Operating Segment

Definition

An operating segment is a component of a business enterprise that engages in business activities from which it may earn revenues and incur expenses, 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 for which discrete financial information is available.

5 Must Know Facts For Your Next Test

1. Operating segments are the building blocks for segment reporting, which provides more detailed and useful information to financial statement users.
2. The identification of operating segments is based on internal reports that the entity's chief operating decision maker (CODM) regularly reviews to allocate resources and assess performance.
3. Reportable segments are operating segments or aggregations of operating segments that meet certain quantitative thresholds, such as contributing a significant portion of the entity's revenues, assets, or profits.
4. Segment reporting allows users to better understand an entity's performance, risks, and opportunities by analyzing the different components of the business.
5. The CODM is responsible for making strategic decisions, allocating resources, and evaluating the performance of the entity's operating segments.

Review Questions

• Explain the role of the chief operating decision maker (CODM) in the identification and evaluation of an entity's operating segments.
  • The chief operating decision maker (CODM) is the key figure in the identification and evaluation of an entity's operating segments. The CODM is responsible for making strategic decisions, allocating resources, and assessing the performance of the different components of the business. The identification of operating segments is based on the internal reports that the CODM regularly reviews to make these decisions. The CODM's perspective is crucial in determining the appropriate operating segments to be reported, as they have the most comprehensive understanding of the entity's operations and the information used to manage the business.
• Describe how the concept of an operating segment is connected to the evaluation of a project or business unit using return on investment (ROI), residual income, and economic value added (EVA).
  • The operating segment is the fundamental unit of analysis for evaluating the performance of a project or business unit using metrics such as return on investment (ROI), residual income, and economic value added (EVA). These performance evaluation tools are applied at the operating segment level to provide insights into the profitability, efficiency, and value creation of the different components of the business. By analyzing the ROI, residual income, and EVA of each operating segment, the chief operating decision maker can make informed decisions about resource allocation, strategic initiatives, and the overall performance of the entity.
• Analyze how the identification and reporting of operating segments can impact an entity's financial statements and the information available to users for decision-making purposes.
  • The identification and reporting of operating segments can have a significant impact on an entity's financial statements and the information available to users for decision-making. Segment reporting provides more detailed and granular information about the different components of the business, allowing users to better understand the entity's performance, risks, and opportunities. This information can influence investment decisions, risk assessments, and the overall evaluation of the entity's financial health. The chief operating decision maker's perspective on the appropriate operating segments to be reported is crucial, as it determines the level of detail and the specific information that will be presented to users of the financial statements. Ultimately, the reporting of operating segments can have a direct impact on the transparency and usefulness of the entity's financial information for stakeholders.

Related terms

Reportable Segment: A reportable segment is an operating segment or aggregation of operating segments that meets certain quantitative thresholds, requiring separate disclosure in a company's financial statements.

Segment Reporting:

Segment reporting is the disclosure of financial information about an entity's different operating segments, which allows users to better understand the entity's performance, risks, and opportunities.

Chief Operating Decision Maker (CODM): The chief operating decision maker is the person or group responsible for allocating resources and assessing the performance of the entity's operating segments.