Advanced Accounting · AS 17 Segment Reporting

Segment Accounting Policies and Allocation under AS 17

Updated 4 October 2026 · Fact-checked

AS 17 segment information uses the enterprise's own accounting policies. Directly attributable and reasonably allocable items go to segments. Extraordinary items, income tax and general enterprise costs stay unallocated. So do interest, dividends and investment or debt gains, unless the segment is mainly financial. Inter-segment transfers use the pricing basis adopted, which you disclose.

Understand Segment Accounting Policies and Allocation

AS 17 wants segment numbers to tie back to the enterprise's own financial statements. So you do not create a separate set of policies for segments. Whatever policies the enterprise uses to prepare its financial statements are used to report segment revenue, segment expense, segment result, segment assets and segment liabilities.

The next question is which items belong to a segment. Segment revenue and segment expense include items directly attributable to the segment, plus a reasonable portion of enterprise items that can be allocated on a reasonable basis. Examples of allocation bases are sales value, headcount, floor area or machine hours. The basis should relate to how the cost is actually used by the segments.

Some items are left out of segment revenue and segment expense by definition. You do not test them for a reasonable allocation basis. They are:

extraordinary items (excluded in every case)
interest and dividend income (excluded unless the segment's operations are mainly financial)
gains or losses on sale of investments or on extinguishment of debt (excluded unless the segment's operations are mainly financial)
interest expense (excluded unless the segment's operations are mainly financial)
income tax expense (excluded in every case)

So for a non-financial segment, all five items stay outside segment results. For a mainly financial segment, only extraordinary items and income tax are always outside.

Separately, general administration expenses and other expenses at enterprise level that relate to the enterprise as a whole are not segment expense. A common cost that has no reasonable basis of allocation also stays unallocated. None of these is forced into segments. They appear in the reconciliation as unallocated items.

Keep two kinds of unallocated amounts apart. Unallocated revenue means only revenue from operations that is not assigned to any segment. Interest and dividend income are not segment revenue (unless the segment is mainly financial). You bring them in separately in the profit reconciliation, not in the revenue reconciliation.

Inter-segment transfers are sales or services between segments. Segment revenue includes them. They are measured on the basis the enterprise actually uses to price them, for example market price or cost plus a margin. You must disclose that basis and any change in it. On consolidation, these inter-segment amounts are eliminated, so the total of segment revenue is reconciled to enterprise revenue by deducting them.

Finally, if you change the segment accounting policies, or the basis of allocation or transfer pricing, this can affect the segment results. AS 17 requires disclosure of the nature of the change and its financial effect, if material. Comparative information is restated where practicable.

Key rules to remember

Policy rule: Segment policies = policies used for the enterprise's financial statements; No separate segment-only policies. Segment information must reconcile to the enterprise's financial statements.
Segment expense: Segment expense = directly attributable expense + reasonable allocation of common expense; Allocate only on a reasonable basis that reflects the segment's use of the cost.
Segment revenue: Segment revenue = external sales + inter-segment sales + other directly attributable or allocable revenue; Inter-segment revenue is included in segment revenue and eliminated in the enterprise total.
Segment result: Segment result = segment revenue − segment expense; Calculated before extraordinary items, income tax and unallocable items. Interest and investment or debt items are also kept out, unless the segment is mainly financial.
Enterprise revenue reconciliation: Enterprise revenue = Σ segment revenue − inter-segment revenue + unallocated revenue; Unallocated revenue here means only revenue from operations not assigned to any segment. Interest and dividend income are not part of it; they are reconciled separately in the profit reconciliation. Present this reconciliation in the disclosure.
Enterprise profit reconciliation: Step 1: Profit from ordinary activities before tax = Σ segment results − unallocated expenses + unallocated income − interest expense + interest and dividend income + gains on sale of investments or extinguishment of debt − losses on sale of investments or extinguishment of debt. Step 2: Profit before tax = result of Step 1 + extraordinary gains − extraordinary losses (where applicable); Start from the total of segment results, which are stated before extraordinary items, and end at profit before tax. Show extraordinary items as separate reconciling lines after Step 1, so you can also read off profit from ordinary activities. Include each item only if it arises in the question. Add gains and deduct losses. Income tax is deducted afterward to reach net profit.
Items outside segment result: Excluded by definition: extraordinary items, interest and dividend income, gains or losses on sale of investments or extinguishment of debt, interest expense, income tax. Enterprise-level general administration expenses are also not segment expense.; The interest, dividend, investment and debt items are excluded unless the segment is mainly financial. Extraordinary items and income tax are excluded in every case. Show all of these as reconciling items, not within segment results.

How to solve Segment Accounting Policies and Allocation questions

Use this order for any question on segment policies, allocation or inter-segment transfers.

1Read the facts and list each segment, with external sales, inter-segment sales and direct costs.
2Classify every cost: directly attributable, common but allocable, or unallocable (corporate, tax, interest, extraordinary items).
3Choose the allocation basis that fits the cost. Use sales for selling costs, headcount for personnel costs, area for rent, and so on, unless the question gives a basis.
4Allocate the common costs in the given ratio. Check that the allocated amounts add up to the total.
5Include inter-segment sales in segment revenue at the stated transfer price. Compute segment result as revenue less expense.
6Reconcile: total segment revenue less inter-segment revenue gives enterprise revenue. Segment results less unallocated items give enterprise profit.
7State the disclosures: the basis of inter-segment pricing, the allocation basis if asked, and any change in policy with its effect.

Quickest way: Three-bucket sort for MCQs and written answers

When to use it: Use this when you have little time and the question lists many items to classify or allocate.

Sort every item into three buckets: direct, common allocable, unallocable. Do this before any calculation.
For MCQs, eliminate options that push tax, corporate overheads or extraordinary items into segment results.
Allocate common costs by the ratio given. Convert it to a simple fraction and multiply once.
Add inter-segment sales to segment revenue, then subtract the same amount to reach the enterprise total.
In written answers, use a small table-like layout with lines: revenue, expense, result, then reconciliation. Write the allocation basis in one line so the examiner can award step marks.

Common mistakes in Segment Accounting Policies and Allocation

Allocating general corporate expenses or income tax to segments.
Students think every cost must be spread across segments.
Fix: Allocate only common costs for which a reasonable basis exists. Income tax is excluded by definition, and enterprise-level general administration expenses stay unallocated.
Leaving inter-segment sales out of segment revenue.
Students treat segment revenue as external sales only.
Fix: Include inter-segment sales in segment revenue, then eliminate them in the reconciliation to enterprise revenue.
Forgetting to eliminate inter-segment sales in the enterprise total.
Students add all segment revenues and stop.
Fix: Deduct inter-segment revenue from total segment revenue to get external revenue.
Using a different valuation for the segment than the enterprise uses.
Students want to use market values for the segment view.
Fix: Use the same accounting policies as the financial statements. Inter-segment transfers are measured on the pricing basis the enterprise actually adopts, and this basis must be disclosed.
Changing the allocation basis without disclosing the effect.
Students think allocation is an internal matter.
Fix: Disclose the nature of the change and its financial effect when material, and restate comparatives where practicable.
Including interest expense in segment result of a non-financial segment.
Students confuse segment result with profit before tax.
Fix: Keep interest and tax out of segment result and bring them in only in the reconciliation, except for mainly financial segments.

Worked examples

Example 1

A company has two segments, A and B. Common administrative expenses of ₹3,00,000 are to be allocated in proportion to segment sales. External sales: A ₹6,00,000, B ₹4,00,000. Direct expenses: A ₹3,50,000, B ₹2,20,000. Corporate expenses of ₹80,000 cannot be reasonably allocated. Find each segment result and the profit before tax and interest.

Show the solution

Total sales = ₹6,00,000 + ₹4,00,000 = ₹10,00,000. A share = 60%, B share = 40%.
Common expenses allocated: A = ₹3,00,000 × 60% = ₹1,80,000. B = ₹3,00,000 × 40% = ₹1,20,000.
Segment expense: A = ₹3,50,000 + ₹1,80,000 = ₹5,30,000. B = ₹2,20,000 + ₹1,20,000 = ₹3,40,000.
Segment result: A = ₹6,00,000 − ₹5,30,000 = ₹70,000. B = ₹4,00,000 − ₹3,40,000 = ₹60,000.
Total segment result = ₹1,30,000. Less unallocated corporate expenses ₹80,000 = ₹50,000.

Answer: Segment result: A ₹70,000 and B ₹60,000. Profit before tax and interest is ₹50,000, after deducting ₹80,000 of unallocated corporate expenses.

Example 2

Segment X sells goods to Segment Y at ₹1,50,000, which is the price the enterprise normally uses for internal transfers. X also has external sales of ₹5,00,000. Y has external sales of ₹3,00,000. Expenses of X are ₹4,00,000 and of Y are ₹2,40,000, where Y's expenses include the ₹1,50,000 purchase from X. Assume the enterprise has no interest, income tax, extraordinary items or other unallocated items. Compute segment revenue, segment results, the enterprise external revenue and the enterprise-level result.

Show the solution

Segment revenue of X = ₹5,00,000 + ₹1,50,000 = ₹6,50,000.
Segment revenue of Y = ₹3,00,000 (external only).
Segment result of X = ₹6,50,000 − ₹4,00,000 = ₹2,50,000.
Segment result of Y = ₹3,00,000 − ₹2,40,000 = ₹60,000.
Total segment result = ₹2,50,000 + ₹60,000 = ₹3,10,000.
Total segment revenue = ₹6,50,000 + ₹3,00,000 = ₹9,50,000.
Enterprise external revenue = ₹9,50,000 − ₹1,50,000 inter-segment = ₹8,00,000.
Enterprise expenses after eliminating the inter-segment amount = ₹4,00,000 + ₹2,40,000 − ₹1,50,000 = ₹4,90,000. The ₹1,50,000 is removed from Y's expenses because it is the same transfer that was removed from revenue.
Enterprise-level check: ₹8,00,000 − ₹4,90,000 = ₹3,10,000. This equals the total segment result. The check is clean only because the example ignores interest, income tax and unallocated items. In a real question, these would be extra reconciling lines.
Disclose the basis of the inter-segment pricing.

Answer: Segment revenue: X ₹6,50,000 and Y ₹3,00,000. Segment results: X ₹2,50,000 and Y ₹60,000, total ₹3,10,000. Enterprise external revenue is ₹8,00,000 and enterprise expenses are ₹4,90,000, giving a result of ₹3,10,000 (ignoring interest, tax and unallocated items). The pricing basis must be disclosed.

Exam tips

In MCQs, the usual trap is putting income tax, corporate overheads or interest into segment results. Check this first.
In written answers, state the allocation basis in one line before you allocate. This earns a step mark even if arithmetic slips.
Always finish with a reconciliation line to enterprise revenue or profit. Examiners look for it.
Mention disclosure of the inter-segment pricing basis and any change in policy with its effect. These are easy theory marks.

Practice questions from AS 17 Segment Reporting

Segment Accounting Policies and Allocation: frequently asked questions

Can a segment use different accounting policies from the enterprise?

No. AS 17 requires segment information to follow the accounting policies used in preparing the enterprise's financial statements. This keeps segment data consistent with the reported figures.

How do I allocate common expenses to segments under AS 17?

Allocate them on a reasonable basis that reflects how segments use the cost, such as sales, headcount, area or machine hours. If the question gives a ratio, use it. If no reasonable basis exists, keep the cost unallocated.

What are unallocable items in AS 17?

Some items are excluded from segment revenue and expense by definition: extraordinary items, interest and dividend income, gains or losses on sale of investments or extinguishment of debt, interest expense and income tax. The interest, dividend, investment and debt items stay in a segment only if it is mainly financial. Enterprise-level general administration expenses are also not segment expense. All of these appear in the reconciliation.

How are inter-segment transfers measured?

They are measured on the basis the enterprise actually uses to price them, such as market price or cost plus margin. You must disclose that basis and any change in it. They are eliminated when reconciling to enterprise revenue.