Segment reporting definition
/What is Segment Reporting?
Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. Segment reporting is intended to give information to investors and creditors regarding the financial results and position of the most important operating units of a company, which they can use as the basis for decisions related to the company.
Under Generally Accepted Accounting Principles (GAAP), an operating segment engages in business activities from which it may earn revenue and incur expenses, has discrete financial information available, and whose results are regularly reviewed by the entity's chief operating decision maker for performance assessment and resource allocation decisions.
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Segment Reporting Rules
Follow these rules to determine which segments need to be reported:
Aggregate the results of two or more segments if they have similar products, services, processes, customers, distribution methods, and regulatory environments.
Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity.
If the total revenue of the segments you have selected under the preceding criteria comprise less than 75% of the entity's total revenue, then add more segments until you reach that threshold.
You can add more segments beyond the minimum just noted, but consider a reduction if the total exceeds ten segments.
Example of Segment Reporting
Lowry Locomotion has six business segments whose results it reports internally. Lowry’s controller needs to test the various segments to see which ones qualify as being reportable. He collects the following information:
In the table, the total profit exceeds the total loss, so the controller uses the total profit for the 10% profit test. The controller then lists the same table again, but now with the losses column removed and with test thresholds at the top of the table that are used to determine which segments are reported. An “X” mark below a test threshold indicates that a segment is reportable. In addition, the controller adds a new column on the right side of the table, which is used to calculate the total revenue for the reportable segments.
This analysis shows that the diesel locomotive, electric locomotive, passenger car, and trolley car segments are reportable, and that the combined revenue of these reportable segments easily exceeds the 75% reporting threshold. Consequently, the company does not need to separately report information for any additional segments.
What to Include in Segment Reporting
The information you should include in segment reporting includes the following items:
The factors used to identify reportable segments
The types of products and services sold by each segment
The basis of organization (such as being organized around a geographic region, product line, and so forth)
Material expense items
Equity method interests in other entities
Income tax expense or income
Other material non-cash items
Profit or loss
Sample Segment Reporting Disclosue
Below is a sample disclosure of the information that should accompany the table disclosures noted earlier in this article. This disclosure should appear in the footnotes that accompany the financial statements of a public company.
Note X – Segment Reporting
The Company operates in three reportable segments: Consumer Products, Industrial Solutions, and Digital Services. These segments are identified based on the Company's internal organizational structure and the way management evaluates performance and allocates resources.
Consumer Products: This segment includes the design, manufacture, and sale of household appliances and personal care products. Revenue is derived primarily from retail and online sales to end consumers.
Industrial Solutions: This segment provides automation systems, power equipment, and maintenance services to commercial and industrial customers. Revenue is recognized from long-term service contracts and equipment sales.
Digital Services: This segment focuses on software development, cloud-based platforms, and data analytics tools provided to both internal and external customers on a subscription basis.
The Chief Operating Decision Maker (CODM), identified as the Chief Executive Officer, regularly reviews segment performance using segment operating income as the primary measure. Intersegment transactions are recorded at arm’s length prices and are eliminated in consolidation.
There are no individual customers accounting for more than 10% of total consolidated revenue. Geographic information and disaggregated revenue by product line are disclosed in Note Y – Revenue Recognition.
IFRS Segment Reporting
The segment reporting requirements under International Financial Reporting Standards are essentially identical to the requirements just noted under GAAP.