Segment Reporting

A. Facts of the Case

1. A multi-state co-operative society was incorporated in April 1980, as a national level co-operative society to manufacture and distribute a chemical fertiliser, i.e., urea. The society has two phases of ammonia plant of 1,350 MTPD capacity each and two phases of urea plant of 2,200 MTPD capacity each, each phase of urea plant consisting of two streams of 1,100 MTPD, with an annual capacity to produce 14.52 lakh MT of urea. The society commenced its commercial production from March 1986. The society manufactures urea at its only plant located at Hazira in Surat. The plant of the society is a continuous process plant.

2. The equity of the society is substantially owned by the Government of India and is under the administrative control of Department of Fertilisers, Ministry of Chemicals and Fertilisers. The rest of the equity of the society is held by other co-operative societies. The shares of the society are neither listed nor traded on any stock exchange and are not governed by any of the regulations of stock exchanges. Also, there is an express provision in the Multi-State Co-operative Societies Act, 1984, that the provisions of the Companies Act, 1956, shall not apply to multi-state co-operative societies. The Multi-State Co-operative Societies Act, 1984, does not provide any specific format for presenting the annual accounts of the society.

3. The Government of India, through the Essential Commodities Act, 1955, and the Fertiliser (Control) Order, 1985, as amended from time to time, regulates the movement of fertiliser and its price. The present pattern of regulation is enumerated as under:

(i) The Central Government allocates the quantity of urea to be sold by each manufacturing unit in the states indicated by the Central government for every season, i.e., Kharif and Rabi season of the year. No manufacturer is allowed to sell beyond the limit prescribed by the Central Government. The allocation fixed by the Central Government for each manufacturer is based on the requirement of urea for every season by the respective state and total production of all the urea manufacturers available in the country. The individual allocation is done so as to cover the entire production.

(ii) Similarly, the price of urea is also controlled by the Central Government, i.e., the price at which various manufacturers can sell the urea in the country is fixed by the Central Government and this price is uniform throughout the country for all manufacturers. No variation is permitted by the Central Government.

(iii) The Central Government also reimburses a uniform amount as freight subsidy for each unit irrespective of the allocation given to various states. Even in this respect, uniformity is maintained by the Central Government.

(iv) The society distributes its product through state government agencies such as Apex Co-operative Marketing Federations, district and primary level co-operative societies, etc.

4. The society does not sell its products beyond the shores of the country. The society has State Marketing Offices in various states and these offices supervise the work of receipt of material from the factory, delivery to various purchasers such as Apex Co-operative Marketing Federations, etc., arrange invoices on the customers, arrange storing/warehousing of the material, lifting

of the material and collection of payment from the respective customers. The State Marketing Offices are not permitted to utilise the sale proceeds and the sale proceeds are directly transferred to Central Collection Accounts

at Delhi/Noida. To meet the day-to-day expenditure for maintaining the office, salary, storage charges, transportation charges, handling charges, etc., the required funds are transferred from Delhi/Noida to the respective State Marketing Offices. The sales terms are uniform in all the States. The respective State Marketing Offices maintain accounts relating to stock transfer from plant to the State, invoice accounting, debtors accounting, expenses accounting, etc., and these are consolidated for preparation of final accounts of the society. These offices are treated as branches and operate for marketing of product of the society within the assigned territorial jurisdiction. The closing stock valuation is done centrally at the Central Marketing Office.

5. In addition to urea, the society sometimes also deals in other products such as bio-fertilisers, seeds, chemicals, other fertilisers including imported fertilisers which are not predominant products

As per the querist, since the revenue from the sale of these products is less than 10% of the total revenue, these products by themselves do not constitutea reportable segment as per paragraph 27 of Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of Chartered Accountants ofIndia.

6. The querist has referred to the ‘Objective’ paragraph of AS 17, which,inter alia, provides as follows:

".... 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. ...."

7. The querist has also referred to the definition of the term ‘geographical segment’ contained in paragraph 5 of AS 17 which provides as below:

"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

(f) the underlying currency risks."

8. According to the querist, the society is of the view that it is providing products or services within the same economic environment of the country. Its products, production, distribution and pricing are controlled by the Central Government. The risks and returns in respect of operations in each state are the same. The geographical location of its State Marketing Offices does not affect the risks and returns of the society. The society is not operating in different countries; no special risks are associated with operations in a particular area. The society is not governed by exchange control regulations and there are no currency risks. The officials incharge of respective State Marketing Offices are not allowed to vary the sales terms, product distribution or allocation of material to that state. Sales terms, product distribution, and allocation of material to the states are duly controlled by the Central Government and are uniform throughout the country. The society has only one plant-factory located at Hazira, Surat. Freight subsidy paid to the society by the Central Government is uniform for all the states.

9. According to the querist, in view of the above uniqueness of operations of the society and factual position stated above, wherein total operations are in the same economic environment and risks and returns are same, it is felt that segment reporting under geographical segments is not applicable in the case of the society.

B . Query

10. The querist has sought the opinion of the Expert Advisory Committee as to whether, in the light of the circumstances explained above, the society needs to comply with AS 17 while presenting its general purpose financial statements, i.e., balance sheet and profit and loss account.

D. Opinion

On the basis of the above, the Committee is of the opinion that in the circumstances of the case, the society should present segment information in its financial statements as per AS 17.

Opinion finalised by the Committee on 25.3.2003.