entrusted to it. Those users
who wish to assess the stewardship or accountability of management do so in
order that they may make economic decisions; these decisions may include, for
example, whether to hold or sell their investment in the enterprise or whether to
reappoint or replace the management.
FINANCIAL POSITION, PERFORMANCE AND CASH
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The economic decisions that are taken by users of financial statements require an
evaluation of the ability of an enterprise to generate cash and cash equivalents and
of the timing and certainty of their generation. This ability ultimately determines,
for example, the capacity of an enterprise to pay its employees and suppliers,
meet interest payments, repay loans, and make distributions to its owners. Users
are better able to evaluate this ability to generate cash and cash equivalents if they
are provided with information that focuses on the financial position, performance
and cash flows of an enterprise.
The financial position of an enterprise is affected by the economic resources it
controls, its financial structure, its liquidity and solvency, and its capacity to adapt
to changes in the environment in which it operates.
Information about the economic resources controlled by the enterprise and its
capacity in the past to alter these resources is useful in predicting the ability of the
enterprise to generate cash and cash equivalents in the future. Information about
financial structure is useful in predicting future borrowing needs and how future
profits and cash flows will be distributed among those with an interest in the
enterprise; it is also useful in predicting how successful the enterprise is likely to
be in raising further finance. Information about liquidity and solvency is useful in
predicting the ability of the enterprise to meet its financial commitments as they
fall due. Liquidity refers to the availability of cash in the near future to meet
financial commitments over this period. Solvency refers to the availability of cash
over the longer term to meet financial commitments as they fall due.
Information about the performance of an enterprise, in particular its profitability,
is required in order to assess potential changes in the economic resources that it is
likely to control in the future. Information about variability of performance is
important in this respect. Information about performance is useful in predicting
the capacity of the enterprise to generate cash flows from its existing resource
base. It is also useful in forming judgments about the effectiveness with which the
enterprise might employ additional resources.
Information concerning cash flows of an enterprise is useful in order to evaluate
its investing, financing and operating activities during the reporting period. This
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information is useful in providing the users with a basis to assess the ability of the
enterprise to generate cash and cash equivalents and the needs of the enterprise to
utilize those cash flows.
Information about financial position is primarily provided in a balance sheet.
Information about performance is primarily provided in a statement of profit and
loss. Information about cash flows is provided in the financial statements by
means of a cash flow statement.
The component parts of the financial statements are interrelated because they
reflect different aspects of the same transactions or other events. Although each
statement provides information that is different from the others, none is likely to
serve only a single purpose nor to provide all the information necessary for
particular needs of users.
Notes and Supplementary Schedules
The financial statements also contain notes and supplementary schedules and
other information. For example, they may contain additional information that is
relevant to the needs of users about the items in the balance sheet and statement of
profit and loss. They may include disclosures about the risks and uncertainties
affecting the enterprise and any resources and obligations not recognized in the
balance sheet (such as mineral reserves). Information about business and
geographical segments and the effect of changing prices on the enterprise may
also be provided in the form of supplementary information.
ELEMENTS OF FINANCIAL STATEMENTS
Financial statements portray the financial effects of transactions and other events
by grouping them into broad classes according to their economic characteristics.
These broad classes are termed the elements of financial statements. The elements
directly related to the measurement of financial position in the balance sheet are
assets, liabilities and equity. The elements directly related to the measurement of
performance in the statement of profit and loss are income and expenses. The cash
flow statement usually reflects elements of statement of profit and loss and
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changes in balance sheet elements; accordingly, this Framework identifies no
elements that are unique to this statement.
The presentation of these elements in the balance sheet and the statement of profit
and loss involves a process of sub-classification. For example, assets and
liabilities may be classified by their nature or function in the business of the
enterprise in order to display information in the manner most useful to users for
purposes of making economic decisions.
FINANCIAL POSITION
The elements directly related to the measurement of financial position are assets,
liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the enterprise as a result of past events
from which future economic benefits are expected to flow to the enterprise.
(b) A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
(c) Equity is the residual interest in the assets of the enterprise after deducting all
its liabilities.
The definitions of an asset and a liability identify their essential features but do
not attempt to specify the criteria that need to be met before they are recognized
in the balance sheet. Thus, the definitions embrace items that are not recognized
as assets or liabilities in the balance sheet because they do not satisfy the criteria
for recognition.
In particular, the expectation that future economic benefits will flow to or from an
enterprise must be sufficiently certain to meet the probability criterion before an
asset or liability is recognized.
In assessing whether an item meets the definition of an asset, liability or equity,
consideration needs to be given to its underlying substance and economic reality
and not merely its legal form. Thus, for example, in the case of hire purchase, the
substance and economic reality are that the hire purchaser acquires the economic
benefits of the use of the asset in return for entering into an obligation to pay for
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that right an amount approximating to the fair value of the asset and the related
finance charge. Hence, the hire purchase gives rise to items that satisfy the
definition of an asset and a liability and are recognized as such in the hire
purchaser’s balance sheet.
ASSETS
The future economic benefit embodied in an asset is the potential to contribute,
directly or indirectly, to the flow of cash and cash equivalents to the enterprise.
The potential may be a productive one that is part of the operating activities of the
enterprise. It may also take the form of convertibility into cash or cash equivalents
or a capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
An enterprise usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers; because these goods or services can
satisfy these wants or needs, customers are prepared to pay for them and hence
contribute to the cash flows of the enterprise. Cash itself renders a service to the
enterprise because of its command over other resources.
The future economic benefits embodied in an asset may flow to the enterprise in a
number of ways. For example, an asset may be:
(a) used singly or in combination with other assets in the production of goods or
services to be sold by the enterprise;
(b) exchanged for other assets;
(c) used to settle a liability; or
(d) distributed to the owners of the enterprise.
Many assets, for example, plant and machinery, have a physical form. However,
physical form is not essential to the existence of an asset; hence patents and
copyrights, for example, are assets if future economic benefits are expected to
flow from them and if they are controlled by the enterprise.
Many assets, for example, receivables and property, are associated with legal
rights, including the right of ownership. In determining the existence of an asset,
the right of ownership is not essential; thus, for example, an item held under a hire
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purchase is an asset of the hire purchaser since the hire purchaser controls the
benefits which are expected to flow from the item. Although the capacity of an
enterprise to control benefits is usually the result of legal rights, an item may
nonetheless satisfy the definition of an asset even when there is no legal control.
For example, know-how obtained from a development activity may meet the
definition of an asset when, by keeping that know- how secret, an enterprise
controls the benefits that are expected to flow from it.
The assets of an enterprise result from past transactions or other past events.
Enterprises normally obtain assets by purchasing or producing them, but other
transactions or events may also generate assets; examples include land received
by an enterprise from government as part of a programme to encourage economic
growth in an area and the discovery of mineral deposits. Transactions or other
events expected to occur in the future do not in themselves give rise to assets;
hence, for example, an intention to purchase inventory does not, of itself, meet the
definition of an asset.
There is a close association between incurring expenditure and obtaining assets
but the two do not necessarily coincide. Hence, when an enterprise incurs
expenditure, this may provide evidence that future economic benefits were sought
but is not conclusive proof that an item satisfying the definition of an asset has
been obtained. Similarly, the absence of a related expenditure does not preclude
an item from satisfying the definition of an asset and thus becoming a candidate
for recognition in the balance sheet.
LIABILITIES
An essential characteristic of a liability is that the enterprise has a present
obligation. An obligation is a duty or responsibility to act or perform in a certain
way. Obligations may be legally enforceable as a consequence of a binding
contract or statutory requirement. This is normally the case, for example, with
amounts payable for goods and services received. Obligations also arise, however,
from normal business practice, custom and a desire to maintain good business
relations or act in an equitable manner. If, for example, an enterprise decides as a
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matter of policy to rectify faults in its products even when these become apparent
after the warranty period has expired, the amounts that are expected to be
expended in respect of goods already sold are liabilities.
A distinction needs to be drawn between a present obligation and a future
commitment. A decision by the management of an enterprise to acquire assets in
the future does not, of itself, give rise to a present obligation. An obligation
normally arises only when the asset is delivered or the enterprise enters into an
irrevocable agreement to acquire the asset. In the latter case, the irrevocable
nature of the agreement means that the economic consequences of failing to
honour the obligation, for example, because of the existence of a substantial
penalty, leave the enterprise with little, if any, discretion to avoid the outflow of
resources to another party.
The settlement of a present obligation usually involves the enterprise giving up
resources embodying economic benefits in order to satisfy the claim of the other
party. Settlement of a present obligation may occur in a number of ways, for
example, by:
(a) payment of cash;
(b) transfer of other assets;
(c) provision of services;
(d) replacement of that obligation with another obligation; or
(e) conversion of the obligation to equity.
An obligation may also be extinguished by other means, such as a creditor
waiving or forfeiting its rights.
Liabilities result from past transactions or other past events. Thus, for example,
the acquisition of goods and the use of services give rise to trade creditors (unless
paid for in advance or on delivery) and the receipt of a bank loan results in an
obligation to repay the loan. An enterprise may also recognize future rebates
based on annual purchases by customers as liabilities; in this case, the sale of the
goods in the past is the transaction that gives rise to the liability.
Some liabilities can be measured only by using a substantial degree of estimation.
Such liabilities are commonly described as ‘provisions’. Examples include
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provisions for payments to be made under existing warranties and provisions to
cover pension obligations.
EQUITY
Although equity is defined in paragraph 49 as a residual, it may be subclassified
in the balance sheet. For example, funds contributed by owners, reserves
representing appropriations of retained earnings, unappropriated retained earnings
and reserves representing capital maintenance adjustments may be shown
separately. Such classifications can be relevant to the decision making needs of
the users of financial statements when they indicate legal or other restrictions on
the ability of the enterprise to distribute or otherwise apply its equity. They may
also reflect the fact that parties with ownership interests in an enterprise have
differing rights in relation to the receipt of dividends or the repayment of capital.
The creation of reserves is sometimes required by law in order to give the
enterprise and its creditors an added measure of protection from the effects of
losses. Reserves may also be created when tax laws grant exemptions from, or
reductions in, taxation liabilities if transfers to such reserves are made. The
existence and size of such reserves is information that can be relevant to the
decision-making needs of users. Transfers to such reserves are appropriations of
retained earnings rather than expenses.
The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities. Normally, the aggregate amount of equity
only by coincidence corresponds with the aggregate market value of the shares of
the enterprise or the sum that could be raised by disposing of either the net assets
on a piecemeal basis or the enterprise as a whole on a going concern basis.
Commercial, industrial and business activities are often undertaken by means of
enterprises such as sole proprietorships, partnerships and trusts and various types
of government business undertakings. The legal and regulatory framework for
such enterprises is often different from that applicable to corporate enterprises.
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For example, unlike corporate enterprises, in the case of such enterprises, there
may be few, if any, restrictions on the distribution to owners or other beneficiaries
of amounts included in equity. Nevertheless, the definition of equity and the other
aspects of this Framework that deal with equity are appropriate for such
enterprises.
PERFORMANCE
Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share. The elements
directly related to the measurement of profit are income and expenses. The
recognition and measurement of income and expenses, and hence profit, depends
in part on the concepts of capital and capital maintenance used by the enterprise in
preparing its financial statements. These concepts are discussed in paragraphs 101
to 109.
Income and expenses are defined as follows:
(a) Income is increase in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.
(b) Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that result
in decreases in equity, other than those relating to distributions to equity
participants.
The definitions of income and expenses identify their essential features but do not
attempt to specify the criteria that need to be met before they are recognized in the
statement of profit and loss.
Income and expenses may be presented in the statement of profit and loss in
different ways so as to provide information that is relevant for economic decision-
making. For example, it is a common practice to distinguish between those items
of income and expenses that arise in the course of the ordinary activities of the
enterprise and those that do not. This distinction is made on the basis that the
source of an item is relevant in evaluating the ability of the enterprise to generate
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cash and cash equivalents in the future. When distinguishing between items in this
way, consideration needs to be given to the nature of the enterprise and its
operations. Items that arise from the ordinary activities of one enterprise may be
extraordinary in respect of another.
Distinguishing between items of income and expense and combining them in
different ways also permits several measures of enterprise performance to be
displayed. These have differing degrees of inclusiveness.
For example, the statement of profit and loss could display gross margin, profit
from ordinary activities before taxation, profit from ordinary activities after
taxation, and net profit.
INCOME
The definition of income encompasses both revenue and gains. Revenue arises in
the course of the ordinary activities of an enterprise and is referred to by a variety
of different names including sales, fees, interest, dividends, royalties and rent.
Gains represent other items that meet the definition of income and may, or may
not, arise in the course of the ordinary activities of an enterprise. Gains represent
increases in economic benefits and as such are no different in nature from
revenue. Hence, they are not regarded as a separate element in this Framework.
The definition of income includes unrealized gains. Gains also include, for
example, those arising on the disposal of fixed assets. When gains are recognized
in the statement of profit and loss, they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions.
Various kinds of assets may be received or enhanced by income; examples
include cash, receivables and goods and services received in exchange for goods
and services supplied. Income may also result in the settlement of liabilities. For
example, an enterprise may provide goods and services to a lender in settlement
of an obligation to repay an outstanding loan.
EXPENSES
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The definition of expenses encompasses those expenses that arise in the course of
the ordinary activities of the enterprise, as well as losses. Expenses that arise in
the course of the ordinary activities of the enterprise include, for example, cost of
goods sold, wages, and depreciation. They take the form of an outflow or
depletion of assets or enhancement of liabilities.
Losses represent other items that meet the definition of expenses and may, or may
not, arise in the course of the ordinary activities of the enterprise. Losses represent
decreases in economic benefits and as such they are no different in nature from
other expenses. Hence, they are not regarded as a separate element in this
Framework.
Losses include, for example, those resulting from disasters such as fire and flood,
as well as those arising on the disposal of fixed assets. The definition of expenses
also includes unrealized losses. When losses are recognized in the statement of
profit and loss, they are usually displayed separately because knowledge of them
is useful for the purpose of making economic decisions.
CAPITAL MAINTENANCE ADJUSTMENTS
The revaluation or restatement of assets and liabilities gives rise to increases or
decreases in equity. While these increases or decreases meet the definition of
income and expenses, they are not included in the statement of profit and loss
under certain concepts of capital maintenance. Instead, these items are included in
equity as capital maintenance adjustments or revaluation reserves.
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
Recognition is the process of incorporating in the balance sheet or statement of
profit and loss an item that meets the definition of an element and satisfies the
criteria for recognition set out. It involves the depiction of the item in words and
by a monetary amount and the inclusion of that amount in the totals of balance
sheet or statement of profit and loss. Items that satisfy the recognition criteria
should be recognized in the balance sheet or statement of profit and loss. The
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failure to recognize such items is not rectified by disclosure of the accounting
policies used nor by notes or explanatory material.
An item that meets the definition of an element should be recognized if:
(a) it is probable that any future economic benefit associated with the item will
flow to or from the enterprise; and
(b) the item has a cost or value that can be measured with reliability.
In assessing whether an item meets these criteria and therefore qualifies for
recognition in the financial statements, regard needs to be given to the materiality
considerations. The interrelationship between the elements means that an item
that meets the definition and recognition criteria for a particular element, for
example, an asset, automatically requires the recognition of another element, for
example, income or a liability.
THE PROBABILITY OF FUTURE ECONOMIC BENEFITS
The concept of probability is used in the recognition criteria to refer to the degree
of uncertainty that the future economic benefits associated with the item will flow
to or from the enterprise. The concept is in keeping with the uncertainty that
characterizes the environment in which an enterprise operates. Assessments of the
degree of uncertainty attaching to the flow of future economic benefits are made
on the basis of the evidence available when the financial statements are prepared.
For example, when it is probable that a receivable will be realized, it is then
justifiable, in the absence of any evidence to the contrary, to recognize the
receivable as an asset. For a large population of receivables, however, some
degree of non-payment is normally considered probable; hence, an expense
representing the expected reduction in economic benefits is recognized.
RELIABILITY OF MEASUREMENT
The second criterion for the recognition of an item is that it possesses a cost or
value that can be measured with reliability. In many cases, cost or value must be
estimated; the use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability. When, however, a
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reasonable estimate cannot be made, the item is not recognized in the balance
sheet or statement of profit and loss. For example, the damages payable in a
lawsuit may meet the definitions of a liability and an expense as well as the
probability criterion for recognition; however, if it is not possible to measure the
claim reliably, it should not be recognized as a liability or as an expense. An item
that, at a particular point in time, fails to meet the recognition criteria may qualify
for recognition at a later date as a result of subsequent circumstances or events.
An item that possesses the essential characteristics of an element but fails to meet
the criteria for recognition may nonetheless warrant disclosure in the notes,
explanatory material or supplementary schedules. This is appropriate when
knowledge of the item is considered to be relevant to the evaluation of the
financial position, performance and cash flows of an enterprise by the users of
financial statements. Thus, in the example given, the existence of the claim would
need to be disclosed in the notes, explanatory material or supplementary
schedules.
RECOGNITION OF ASSETS
An asset is recognized in the balance sheet when it is probable that the future
economic benefits associated with it will flow to the enterprise and the asset has a
cost or value that can be measured reliably.
An asset is not recognized in the balance sheet when expenditure has been
incurred for which it is considered improbable that economic benefits will flow to
the enterprise beyond the current accounting period. Instead, such a transaction
results in the recognition of an expense in the statement of profit and loss. This
treatment does not imply either that the intention of management in incurring
expenditure was other than to generate future economic benefits for the enterprise
or that management was misguided.
The only implication is that the degree of certainty that economic benefits will
flow to the enterprise beyond the current accounting period is insufficient to
warrant the recognition of an asset.
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RECOGNITION OF LIABILITIES
A liability is recognized in the balance sheet when it is probable that an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can be
measured reliably. In practice, obligations under contracts that are equally
proportionately unperformed (for example, liabilities for inventory ordered but
not yet received) are generally not recognized as liabilities in the financial
statements. However, such obligations may meet the definition of liabilities and,
provided the recognition criteria are met in the particular circumstances, may
qualify for recognition. In such circumstances, recognition of liabilities entails
recognition of related assets or expenses.
RECOGNITION OF INCOME
Income is recognized in the statement of profit and loss when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability has
arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable).
The procedures normally adopted in practice for recognizing income, for
example, the requirement that revenue should be earned, are applications of the
recognition criteria in this Framework. Such procedures are generally directed at
restricting the recognition as income to those items that can be measured reliably
and have a sufficient degree of certainty.
RECOGNITION OF EXPENSES
Expenses are recognized in the statement of profit and loss when a decrease in
future economic benefits related to a decrease in an asset or an increase of a
liability has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an increase
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of liabilities or a decrease in assets (for example, the accrual of employees’
salaries or the depreciation of plant and machinery).
Many expenses are recognized in the statement of profit and loss on the basis of a
direct association between the costs incurred and the earning of specific items of
income. This process, commonly referred to as the matching of costs with
revenues, involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events; for example, the various components of expense making up the cost of
goods sold are recognized at the same time as the income derived from the sale of
the goods. However, the application of the matching concept under this
Framework does not allow the recognition of items in the balance sheet which do
not meet the definition of assets or liabilities.
When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined,
expenses are recognized in the statement of profit and loss on the basis of
systematic and rational allocation procedures. This is often necessary in
recognizing the expenses associated with the using up of assets such as plant and
machinery, goodwill, patents and trademarks; in such cases, the expense is
referred to as depreciation or amortization. These allocation procedures are
intended to recognize expenses in the accounting periods in which the economic
benefits associated with these items are consumed or expire.
An expense is recognized immediately in the statement of profit and loss when
expenditure produces no future economic benefits. An expense is also recognized
to the extent that future economic benefits from expenditure do not qualify, or
cease to qualify, for recognition in the balance sheet as an asset.
An expense is recognized in the statement of profit and loss in those cases also
where a liability is incurred without the recognition of an asset, for example, in
the case of a liability under a product warranty.
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CHAPTER VII
Accounting Standard (AS-17)
SEGMENT REPORT
Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Council of the
Institute of Chartered Accountants of India, comes into effect in respect of
accounting periods commencing on or after 1.4.2001.
This Standard is mandatory in nature in respect of accounting periods
commencing on or after 1-4-2004 for the enterprises which fall in any one or
more of the following categories, at any time during the accounting period:
(i) Enterprises whose equity or debt securities are listed whether in India or
outside India.
(ii) Enterprises which are in the process of listing their equity or debt securities as
evidenced by the board of directors’ resolution in this regard.
1 Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the Council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a
detailed discussion on the implications of the mandatory status of an
accounting standard.
3 AS 17 was originally made mandatory in respect of accounting periods
commencing on or after 1-4-2001 for the following enterprises:
(i) Enterprises whose equity or debt securities are listed on a recognized stock
exchange in India, and enterprises that are in the process of issuing equity or
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debt securities that will be listed on a recognized stock exchange in India as
evidenced by the board of directors’ resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose
turnover for the accounting period exceeds Rs. 50 crores.
(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises, whose turnover
for the immediately preceding accounting period on the basis of audited
financial statements exceeds Rs. 50 crore. Turnover does not include ‘other
income’.
(vii) All commercial, industrial and business reporting enterprises having
borrowings, including public deposits, in excess of Rs. 10 crore at any time
during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at any time
during the accounting period.
The enterprises which do not fall in any of the above categories are not required
to apply this Standard.
Where an enterprise has been covered in any one or more of the above categories
and subsequently, ceases to be so covered, the enterprise will not qualify for
exemption from application of this Standard, until the enterprise ceases to be
covered in any of the above categories for two consecutive years.
Where an enterprise has previously qualified for exemption from application of
this Standard (being not covered by any of the above categories) but no longer
qualifies for exemption in the current accounting period, this Standard becomes
applicable from the current period. However, the corresponding previous period
figures need not be disclosed.
An enterprise, which, pursuant to the above provisions, does not disclose segment
information, should disclose the fact.
The following is the text of the Accounting Standard.
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OBJECTIVES
The objective of this Statement is to establish principles for reporting financial
information, about the different types of products and services an enterprise
produces and the different geographical areas in which it operates. Such
information helps users of financial statements:
(a) better understand the performance of the enterprise;
(b) better assess the risks and returns of the enterprise; and
(c) make more informed judgments about the enterprise as a whole.
Many enterprises provide groups of products and services or operate in
geographical areas that are subject to differing rates of profitability, opportunities
for growth, future prospects, and risks. Information about different types of
products and services of an enterprise and its operations in different geographical
areas - often called segment information - is relevant to assessing the risks and
returns of a diversified or multi-locational enterprise but may not be determinable
from the aggregated data. Therefore, reporting of segment information is widely
regarded as necessary for meeting the needs of users of financial statements.
SCOPE
1. This Statement should be applied in presenting general purpose financial
statements.
2. The requirements of this Statement are also applicable in case of consolidated
financial statements.
3. An enterprise should comply with the requirements of this Statement fully and
not selectively.
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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.
DEFINITION
The following terms are used in this Statement with the meanings specified:
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.
A geographical segment is a distinguishable component of an enterprise that is
engaged in providing products or services within a particular economic
environment and that is subject to risks and returns that are different from those of
components operating in other economic environments. Factors that should be
considered in identifying geographical segments include:
(a) similarity of economic and political conditions;
(b) relationships between operations in different geographical areas;
(c) proximity of operations;
(d) special risks associated with operations in a particular area;
(e) exchange control regulations; and
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(f) the underlying currency risks.
A reportable segment is a business segment or a geographical segment identified
on the basis of foregoing definitions for which segment information is required to
be disclosed by this Statement.
Enterprise revenue is revenue from sales to external customers as reported in the
statement of profit and loss.
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.
Segment revenue does not include:
(a) extraordinary items as defined in AS 5, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies;
(b) interest or dividend income, including interest earned on advances or loans to
other segments unless the operations of the segment are primarily of a financial
nature; and
(c) gains on sales of investments or on extinguishment of debt unless the
operations of the segment are primarily of a financial nature.
Segment expense is the aggregate of
(i) the expense resulting from the operating activities of a segment that is directly
attributable to the segment, and
(ii) the relevant portion of enterprise expense that can be allocated on a reasonable
basis to the segment, including expense relating to transactions with other
segments of the enterprise.
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Segment expense does not include:
(a) extraordinary items as defined in AS 5, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies;
(b) interest expense, including interest incurred on advances or loans from other
segments, unless the operations of the segment are primarily of a financial
nature;
(c) losses on sales of investments or losses on extinguishment of debt unless the
operations of the segment are primarily of a financial nature;
(d) income tax expense; and
(e) general administrative expenses, head-office expenses, and other expenses that
arise at the enterprise level and relate to the enterprise as a whole. However,
costs are sometimes incurred at the enterprise level on behalf of a segment.
Such costs are part of segment expense if they relate to the operating activities
of the segment and if they can be directly attributed or allocated to the segment
on a reasonable basis.
Segment result is segment revenue less segment expense.
Segment assets are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable to the segment or can
be allocated to the segment on a reasonable basis.
If the segment result of a segment includes interest or dividend income, its
segment assets include the related receivables, loans, investments, or other
interest or dividend generating assets. Segment assets do not include income tax
assets. Segment assets are determined after deducting related allowances/
provisions that are reported as direct offsets in the balance sheet of the enterprise.
Segment liabilities are those operating liabilities that result from the operating
activities of a segment and that either are directly attributable to the segment or
can be allocated to the segment on a reasonable basis.
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If the segment result of a segment includes interest expense, its segment liabilities
include the related interest-bearing liabilities. Segment liabilities do not include
income tax liabilities.
Segment accounting policies are the accounting policies adopted for preparing
and presenting the financial statements of the enterprise as well as those
accounting policies that relate specifically to segment reporting.
A single business segment does not include products and services with
significantly differing risks and returns. While there may be dissimilarities with
respect to one or several of the factors listed in the definition of business segment,
the products and services included in a single business segment are expected to be
similar with respect to a majority of the factors. Similarly, a single geographical
segment does not include operations in economic environments with significantly
differing risks and returns. A geographical segment may be a single country, a
group of two or more countries, or a region within a country. The risks and
returns of an enterprise are influenced both by the geographical location of its
operations (where its products are produced or where its service rendering
activities are based) and also by the location of its customers (where its products
are sold or services are rendered). The definition allows geographical segments to
be based on either:
(a) the location of production or service facilities and other assets of an enterprise;
or
(b) the location of its customers.
The organizational and internal reporting structure of an enterprise will normally
provide evidence of whether its dominant source of geographical risks results
from the location of its assets (the origin of its sales) or the location of its
customers (the destination of its sales). Accordingly, an enterprise looks to this
structure to determine whether its geographical segments should be based on the
location of its assets or on the location of its customers.
Determining the composition of a business or geographical segment involves a
certain amount of judgment. In making that judgment, enterprise management
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takes into account the objective of reporting financial information by segment as
set forth in this Statement and the qualitative characteristics of financial
statements as identified in the Framework for the Preparation and Presentation of
Financial Statements issued by the Institute of Chartered Accountants of India.
The qualitative characteristics include the relevance, reliability, and comparability
over time of financial information that is reported about the different groups of
products and services of an enterprise and about its operations in particular
geographical areas, and the usefulness of that information for assessing the risks
and returns of the enterprise as a whole.
The predominant sources of risks affect how most enterprises are organized and
managed. Therefore, the organizational structure of an enterprise and its internal
financial reporting system are normally the basis for identifying its segments.
The definitions of segment revenue, segment expense, segment assets and
segment liabilities include amounts of such items that are directly attributable to a
segment and amounts of such items that can be allocated to a segment on a
reasonable basis. An enterprise looks to its internal financial reporting system as
the starting point for identifying those items that can be directly attributed, or
reasonably allocated, to segments. There is thus a presumption that amounts that
have been identified with segments for internal financial reporting purposes are
directly attributable or reasonably allocable to segments for the purpose of
measuring the segment revenue, segment expense, segment assets, and segment
liabilities of reportable segments.
In some cases, however, a revenue, expense, asset or liability may have been
allocated to segments for internal financial reporting purposes on a basis that is
understood by enterprise management but that could be deemed arbitrary in the
perception of external users of financial statements. Such an allocation would not
constitute a reasonable basis under the definitions of segment revenue, segment
expense, segment assets, and segment liabilities in this Statement. Conversely, an
enterprise may choose not to allocate some item of revenue, expense, asset or
liability for internal financial reporting purposes, even though a reasonable basis
for doing so exists. Such an item is allocated pursuant to the definitions of
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segment revenue, segment expense, segment assets, and segment liabilities in this
Statement.
Examples of segment assets include current assets that are used in the operating
activities of the segment and tangible and intangible fixed assets. If a particular
item of depreciation or amortization is included in segment expense, the related
asset is also included in segment assets. Segment assets do not include assets used
for general enterprise or head-office purposes. Segment assets include operating
assets shared by two or more segments if a reasonable basis for allocation exists.
Segment assets include goodwill that is directly attributable to a segment or that
can be allocated to a segment on a reasonable basis, and segment expense
includes related amortization of goodwill. If segment assets have been revalued
subsequent to acquisition, then the measurement of segment assets reflects those
revaluations.
Examples of segment liabilities include trade and other payables, accrued
liabilities, customer advances, product warranty provisions, and other claims
relating to the provision of goods and services. Segment liabilities do not include
borrowings and other liabilities that are incurred for financing rather than
operating purposes. The liabilities of segments whose operations are not primarily
of a financial nature do not include borrowings and similar liabilities because
segment result represents an operating, rather than a net of- financing, profit or
loss. Further, because debt is often issued at the head office level on an enterprise-
wide basis, it is often not possible to directly attribute, or reasonably allocate, the
interest-bearing liabilities to segments.
Segment revenue, segment expense, segment assets and segment liabilities are
determined before intra-enterprise balances and intra-enterprise transactions are
eliminated as part of the process of preparation of enterprise financial statements,
except to the extent that such intra-enterprise balances and transactions are within
a single segment.
While the accounting policies used in preparing and presenting the financial
statements of the enterprise as a whole are also the fundamental segment
accounting policies, segment accounting policies include, in addition, policies that
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relate specifically to segment reporting, such as identification of segments,
method of pricing inter-segment transfers, and basis for allocating revenues and
expenses to segments.
IDENTIFYING REPORTABLE SEGMENTS
Primary and Secondary Segment Reporting Formats
The dominant source and nature of risks and returns of an enterprise should
govern whether its primary segment reporting format will be business segments or
geographical segments. If the risks and returns of an enterprise are affected
predominantly by differences in the products and services it produces, its primary
format for reporting segment information should be business segments, with
secondary information reported geographically. Similarly, if the risks and returns
of the enterprise are affected predominantly by the fact that it operates in different
countries or other geographical areas, its primary format for reporting segment
information should be geographical segments, with secondary information
reported for groups of related products and services.
Internal organization and management structure of an enterprise and its system of
internal financial reporting to the board of directors and the chief executive officer
should normally be the basis for identifying the predominant source and nature of
risks and differing rates of return facing the enterprise and, therefore, for
determining which reporting format is primary and which is secondary, except as
provided in subparagraphs (a) and (b) below:
(a) if risks and returns of an enterprise are strongly affected both by differences in
the products and services it produces and by differences in the geographical areas
in which it operates, as evidenced by a ‘matrix approach’ to managing the
company and to reporting internally to the board of directors and the chief
executive officer, then the enterprise should use business segments as its primary
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segment reporting format and geographical segments as its secondary reporting
format; and
(b) if internal organizational and management structure of an enterprise and its
system of internal financial reporting to the board of directors and the chief
executive officer are based neither on individual products or services or groups of
related products/services nor on geographical areas, the directors and management
of the enterprise should determine whether the risks and returns of the enterprise
are related more to the products and services it produces or to the geographical
areas in which it operates and should, accordingly, choose business segments or
geographical segments as the primary segment reporting format of the enterprise,
with the other as its secondary reporting format.
For most enterprises, the predominant source of risks and returns determines how
the enterprise is organized and managed. Organizational and management
structure of an enterprise and its internal financial reporting system normally
provide the best evidence of the predominant source of risks and returns of the
enterprise for the purpose of its segment reporting. Therefore, except in rare
circumstances, an enterprise will report segment information in its financial
statements on the same basis as it reports internally to top management. Its
predominant source of risks and returns becomes its primary segment reporting
format. Its secondary source of risks and returns becomes its secondary segment
reporting format.
A ‘matrix presentation’ — both business segments and geographical segments as
primary segment reporting formats with full segment disclosures on each basis --
will often provide useful information if risks and returns of an enterprise are
strongly affected both by differences in the products and services it produces and
by differences in the geographical areas in which it operates. This Statement does
not require, but does not prohibit, a ‘matrix presentation’.
In some cases, organization and internal reporting of an enterprise may have
developed along lines unrelated to both the types of products and services it
produces, and the geographical areas in which it operates. In such cases, the
internally reported segment data will not meet the objective of this Statement.
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Accordingly, it requires the directors and management of the enterprise to
determine whether the risks and returns of the enterprise are more product/service
driven or geographically driven and to accordingly choose business segments or
geographical segments as the primary basis of segment reporting. The objective is
to achieve a reasonable degree of comparability with other enterprises, enhance
understandability of the resulting information, and meet the needs of investors,
creditors, and others for information about product/service-related and
geographically related risks and returns.
BUSINESS AND GEOGRAPHICAL SEGMENTS
Business and geographical segments of an enterprise for external reporting
purposes should be those organizational units for which information is reported to
the board of directors and to the chief executive officer for the purpose of
evaluating the unit’s performance and for making decisions about future
allocations of resources.
If internal organizational and management structure of an enterprise and its
system of internal financial reporting to the board of directors and the chief
executive officer are based neither on individual products or services or groups of
related products/services nor on geographical areas, it requires that the directors
and management of the enterprise should choose either business segments or
geographical segments as the primary segment reporting format of the enterprise
based on their assessment of which reflects the primary source of the risks and
returns of the enterprise, with the other as its secondary reporting format. In that
case, the directors and management of the enterprise should determine its business
segments and geographical segments for external reporting purposes based on the
factors in the definitions of this Statement, rather than on the basis of its system of
internal financial reporting to the board of directors and chief executive officer,
consistent with the following:
(a) if one or more of the segments reported internally to the directors and
management is a business segment or a geographical segment based on the factors
in the definitions, but others are not, sub-paragraph (b) below should be applied
only to those internal segments that do not meet the definitions (that is, an
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internally reported segment that meets the definition should not be further
segmented);
(b) for those segments reported internally to the directors and management that do
not satisfy the definitions, management of the enterprise should look to the next
lower level of internal segmentation that reports information along product and
service lines or geographical lines, as appropriate under the definitions; and
(c) if such an internally reported lower-level segment meets the definition of
business segment or geographical segment based on the factors, the criteria for
identifying reportable segments should be applied to that segment.
Under this Statement, most enterprises will identify their business and
geographical segments as the organizational units for which information is
reported to the board of the directors (particularly the non-executive directors, if
any) and to the chief executive officer (the senior operating decision maker,
which in some cases may be a group of several people) for the purpose of
evaluating each unit’s performance and for making decisions about future
allocations of resources. Even if an enterprise must apply this because its internal
segments are not along product/service or geographical lines, it will consider the
next lower level of internal segmentation that reports information along product
and service lines or geographical lines rather than construct segments solely for
external reporting purposes. This approach of looking to organizational and
management structure of an enterprise and its internal financial reporting system
to identify the business and geographical segments of the enterprise for external
reporting purposes is sometimes called the ‘management approach’, and the
organizational components for which information is reported internally are
sometimes called ‘operating segments’.
REPORTABLE SEGMENTS
A business segment or geographical segment should be identified as a reportable
segment if:
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(a) its revenue from sales to external customers and from transactions with other
segments is 10 per cent or more of the total revenue, external and internal, of
all segments; or
(b) its segment result, whether profit or loss, is 10 per cent or more of –
(i) the combined result of all segments in profit, or
(ii) the combined result of all segments in loss, whichever is greater in absolute
amount; or
(c) its segment assets are 10 per cent or more of the total assets of all segments.
A business segment or a geographical segment which is not a reportable segment
may be designated as a reportable segment despite its size at the discretion of the
management of the enterprise. If that segment is not designated as a reportable
segment, it should be included as an unallocated reconciling item.
If total external revenue attributable to reportable segments constitutes less than
75 per cent of the total enterprise revenue, additional segments should be
identified as reportable segments, even if they do not meet the 10 per cent
thresholds, until at least 75 per cent of total enterprise revenue is included in
reportable segments.
The 10 per cent thresholds in this Statement are not intended to be a guide for
determining materiality for any aspect of financial reporting other than identifying
reportable business and geographical segments.
Illustration I to this Statement presents an illustration of the determination of
reportable segments.
A segment identified as a reportable segment in the immediately preceding period
because it satisfied the relevant 10 per cent thresholds should continue to be a
reportable segment for the current period notwithstanding that its revenue, result,
and assets all no longer meet the 10 per cent thresholds.
If a segment is identified as a reportable segment in the current period because it
satisfies the relevant 10 per cent thresholds, preceding period segment data that is
presented for comparative purposes should, unless it is impracticable to do so, be
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restated to reflect the newly reportable segment as a separate segment, even if that
segment did not satisfy the 10 per cent thresholds in the preceding period.
SEGMENT ACCOUNTING POLICIES
Segment information should be prepared in conformity with the accounting
policies adopted for preparing and presenting the financial statements of the
enterprise as a whole.
There is a presumption that the accounting policies that the directors and
management of an enterprise have chosen to use in preparing the financial
statements of the enterprise as a whole are those that the directors and
management believe are the most appropriate for external reporting purposes.
Since the purpose of segment information is to help users of financial statements
better understand and make more informed judgments about the enterprise as a
whole, this Statement requires the use, in preparing segment information, of the
accounting policies adopted for preparing and presenting the financial statements
of the enterprise as a whole. That does not mean, however, that the enterprise
accounting policies are to be applied to reportable segments as if the segments
were separate stand-alone reporting entities. A detailed calculation done in
applying a particular accounting policy at the enterprise-wide level may be
allocated to segments if there is a reasonable basis for doing so. Pension
calculations, for example, often are done for an enterprise as a whole, but the
enterprise-wide figures may be allocated to segments based on salary and
demographic data for the segments.
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This Statement does not prohibit the disclosure of additional segment information
that is prepared on a basis other than the accounting policies adopted for the
enterprise financial statements provided that
(a) the information is reported internally to the board of directors and the chief
executive officer for purposes of making decisions about allocating resources to
the segment and assessing its performance and
(b) the basis of measurement for this additional information is clearly described.
Assets and liabilities that relate jointly to two or more segments should be
allocated to segments if, and only if, their related revenues and expenses also are
allocated to those segments.
The way in which asset, liability, revenue, and expense items are allocated to
segments depends on such factors as the nature of those items, the activities
conducted by the segment, and the relative autonomy of that segment. It is not
possible or appropriate to specify a single basis of allocation that should be
adopted by all enterprises; nor is it appropriate to force allocation of enterprise
asset, liability, revenue, and expense items that relate jointly to two or more
segments, if the only basis for making those allocations is arbitrary. At the same
time, the definitions of segment revenue, segment expense, segment assets, and
segment liabilities are interrelated, and the resulting allocations should be
consistent. Therefore, jointly used assets and liabilities are allocated to segments
if, and only if, their related revenues and expenses also are allocated to those
segments. For example, an asset is included in segment assets if, and only if, the
related depreciation or amortization is included in segment expense.
DISCLOSURE
The previous paragraphs specify the disclosures required for reportable segments
for primary segment reporting format of an enterprise. They identify the
disclosures required for secondary reporting format of an enterprise. Enterprises
are encouraged to make all of the primary-segment disclosures identified for each
reportable secondary segment although they require considerably less disclosure
on the secondary basis. The above paragraphs address several other segment
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disclosure matters. Illustration II to this Statement illustrates the application of
these disclosure standards.
PRIMARY REPORTING FORMAT
The disclosure requirements should be applied to each reportable segment based
on primary reporting format of an enterprise.
An enterprise should disclose 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;
(b) segment result;
(c) total carrying amount of segment assets;
(d) total amount of segment liabilities;
(e) total cost incurred during the period to acquire segment assets that are
expected to be used during more than one period (tangible and intangible
fixed assets);
(f) total amount of expense included in the segment result for depreciation and
amortization in respect of segment assets for the period; and
(g) total amount of significant non-cash expenses, other than depreciation and
amortization in respect of segment assets, that were included in segment
expense and, therefore, deducted in measuring segment result.
It requires an enterprise to report segment result. If an enterprise can compute
segment net profit or loss or some other measure of segment profitability other
than segment result, without arbitrary allocations, reporting of such amount(s) in
addition to segment result is encouraged. If that measure is prepared on a basis
other than the accounting policies adopted for the financial statements of the
enterprise, the enterprise will include in its financial statements a clear description
of the basis of measurement.
An example of a measure of segment performance above segment result in the
statement of profit and loss is gross margin on sales. Examples of measures of
segment performance below segment result in the statement of profit and loss are
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profit or loss from ordinary activities (either before or after income taxes) and net
profit or loss.
Accounting Standard 5, ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’ requires that “when items of income and
expense within profit or loss from ordinary activities are of such size, nature or
incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed
separately”. Examples of such items include write downs of inventories,
provisions for restructuring, disposals of fixed assets and long-term investments,
legislative changes having retrospective application, litigation settlements, and
reversal of provisions. An enterprise is encouraged, but not required, to disclose
the nature and amount of any items of segment revenue and segment expense that
are of such size, nature, or incidence that their disclosure is relevant to explain the
performance of the segment for the period. Such disclosure is not intended to
change the classification of any such items of revenue or expense from ordinary
to extraordinary or to change the measurement of such items. The disclosure,
however, does change the level at which the significance of such items is
evaluated for disclosure purposes from the enterprise level to the segment level.
An enterprise that reports the amount of cash flows arising from operating,
investing and financing activities of a segment need not disclose depreciation and
amortization expense and non-cash expenses of such segment.
AS 3, Cash Flow Statements recommends that an enterprise present a cash flow
statement that separately reports cash flows from operating, investing and
financing activities. Disclosure of information regarding operating, investing and
financing cash flows of each reportable segment is relevant to understanding the
enterprise’s overall financial position, liquidity, and cash flows. Disclosure of
segment cash flow is, therefore, encouraged, though not required. An enterprise
that provides segment cash flow disclosures need not disclose depreciation and
amortization expense and noncash expenses.
An enterprise should present reconciliation between the information disclosed for
reportable segments and the aggregated information in the enterprise financial
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statements. In presenting the reconciliation, segment revenue should be reconciled
to enterprise revenue; segment result should be reconciled to enterprise net profit
or loss; segment assets should be reconciled to enterprise assets; and segment
liabilities should be reconciled to enterprise liabilities.
SECONDARY SEGMENT INFORMATION
The primary reporting format identifies the disclosure requirements to be applied
to each reportable segment based on primary reporting format of an enterprise.
The following paragraphs identify the disclosure requirements to be applied to
each reportable segment based on secondary reporting format of an enterprise, as
follows:
(a) if primary format of an enterprise is business segments, the required
secondary-format disclosures are identified in the net paragraph;
(b) if primary format of an enterprise is geographical segments based on location
of assets (where the products of the enterprise are produced or where its service
rendering operations are based), the required secondary-format disclosures are
identified in the next two paragraphs;
(c) if primary format of an enterprise is geographical segments based on the
location of its customers (where its products are sold or services are rendered), the
required secondary-format disclosures are identified in the last two paragraphs of
the segment.
If primary format of an enterprise for reporting segment information is business
segments, it should also report the following information:
(a) segment revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose
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revenue from sales to external customers is 10 per cent or more of enterprise
revenue;
(b) the total carrying amount of segment assets by geographical location of assets,
for each geographical segment whose segment assets are 10 per cent or more of
the total assets of all geographical segments; and
(c) the total cost incurred during the period to acquire segment assets that are
expected to be used during more than one period (tangible and intangible fixed
assets) by geographical location of assets, for each geographical segment whose
segment assets are 10 per cent or more of the total assets of all geographical
segments.
If primary format of an enterprise for reporting segment information is
geographical segments (whether based on location of assets or location of
customers), it should also report the following segment information for each
business segment whose revenue from sales to external customers is 10 per cent
or more of enterprise revenue or whose segment assets are 10 per cent or more of
the total assets of all business segments:
(a) segment revenue from external customers;
(b) the total carrying amount of segment assets; and
(c) the total cost incurred during the period to acquire segment assets that are
expected to be used during more than one period (tangible and intangible fixed
assets).
If primary format of an enterprise for reporting segment information is
geographical segments that are based on location of assets, and if the location of
its customers is different from the location of its assets, then the enterprise should
also report revenue from sales to external customers for each customer-based
geographical segment whose revenue from sales to external customers is 10 per
cent or more of enterprise revenue.
If primary format of an enterprise for reporting segment information is
geographical segments that are based on location of customers, and if the assets of
the enterprise are located in different geographical areas from its customers, then
the enterprise should also report the following segment information for each
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asset-based geographical segment whose revenue from sales to external customers
or segment assets are 10 per cent or more of total enterprise amounts:
(a) the total carrying amount of segment assets by geographical location of the
assets; and
(b) the total cost incurred during the period to acquire segment assets that are
expected to be used during more than one period (tangible and intangible fixed
assets) by location of the assets.
ILLUSTRATIVE SEGMENT DISCLOSURES
Illustration II to this Statement presents an illustration of the disclosures for
primary and secondary formats that are required by this Statement.
OTHER DISCLOSURES
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.
Changes in accounting policies adopted for segment reporting that have a material
effect on segment information should be disclosed. Such disclosure should
include a description of the nature of the change, and the financial effect of the
change if it is reasonably determinable.
AS 5 requires that changes in accounting policies adopted by the enterprise should
be made only if required by statute, or for compliance with an accounting
standard, or if it is considered that the change would result in a more appropriate
presentation of events or transactions in the financial statements of the enterprise.
Changes in accounting policies adopted at the enterprise level that affect segment
information are dealt with in accordance with AS 5. AS 5 requires that any
change in an accounting policy which has a material effect should be disclosed.
The impact of, and the adjustments resulting from, such change, if material,
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should be shown in the financial statements of the period in which such change is
made, to reflect the effect of such change. Where the effect of such change is not
ascertainable, wholly or in part, the fact should be indicated. If a change is made
in the accounting policies which has no material effect on the financial statements
for the current period but which is reasonably expected to have a material effect in
later periods, the fact of such change should be appropriately disclosed in the
period in which the change is adopted.
Some changes in accounting policies relate specifically to segment reporting.
Examples include changes in identification of segments and changes in the basis
for allocating revenues and expenses to segments. Such changes can have a
significant impact on the segment information reported but will not change
aggregate financial information reported for the enterprise. To enable users to
understand the impact of such changes, this Statement requires the disclosure of
the nature of the change and the financial effect of the change, if reasonably
determinable.
An enterprise should indicate the types of products and services included in each
reported business segment and indicate the composition of each reported
geographical segment, both primary and secondary, if not otherwise disclosed in
the financial statements.
To assess the impact of such matters as shifts in demand, changes in the prices of
inputs or other factors of production, and the development of alternative products
and processes on a business segment, it is necessary to know the activities
encompassed by that segment. Similarly, to assess the impact of changes in the
economic and political environment on the risks and returns of a geographical
segment, it is important to know the composition of that geographical segment.
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ILLUSTRATION I
Illustration on Determination of Reportable Segments
This example is illustrative only and does not form part of the Accounting
Standard. The purpose of this example is to illustrate the application of the
Accounting Standard.
An enterprise operates through eight segments, namely, A, B, C, D, E, F, G and
H. The relevant information about these segments is given in the following table
(amounts in Rs.’000):
Table 7.1: Determination of Reportable Segments (Amount in Rs.
‘000)
A B C D E F G HTotal
Segments
Total
Enterprise
SEGMENT
REVENUE
External
Sales
- 255 15 10 15 50 20 35 400
Inter
segment
Sales
100 60 30 5 - - 5 - 200
Total
Revenue100 315 45 15 15 50 25 35 600 400
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Total
Revenue of
each
segment as a
percentage
of total
revenue of
all segments
16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8
SEGMENT
RESULT
Profit/(Loss)
5 (90) 15 (5) 8 (5) 5 7
Combined
Result of all
Segments in
profits
5 15 8 5 7 40
Combined
Result of all
Segments in
loss
(90) (5) (5) (100)
Segment
Result as a
percentage
of the
greater of
the totals
arrived
above in
absolute
amount (i.e.,
100)
5 90 15 5 8 5 5 7
SEGMENT
ASSETS15 47 5 11 3 5 5 9 100
Segment
assets as a
percentage
15 47 5 11 3 5 5 9
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of total
assets
of all
segments
The reportable segments of the enterprise will be identified as below:
a), segments whose total revenue from external sales and inter-segment sales is
10% or more of the total revenue of all segments, external and internal, should be
identified as reportable segments. Therefore, Segments A and B are reportable
segments.
(b), it is to be first identified whether the combined result of all segments in profit
or the combined result of all segments in loss is greater in absolute amount. From
the table, it is evident that combined result in loss (i.e., Rs.100,000) is greater.
Therefore, the individual segment result as a percentage of Rs.100,000 needs to
be examined. Segments B and C are reportable segments as their segment result is
more than the threshold limit of 10%.
(c) Segments A, B and D are reportable segments, as their segment assets are
more than 10% of the total segment assets.
Thus, Segments A, B, C and D are reportable segments in terms of the criteria laid
down in above explanation.
The Statement gives an option to the management of the enterprise to designate
any segment as a reportable segment. In the given case, it is presumed that the
management decides to designate Segment E as a reportable segment.
The AS-17 requires that if total external revenue attributable to reportable
segments identified as aforesaid constitutes less than 75% of the total enterprise
revenue, additional segments should be identified as reportable segments even if
they do not meet the 10% thresholds, until at least 75% of total enterprise revenue
is included in reportable segments.
The total external revenue of Segments A, B, C, D and E, identified above as
reportable segments, is Rs.2,95,000. This is less than 75% of total enterprise
revenue of Rs.4,00,000. The management of the enterprise is required to
designate any one or more of the remaining segments as reportable segment(s) so “SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
that the external revenue of reportable segments is at least 75% of the total
enterprise revenue. Suppose, the management designates Segment H for this
purpose the external revenue of reportable segments is more than 75% of the total
enterprise revenue. Segments A, B, C, D, E and H are reportable segments.
Segments F and G will be shown as reconciling items.
ILLUSTARTION II
Illustrative Segment Disclosures
This example is illustrative only and does not form part of the Accounting
Standard. The purpose of this example is to illustrate the application of the
Accounting Standard.
This example illustrates the segment disclosures that this Statement would require
for a diversified multi-locational business enterprise. This example is intentionally
complex to illustrate most of the provisions of this Statement.
Table 7.2: INFORMATION ABOUT BUSINESS SEGMENTS (NOTE xx)
(Amounts in Rs. lakhs)
Paper
Products
Office
Products
Publishing Other
Operations
Eliminations Consolidated
Total
‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07
REVENUE
External
sales55 50 20 17 19 16 7 7
Inter-
segment
sales
15 10 10 14 2 4 2 2 (29) (30)
Total
Revenue70 60 30 31 21 20 9 9 (29) (30) 101 90
RESULT
Segment
result20 17 9 7 2 1 0 0 (1) (1) 30 24
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Unallocated
corporate
expenses
(7) (9)
Operating
profit23 15
Interest
expense(4) (4)
Interest
income2 3
Income
taxes(7) (4)
Paper
Products
Office
Products
Publishing Other
Operations
Eliminations Consolidated
Total
‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07
Profit from
ordinary
activities
14 10
Extraordinary
loss:
uninsured
Earthquake
damage to
factory
(3) (3)
Net profit 14 7
OTHER
INFORMA-
-TION
Segment
assets54 50 34 30 10 10 10 9 108 99
Unallocated
corporate
assets
67 56
Total assets 175 155
Segment
liabilities25 15 8 11 8 8 1 1 42 35
Unallocated
corporate
liabilities
40 55
Total
liabilities82 90
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Capital
expenditure12 10 3 5 5 4 3
Depreciation 9 7 9 7 5 3 3 4
Non-cash
expenses
other than
Depreciation
8 2 7 3 2 2 2 1
NOTE XX-BUSINESS AND GEOGRAPHICAL SEGMENTS (AMOUNTS
IN RS. LAKHS)
Business segments: For management purposes, the Company is organized on a
worldwide basis into three major operating divisions-paper products, office
products and publishing - each headed by a senior vice president. The divisions
are the basis on which the company reports its primary segment information. The
paper products segment produces a broad range of writing and publishing papers
and newsprint. The office products segment manufactures labels, binders, pens,
and markers and also distributes office products made by others. The publishing
segment develops and sells books in the fields of taxation, law and accounting.
Other operations include development of computer software for standard and
specialized business applications. Financial information about business segments
is presented in the above table ‘Illustration II’
Geographical segments: Although the Company’s major operating divisions are
managed on a worldwide basis, they operate in four principal geographical areas
of the world. In India, its home country, the Company produces and sells a broad
range of papers and office products. Additionally, all of the Company’s
publishing and computer software development operations are conducted in India.
In the European Union, the Company operates paper and office products
manufacturing facilities and sales offices in the following countries: France,
Belgium, Germany and the U.K. Operations in Canada and the United States are
essentially similar and consist of manufacturing papers and newsprint that are
sold entirely within those two countries. Operations in Indonesia include the
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
production of paper pulp and the manufacture of writing and publishing papers
and office products, almost all of which is sold outside Indonesia, both to other
segments of the company and to external customers.
Sales by market: The following table shows the distribution of the Company’s
consolidated sales by geographical market, regardless of where the goods were
produced:
Table 7.3: Distribution of the Company’s consolidated sales by geographical
market (Amount in Rs.
lakhs)
Sales Revenue by
Geographical Market
Current Year
(’06)
Previous Year
(’07)
India 19 22
European Union 30 31
Canada and the United States 28 21
Mexico and South America 6 2
Southeast Asia (principally Japan and
Taiwan)18 14
101 90
Assets and additions to tangible and intangible fixed assets by geographical area:
The following table shows the carrying amount of segment assets and additions to
tangible and intangible fixed assets by geographical area in which the assets are
located
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Table 7.4: Tangible and intangible fixed assets by geographical area
(Amount in Rs. Lakhs)
Carrying Amount of
Segment Assets
Additions to Fixed
Assets and Intangible
Assets
Current
Year (’06)
Previous
Year (’07)
Current
Year (’06)
Previous
Year (’07)
India 72 78 8 5
European Union 47 37 5 4
Canada and the United
States34 20 4 3
Indonesia 22 20 7 6
175 155 24 18
Segment revenue and expense: In India, paper and office products are
manufactured in combined facilities and are sold by a combined sales force. Joint
revenues and expenses are allocated to the two business segments on a reasonable
basis. All other segment revenue and expense are directly attributable to the
segments.
Segment assets and liabilities: Segment assets include all operating assets used
by a segment and consist principally of operating cash, debtors, inventories and
fixed assets, net of allowances and provisions which are reported as direct offsets
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
in the balance sheet. While most such assets can be directly attributed to
individual segments, the carrying amount of certain assets used jointly by two or
more segments is allocated to the segments on a reasonable basis. Segment
liabilities include all operating liabilities and consist principally of creditors and
accrued liabilities. Segment assets and liabilities do not include deferred income
taxes.
Inter-segment transfers: Segment revenue, segment expenses and segment
result include transfers between business segments and between geographical
segments. Such transfers are accounted for at competitive market prices charged
to unaffiliated customers for similar goods. Those transfers are eliminated in
consolidation.
Unusual item: Sales of office products to external customers in the current year
were adversely affected by a lengthy strike of transportation workers in India,
which interrupted product shipments for approximately four months. The
Company estimates that sales of office products during the four-month period
were approximately half of what they would otherwise have been.
Extraordinary loss: As more fully discussed in Note x, the Company incurred an
uninsured loss of Rs.3,00,000 caused by earthquake damage to a paper mill in
India during the previous year.
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
ILLUSTARTION III
The example is illustrative only and does not form part of the Accounting
Standard. Its purpose is to summarize the disclosures required by for each of the
three possible primary segment reporting formats.
Table 7.5: Summary of Required Disclosure
PRIMARY FORMAT IS
BUSINESS SEGMENTS
PRIMARY FORMAT IS
GEOGRAPHICAL
SEGMENTS BY
LOCATION OF ASSETS
PRIMARY FORMAT
IS GEOGRAPHICAL
SEGMENTS BY
LOCATION OF
CUSTOMERS
Required Primary
Disclosures
Required Primary
Disclosures
Required Primary
Disclosures
Revenue from external
customers by business
segment
Revenue from external
customers by location of
assets
Revenue from external
customers by location
of customers
Revenue from
transactions with other
segments by business
segment
Revenue from transactions
with other segments by
location of assets
Revenue from
transactions with other
segments by location of
customers
Segment result by
business segment
Segment result by location
of assets
Segment result by
location of customers
Carrying amount of
segment assets by
business segment
Carrying amount of
segment assets by location
of assets
Carrying amount of
segment assets by
location of customers
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Segment liabilities by
business segment
Segment liabilities by
location of assets
Segment liabilities by
location of customers
Cost to acquire tangible
and intangible fixed
assets by business
segment
Cost to acquire tangible
and intangible fixed assets
by location of assets
Cost to acquire tangible
and intangible fixed
assets by location of
customers
PRIMARY FORMAT IS
BUSINESS SEGMENTS
PRIMARY FORMAT IS
GEOGRAPHICAL
SEGMENTS BY
LOCATION OF ASSETS
PRIMARY FORMAT
IS GEOGRAPHICAL
SEGMENTS BY
LOCATION OF
CUSTOMERS
Required Primary
Disclosures
Required Primary
Disclosures
Required Primary
Disclosures
Depreciation and
amortization expense by
business segment
Depreciation and
amortization expense by
location of assets
Depreciation and
amortization expense
by location of
customers
Non-cash expenses
other than depreciation
and amortization by
business segment
Non-cash expenses other
than depreciation and
amortization by location
of assets
Non-cash expenses
other than depreciation
and amortization by
location of customers
Reconciliation of
revenue, result, assets,
and liabilities by
business segment
Reconciliation of revenue,
result, assets, and
liabilities
Reconciliation of
revenue, result, assets,
and liabilities
Required Secondary
Disclosures
Required Secondary
Disclosures
Required Secondary
Disclosures
Revenue from external
customers by location of
customers
Revenue from external
customers by business
segment
Revenue from external
customers by business
segment
Carrying amount of Carrying amount of Carrying amount of
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
segment assets by
location of assets
segment assets by
business segment
segment assets by
business segment
Cost to acquire tangible
and intangible fixed
assets by location of
assets
Cost to acquire tangible
and intangible fixed assets
by business segment
Cost to acquire tangible
and intangible fixed
assets by business
segment
Revenue from external
customers by geographical
customers if different
from location of assets
Carrying amount of
segment assets by
location of assets if
different from location
of customers
Cost to acquire tangible
and intangible fixed
assets by location of
assets if different from
location of customers
Other Required
Disclosures
Other Required
Disclosures
Other Required
Disclosures
Basis of pricing
intersegment transfers
and any change therein
Basis of pricing
intersegment transfers and
any change therein
Basis of pricing
intersegment transfers
and any change therein
Changes in segment
accounting policies
Changes in segment
accounting policies
Changes in segment
accounting policies
Types of products and
services in each business
segment
Types of products and
services in each business
segment
Types of products and
services in each
business segment
Composition of each Composition of each Composition of each
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
geographical segment geographical segment geographical segment
“SEGMENT REPORTING IN A FOUNDRY”
Segment Reporting
Segment = Distinguishable component of enterprise
Business Segment (BS)
If BS is primary GS will be Secondary
Geographical Segment (GS)
If GS is primary BS will be Secondary
Location of Assets
Location of Customers
Dominance of Risk/Return Organizational Structure
Reporting Structure/System Definition based decision
Reportable Segment
Disclosures: In both primary format and in secondary format
75% enterprise revenue criteria
Segment Revenue ≥ 10% of
all segments revenue
Previous year segment information to continue in current year Previous year figures to be regrouped to fall in line with current year
Management Choice
Segment Revenue ≥ 10% of higher of segments
in profit/loss
Segment Assets ≥ 10% of
enterprise assets
Business Primary – Geographic Secondary;
Geographic LOA Primary(a) Business secondary (b) Geographic LOC secondary
Geographic LOC Primary(b) Business secondary (b) Geographic LOA secondary
SAAB MARFIN MBA
Chapter VIII
Calculations and Segment Report
“SEGMENT REPORTING IN A FOUNDRY”
Other Disclosures:Basis of transfer pricing
Changes, if any, in accounting policies, types of products, services, composition of each geographical or business segment
SAAB MARFIN MBA
Table 8.1: Cost Sheet
“SEGMENT REPORTING IN A FOUNDRY”
Particulars Ventilated Disc Solid Disc FlywheelMATERIAL REQUIREMENT PIG 126.75 126.75 126.75MS 134.55 134.55 134.55RR 128.64 128.64 128.64BORING 0 0 0Total 128.64 128.64 128.64ALLOYS REQUIREMENT FeMn 2.15 1.95 1.95FeSi 0 0 0CPC 0.20 0 0FeCr 0.98 0.91 0.91Cu 0 8.06 8.06INOCULANT 3.25 2.80 2.80Total 6.58 13.72 13.72SAND ADDITIVES BENTONITE 4.49 2.21 2.21NEW SAND 2.08 1.04 1.04COAL ADDITIVE 5.92 2.99 2.99Total 12.49 6.24 6.24CORE COSTS SAND ADDITIVES 1.76 0 0RESIN 1.69 0 0BINDER 2.60 0 0CATALYST 1.95 0 0Total 8.00 0 0POWER UNITS REQ/ TON 43.68 39.98 39.98FETTLING & SHOT BLASTING/ KG 5.20 5.20 5.20TOTAL DIRECT COST 204.59 193.78 193.78LABOUR COST 19.50 22.75 22.75REPAIR & MAINTENANCE 3.25 3.25 3.25FRIEGHT 1.63 1.63 1.63OVER HEAD COSTS 16.25 16.25 16.25ADMIN & TESTING COSTS 6.50 6.50 6.50
TOTAL COST (per unit) 251.72 244.16 244.16
SAAB MARFIN MBA
Table 8.2: Calculation of Profit after Tax
ParticularsVentilated
Disc Solid Disc Flywheel Total
Total Cost per unit 251.72 244.16 244.16
Profit 42.28 40.84 34.84
Total Sales Price 294.00 285.00 279.00
No. of units 268500 193500 177450 639450
Total revenue 78939000 55147500 49508550 183595050
Total Cost 67586820 47244960 43326192 158157972
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Profit before interest, tax and depreciation (PBITD) 11352180 7902540 6182358 25437078
Less: Depreciation 1913000 1913000 1913000 5739000Profit before interest and tax (PBIT) 9439180 5989540 4269358 19698078
Less: Interest 4251783 2804367 1990196 9046347
Profit before tax (PBT) 5187397 3185173 2279162 10651731
Income Tax 1178171 777091 551484 2506746
Profit after tax (PAT) 4009226 2408082 1727678 8144985
Table 8.3: Segment Report
ParticularsVentilated
Disc Solid Disc Flywheel Total
REVENUE
External Sale 78939000 55147500 49508550 183595050
Inter-segment Sale 0 0 0 0
Total Revenue 78939000 55147500 49508550 183595050
RESULT
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
Segment Result 11352180 7902540 6182358 25437078Unallocated corporate exp. 937467 937467 937467 2812402
Operating Profit 10414713 6965073 5244891 22624676
Interest 4251783 2804367 1990196 9046347
Income-Tax 1178171 777091 551484 2506746Profit from ordinary activities 0 0 0 0
Extraordinary 0 0 0 0
Net Profit 4009226 2408082 1727678 8144985OTHER INFORMATION
Segment Assets 68805406 45382289 32206786 146394480Unallocated corporate Assets 7645045 5042476 3578532 16266053
Total Assets 76450451 50424765 35785318 162660533
Segment Liabilities 107356452 70809575 50251956 228417984
Unallocated corporate liabilities 9019220 5948847 4221762 19189829
Total Liabilities 116375672 76758422 54473718 247607813
Capital Expenditure 0 0 0 0
Depreciation 1913000 1913000 1913000 5739000
CHAPTER IX
Conclusion
1. Segment reporting is not mandatory for companies that have a turnover of less
than 5 crores or have no stock market listed equity share. However, from this
study it may be concluded that segment reporting is quite useful for financial
analysis and decision making.
2. Accounting Standards when implemented meticulously add to the
convenience of Financial Analyst.
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
3. In the study the findings of one segment (product category) not doing as good
as the other two segments is not clear in consolidate income statement.
Information about performance of products falling in similar risk and return
categories is a useful input in many a decision making situation.
4. Since it is not too expensive in terms of time, money and effort in maintaining
this accounting procedures that aid in reporting income segment wise and the
benefit of doing so make good for any additional resource expenditure,
segment reporting should be adopted by foundries of Alucast kind.
5. Alucast needs to do some analysis on the Flywheel segment in order to bring
it in par with the other two segments, this would ensure that the company
performs equally well with all the customers.
References and Bibliography
Books and Manuals
1. M. P. Vijay Kumar, First Lessons in Accounting Standards, Snow White
Publications, 2005.
2. D. S. Rawat, Students guide to Accounting Standards, Taxmann, 2006.
3. S. P. Jain and K. L. Narang, Cost Accounting, Kalyani Publications, 1990.
4. M. Y. Khan & P. K. Jain, Financial Management
5. Dr. S. N. Maheshwari, Principles of Management Accounting, Sultan Chand,
2005.
“SEGMENT REPORTING IN A FOUNDRY”
SAAB MARFIN MBA
WWW support
http://icai.org/icairoot/resources/as_index.jsp
http://www.smnpco.com/download/as/as17.html
http://icai.org/icairoot/publications/complimentary/cajournal_mar04/p946-1-
50.pdf
http://www.thehindubusinessline.com/2002/05/28/stories/2002052802211000.htm
http://www.wepindia.com/ap/2002_2003/page2_52.pdf
http://iob.in/segrep300605.asp
http://www.duncanwil.co.uk/pdfs/ias/ias14.pdf
“SEGMENT REPORTING IN A FOUNDRY”