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SEGMENTAL REPORTING

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

GROUP MEMBERS

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Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements

WHAT IS SEGMENT REPORTING?

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

NEED FOR SEGMENT REPORTING

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Airlines face a lot of difficulties in determining and reporting segment information

Differing disclosures lead to difficulties in making meaningful comparisons

Areas of difficulties are◦ Determination of segments of business◦ Meaningful allocation of assets, costs and

revenues to those segments

BACKGROUND

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Set out practical guidance for airlines in preparing segmental disclosures

Present a set of disclosures that, if consistently prepared, will allow greater comparability of airline reporting

The Accounting Policy Task Force recognizes the different approaches to segmental reporting adopted by ◦ IASC (segments represent activities(split by

geography or business◦ FASB(segments are derived from the information

used by senior management

OBJECTIVES OF THE AIRLINE ACCOUNTING GUIDELINE

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BACKGROUND IAS 14 (revised) Segment Reporting is

effective for accounting periods beginning on or after 1st July, 1998

INTERNATIONAL STANDARD

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Seeks to segment on the basis of business and geography

It defines as both being subject to risks and returns that are different to other segments

Every organization should consider one primary and the other secondary

Determination is based on◦ Risks and returns are affected by differences in its

products and services or◦ Differences in the location of its customers or

production facilities

IDENTIFICATION OF SEGMENTS

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It further suggests that determination is best made by reference to the structure of the organization

AS14 does not require the segments which trade predominantly internally to be disclosed separately

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BACKGROUND FAS 131 disclosures about segments of an

enterprise and related information was issued in June 1997 and its effective for financial years beginning after 15 December 1997.

US STANDARD

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It requires organizations to segment according to the information used by the “Chief operating decision maker’ (CODM)

Segment may either be business or geography

IDENTIFICATION OF SEGMENTATION

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PARTICULAR ISSUES FACED BY AIRLINES AND RECOMMENDATIONSINBASIS OF SEGMENTATION

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The Accounting Task Force considers that the◦ IASC (segments represent activities(split by

geography or business) will have the same consequences as the

◦ FASB(segments are derived from the information used by senior management)

ISSUE

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Consideration for those airlines reporting under IASC which source to consider primary and which to consider secondary◦ Check whether the dominant source and nature of

its risks and returns relates to the geographic location or its operations or its component business of the operation or indeed to the operation as a whole

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The basis of segmentation under IASC of primary and secondary is based on airlines individual circumstances

The Accounting Policy Task Force considers that segmentation of an airline’s business should be on viewed as a function of product or service rather than geography

RECOMMENDATION

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The Accounting Policy Task Force has taken the view that ◦ although revenue is managed and reported on a

geographical basis, airlines usually consider their cost on a functional rather than geographic basis

◦ Further, the risks and returns faced by the airline are dominated by the nature of products and services offered rather than where the products and services are offered

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BUT for those airlines having clearly identifiable business areas which are managed and reported upon internally ◦ For those more than one segmented has to be

reported◦ EXAMPLE: low cost airlines which operates as a

business separate from the rest of the airlines◦ Cargo operation◦ Maintenance and catering where there is

significance level of involvement of third party

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Segmentation is required of least 75% of the total revenues

Disclosure is not required of any business segment where that segments share of revenue, profit and total assets is less than 10% of the entity’s total

Conversely, of course business or geographic reasons that are considered to be separate segments and that meet the 10% test are required to be disclosed

CERTAIN LIMITS AND THRESHOLDS

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Example: 10% Revenue Test

A segment is reportable if its total revenue ≥ 10% of combined segment revenue.

Threshold = 10%(1,500) = $150

Transportation ($360) and Oil refining ($885) are reportable segments.

 Operating segment revenue

Intersegment revenue

Total segment revenue

Report-able?

Transportation $360 $0 $360 YesOil refining 405 480 885 YesInsurance 95 20 115 NoFinancing 140 0 140 NoTotal $1,000 $500 $1,500  

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Example: 10% Asset Test

 Operating segment's

identifiable assets Reportable?Transportation $700 YesOil refining 950 YesInsurance 180 NoFinancing 1,170 YesTotal $3,000

A segment is reportable if its identifiable assets ≥ 10% of combined segment assets.

Threshold = 10%(3,000) = $300

Transportation, Oil refining, and Financing are reportable segments.

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Example: 10% Profit or Loss Test

Separate profitable and unprofitable segments.

A reportable segment's |profit or loss| ≥ 10% of the greater of |combined profits or combined losses|.

$270 is greater than $100.Threshold = 10%(270) = $27.

Transportation, Oil refining and Finance are reportable segments.

 Segment

operating profitSegment

operating loss Reportable?Transportation   (100) YesOil refining 200   YesInsurance 20   NoFinancing 50   YesTotal 270 (100)

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Allocation of Assets, Cost and Revenues Between Segments

International Standard utilizes 2 bases for categorizing sales by Geographic region.

-- Origin Method (U.K. , U.S.)

-- Destination Method

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ORIGIN METHOD Depends on the location of an entity’s assets that manufacture the

goods /services.

For airlines key revenue generating assets is Aircraft Fleet.

So from Airline perspective this method is meaningless as : -- Fleet is Deployed flexibly across the entire route network . -- Revenue systems are unable to analyze the flight data unless

all legs fall under same flight number

However some airlines having regional basis may find merit in this method.

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Destination Method Depends on the location of entity’s customers and allocates

its sales.

Most practical approach to segmentation.

This is easier but there is no uniform definitions of regions/continents and Classification of feeder service

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Allocation of Assets, Cost and Revenues Between Segments (Contd..) Revenue from feeder service can be segmented as

part of trunk revenue or in its own right.

Eg: Consider flight from LAX-JFK-LON . Here all revenue are considered as a part of Atlantic Segment consisting of North America and Europe Sectors .

All the end sectors are considered as discreet flights for segmental report. Where revenue is split by pro-ration basis

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ALLOCATION OF ASSESTS AND FLEET COST Allocation of fleet is a complicated process. This is because airlines deploy their fleets

across the network. Thus, according to Accounting Policy Task

Force ,the Airlines adopting geographic basis of segmentation are requried to make :

-- Extensive Disclosure of Asset , -- Cost allocation by geographic

region.

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DISCLOSURES• Summary of guideline under both International and US Standards

• Many National standards are moving into line with International standards, it is likely that the disclosures illustrates will also satisfy local requirements in many other Jurisdictions.

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Assumptions The airline is managed by business segment

rather than by geographic region and that risks and rewards of the airline are driven principally by business rather than by geography

The airline operates only passenger, cargo or mail services(other businesses are immaterial)

Geographic segmentation is analyzed by destination

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Contd…

Management use an operating profit figure (PBIT) to review

Segment result

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Disclosure of segmentation of Revenue should comprise Passenger revenue

Scheduled services

Charter

Cargo revenue

Other income

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