Page 5 - 25. COMPILER QB - IND AS 108

Q4 (March 21 – 6 Marks)

T Ltd is engaged in the transport sector, running a fleet of buses at different routes. T Ltd has identified 3
operating segments:
Segment 1: Local Route
- Segment 2: Inter-city Route

- Segment 3: Contract Hiring
The characteristics of each segment are as under:
Segment 1: The local transport authority awards the contract to ply the buses at different routes for
passengers. These contracts are awarded following a competitive tender process; the ticket price paid by
passengers is controlled by the local transport authority. T Ltd would charge the local transport authority on a

per kilometer basis.
Segment 2: T Ltd operates buses from one city to another, prices are set by T Ltd on the basis of services
provided (Deluxe, Luxury or Superior).
Segment 3: T Ltd also leases buses to schools under a long-term arrangement.
While Segment 1 has been showing significant decline in profitability, Segment 2 is performing well in respect
of higher revenues and improved margins. The management of the company is not sure why the segment

information is relevant for users when they should only be concerned about the returns from overall business.
They would like to aggregate the Segment 1 and Segment 2 for reporting under ‘Operating Segment’
Required:
Whether it is appropriate to aggregate Segments 1 and 2 with reference to Ind AS 108 ‘Operating Segments’?

and
Discuss, in the above context, whether disclosure of segment information is relevant to an investor’s appraisal
of financial statements?
SOLUTION

Ind AS 108 ‘Operating Segments’ requires operating segments to be aggregated to present a reportable
segment if the segments have similar economic characteristics, and the segments are similar in each of the
following aggregation criteria:
(a) The nature of the products and services

(b) The nature of the production process
(c) The type or class of customer for their products and services
(d) The methods used to distribute their products or provide their services
(e) If applicable, the nature of the regulatory environment
While the products and services are similar, the customers for those products and services are different.

In Segment 1, the decision to award the contract is in the hands of the local authority, which also sets prices
and pays for the services. The company is not exposed to passenger revenue risk, since a contract is awarded
by competitive tender.
On the other hand, in the inter-city segment, the customer determines whether a bus route is economically
viable by choosing whether or not to buy tickets. T Ltd sets the ticket prices but will be affected by

customer behavior or feedback. T Ltd is exposed to passenger revenue-risk, as it sets prices which customers
may or may not choose to pay.
Operating Segment provides information that makes the financial statements more useful to investors. In
making the investment decisions, investors and creditors consider the returns they are likely to make on their
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