Segment Reporting and SAP New GL - ECC 6

Business Segments and it’s Reporting
July 2015
Understanding Segment Reporting – SAP New GL

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http://www.linkedin.com/in/ashokbackiaraj.(A guide for educational purpose only)
Disclaimer
Segment Reporting – SAP New GL
(Reference: International Financial Reporting Standard 8 (IFRS 8) which replaces the requirement of IAS 14))
(A GUIDE)
(For information purpose only)
author :
Ashok Backiaraj
SAP Project Manager & SAP FICO Consultant
(freelancer)
http://www.linkedin.com/in/ashokbackiaraj
(Disclaimer: This slide share/blog is a simple guide to understand Operating Segments and shall not be taken as legal base.
The author accepts no liability or responsibility to the contents of this publication or any reliance based on it. This is for
information and education purpose only)

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What is an Operating Segment?
An Operating Segment is a component of a Business Entity, which engages in business
activities from which it may earn revenues and incur expenses. This includes inter-
segment revenues and expenses relating to transactions of the same entity.
Wind Energy
Generators
Solar
Energy
Inter-Segment
Revenue &
Expenses
Entity

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What is an Operating Segment?...Continued…
The Operating results of each Segment is regularly reviewed by the entity’s ‘Chief
operating decision maker (CODM)’ to make decisions about resources to be allocated to
the Segment and assess its performance; and for each Operating Segment, discrete
financial information is available viz., P&L and B/S.
To sum up, the purpose of operating segment reporting is to make the profit and risk
situation of individual business areas transparent. Since operating segment reporting must
be configured in accordance with specific customer requirements, an analysis of Entity’s
business activities under the guidance of IFRS 8 guidelines is required.

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Who is a chief operating decision maker (CODM)?
The CODM is nothing but a “function”. A function may be of Chief Operating Officer or of
Senior Management Team or of the Board of Directors. The function is empowered to
allocate entity’s resources. The function will assess the performance of Operating
Segments for key business decision making.
Chief Operating Officer
Senior Management Team
The Board of Directors
Function
Function
Function
CODM

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How to determine an entity’s Operating Segment?
If Operating Segment’s reported revenue (external and inter-segment) is 10% or more of
the combined revenue of all Operating Segments; - (Revenue Test)
(OR)
If the absolute amount of the segment’s reported profit or loss is 10% or more of the
greater: - ( P & L Test )
1. of the combined reported profit of all operating segments that did not report a loss.
2. of the combined loss of all operating segments that reported a loss;
(OR)

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If the segment’s assets are 10% or more of the combined assets of all operating segments.
–( Asset Test )
Then, the Segment needs to be determined as reportable ‘Operating Segment’. After
determining the reportable operating segments, the entity should ensure that the total
external Revenue attributable to those reportable Operating segments is at least 75% of
the entity’s total revenue.
When the 75% threshold is not met, additional reportable operating segments should be
identified (even if they do not meet the 10% thresholds), until at least 75% of the entity’s
total external revenue is included in its reportable operating segments.
……….Let us see an Example in the next slide, to understand how to determine the
Segments ……….

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Example:
An Entity has operating segments as detailed below:
Operating Segments Total Revenue Profit/Loss Total Assets
Wind Energy 22,000 4,000 50,000
Solar Energy 15,000 2,000 31,000
Generators 6,000 (2,000) 21,000
Accessories 7,000 (1,000) 14,000
Maintenance Service 8,000 1,200 14,000
Warranty 3,000 800 7,000
TOTAL 61,000 5,000 137,000
The revenues include both internal and external revenue with respective profits or losses.
Now the Entity needs to determine how many reportable segments it has. …………Let us
see the Analysis in the next slide …….

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The following Operating Segments clearly satisfy the revenue and assets tests under IFRS 8
and they are separate reportable segments. There is no need to consider the profit test.
1. Wind Energy,
2. Solar Energy,
3. Accessories and
4. Maintenance Service
Operating Segment ‘Generators’ does not satisfy the revenue test. But it does satisfy the
assets test. Hence it is a reportable segment. Here, there is no need to consider the profit
test.
Operating Segment ‘Warranty’ does not satisfy the revenue or the assets tests. But it does
satisfy the profits test because its profit of 800 is 10% of the greater of the absolute
amount of losses of those segments in loss (3,000) and those that either break even or
make a profit (8,000 including segment ‘Warranty’). Therefore segment ‘Warranty’ is a
reportable Operating segment.

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Must all Operating Segments be ‘Reportable
Segments’?
Not every operating segments need to be reported separately. Operating segments are
only need to be reportable, if they exceed quantitative thresholds, as explained in the
previous slides.
Non-reportable
Segment

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What is the Minimum number of reportable
operating segments?
An Entity can restrict its number of operating segments, after determining the reportable
operating segments. To do so, the entity should ensure that the total external Revenue
attributable to those reportable operating segments is at least 75% of the entity’s total
external revenue.
If the Entity’s 75% threshold is not met, additional reportable operating segments should
be identified (even if they do not meet the 10% thresholds), until at least 75% of the
entity’s total external revenue is included in its reportable operating segments.
Reportable segments reach 75% of total External Revenue

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How to split Profit & Loss and Balance Sheet,
Operating Segment wise?
US GAAP requires a virtually complete balance sheet at the operating segment level. This
means essentially every Balance Sheet items apart from stockholders' equity.
Top ERP software companies now-a-days upgrade their product to a newer version, to
meet this international requirement as our business spreads in a global village. With
MYSAP ERP releases (ECC 5.0 onwards) SAP introduced New GL functionality. The Internal
architecture of General Ledgers and available functionality has changed significantly.
SAP New GL ( version ECC 6.0 and above) has the following restructured new
functionalities:
1. Segment reporting. Profit Centre & Segment wise Financial Statements
2. Real time document splitting based on Scenarios (Example Profit Centre, Segment etc)
3. Real time FI – CO reconciliation
4. Parallel Ledgers for various Accounting Standards and Regional Fiscal requirement
Accordingly, now Financial Accounting Group has reconcilable data flow from
Management Accounting Group too.

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How to split Profit & Loss and Balance Sheet,
Operating Segment wise? – Continued..
When SAP introduced Classic G/L functionality, in R/3, there was a clear demarcation
between Financial Accounting Module (FI) and Controlling (CO) Module and it was
stressed that FI Module is to be used only for external reporting and CO Module to be
used for internal reporting.
Business users always had tough time over this difference, because accounting
department has always seen these two functions as one. New G/L attempts to satisfy
financial users by giving them a single unified tool for all the reporting needs.

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My Slide share/Blog topics in pipeline are :
1. SAP Parallel Ledger Concept – Earlier Business had to deal with different ledgers in
different modules. SAP ledgers are combined in G/L by introducing parallel ledger
concepts. Leading Ledger is assigned to all Company Codes and Non Leading ledgers can
be assigned to individual company codes to meet specific requirements. There can be
only one leading ledger. All the data from other modules such as Controlling and sub-
ledgers such as AA, AP, AR flows to leading ledgers which posts in Profit Centres and
Segments in real time.
2. Multi-currency and Multi-Valuations viz., Group, Legal and Profit Centre-(Segment)
valuations
3. Reconciliation ledger to reconcile CO with FI in real time transaction postings.
4. Migration from SAP Classic GL to SAP New GL (Segmentation) functionalities.

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Thank you….

Segment Reporting and SAP New GL - ECC 6

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