THE INTRODUCTION:
The company in question is a subsidiary of India’s leading downstream gas distribution entities. The company is poised to accelerate the City Gas Distribution business in a focused manner across various cities of the nation. The company’s product portfolio includes Compressed Natural Gas (CNG) and Piped Natural Gas (PNG).
THE PROBLEM:
The company operates in a single segment of the Natural Gas Business; therefore, disclosure requirements, as per Ind AS 108 “Operating Segments” [1], are not applicable. As a result, the company could not maintain separate financial information concerning different CNG stations, PNG customer segments, geographies, etc.
The client’s SAP system was implemented in 2010 and operated on a classic GL functionality, with clear demarcations of the Financial Accounting module (FI) and Controlling module (CO). As a result, reconciliation issues were found in the SAP modules of general ledger accounting (FI-GL) and profit centre accounting (CO-PCA).
Cost allocation between CNG and PNG product segments was based on sales revenue (8%:92%), which being an ad-hoc approach, rendered unreliable figures. In addition, the capital assets had to be mapped to different business segments.
THE SOLUTION:
The company aspires to become a leader in both its business segments. As a result, the management of the company sought monitoring of its operations results of its business segments for making decisions, particularly regarding resource allocation and performance assessment. Therefore, a structured segment reporting system was required to create timely and effective operational/ financial insights. To this end, the following accurate cost/ profitability reports were generated on a real-time basis:
Product Segment-wise
Depot/ Station-wise
Geography/ Region-wise
Customer-wise
THE RESULTS:
After rigorous deliberations and continuous collaboration with the client for over five months, our team at Chandra Wadhwa & Co. implemented a detailed oriented segment reporting framework, offering the following salient features:
Reorganisation of cost-centres/profit-centres hierarchies.
Introducing a logical codification scheme for cost-centres/ profit centres comprising the company code, plant code, region, product group, functions, etc.
For the CNG product segment – CNG stations were identified as cost-centres/ profit-centres.
For PNG product segment – PNG Domestic, PNG Industrial and PNG Commercial segments were identified as cost-centres/ profit-centres.
Redundant cost-centres/ profit-centres were blocked/ deleted.
Around 40% gross value of the capitalised fixed assets were re-mapped to the correct costcentres/profit-centres, thereby enabling effective and accurate analysis.
The classic G/L functionality in SAP was migrated to a new G/L functionality fostering realtime FI-CO reconciliations. As a result, the company could obtain financial statements for different product/ geography segments.
After the implementation of the segment reporting framework, the financial transaction level data was assigned to segments following the principle of cause-and-effect, amounting to coverage of ~96% of the total costs. This helped us map relevant costs, revenues and balance sheet items to the correct segments from the beginning itself, i.e. at the time of data entry (by the operator) and thereby achieve the appropriate and accurate segment level insights/analysis. The ad hoc approach of cost computation for CNG and PNG stations was replaced with a detailed and precise cost computation system. The new cost split between CNG and PNG product segments was 14%:86%, backed by transparent and authentic data.
In a nutshell, the management gained the following advantages in its business operations:
Timely determination of segment-wise returns on assets and payback periods, with a better focus on product segments.
Better monitoring of underutilised CNG stations that could not achieve breakeven through efforts including keeping them under regular check-ups.
Identify product segments that enjoy a margin of safety and the extent to which it can be applied?
Regular analyses of cross-subsidisation of profit-making product segments as opposed to loss-making ones, duly taking into account the selling and distribution costs.
Improved focus on turnaround of the loss-making CNG stations.
FOOTNOTES:
1. ⌃ In accordance with the IFRS 8/ Ind AS 108, an operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
(b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
(c) for which discrete financial information is available.
FREQUENTLY ASKED QUESTIONS:
What is segment reporting?
Segment reporting is a financial reporting practice that allows businesses to report financial information about their operating segments. It helps investors and analysts to understand how a company operates and generates revenue in different geographic areas or business units.
Why is segment reporting important?
Segment reporting is essential because it helps stakeholders understand the performance of each business segment, which in turn helps them make informed investments and business decisions. It also provides a better picture of a company's operations, growth prospects, and risk exposure.
What are the requirements for segment reporting?
Segment reporting requirements are set by accounting standards like IFRS 8 and US GAAP. These standards require companies to identify and report their operating segments based on how management makes decisions about resource allocation and performance evaluation.
What are the benefits of segment reporting?
Segment reporting offers several benefits, including:
It helps investors and analysts evaluate a company's performance and prospects more accurately.
Enables better decision-making for management by highlighting areas of strength and weakness.
Provides insight into the company's operations, risk exposure, and growth prospects.
Facilitates benchmarking against competitors and industry standards.
What are the challenges of segment reporting?
Some of the challenges of segment reporting include:
Difficulty in identifying and defining operating segments.
High cost of collecting and reporting segment data.
Risk of disclosing sensitive information that could harm the company's competitive position.
Complexity of reconciling segment information with consolidated financial statements.
How can companies improve their segment reporting?
Companies can improve their segment reporting by:
Ensuring consistent application of accounting policies and procedures across all segments.
Establishing clear segment definitions and boundaries.
Providing adequate disclosure of segment information, including revenue, profit, assets, and liabilities.
Using appropriate analytical tools to interpret and present segment data.
Ensuring compliance with accounting standards and regulations.
CONTACT US
Reach us if you have any concerns regarding cost management accounting issues in your organization.
SANKALP WADHWA
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in
Tel: +91-8800018190, +91-7503703599.
Website: www.cwcindia.in