Segment Reporting Requirements to Know for Financial Accounting II

Segment reporting is essential for understanding a company's performance across different areas. It involves identifying operating segments, meeting specific criteria, and providing detailed disclosures to help stakeholders make informed decisions about the business's financial health.

1. Definition of an operating segment

   • An operating segment is a component of a company that engages in business activities, earns revenues, and incurs expenses.
   • It must have discrete financial information available for evaluation by the chief operating decision maker (CODM).
   • The segment's operating results are regularly reviewed to assess performance and allocate resources.

2. Criteria for reportable segments

   • A segment must meet at least one of the quantitative thresholds to be considered reportable.
   • It should have revenues, profit or loss, or assets that exceed specified limits relative to the total company.
   • The segment must be regularly reviewed by the CODM for decision-making purposes.

3. Quantitative thresholds for segment reporting

   • A segment is reportable if its revenue is 10% or more of the combined revenue of all segments.
   • A segment is reportable if its absolute profit or loss is 10% or more of the greater of the total profit or loss of all segments.
   • A segment is reportable if its assets are 10% or more of the total assets of all segments.

4. Required disclosures for reportable segments

   • Disclose segment revenues, profit or loss, and total assets.
   • Provide a description of the segment's products and services.
   • Include the basis of measurement for segment profit or loss and assets.

5. Aggregation criteria for operating segments

   • Segments may be aggregated if they have similar economic characteristics.
   • Factors for aggregation include the nature of products/services, production processes, and customer types.
   • The aggregated segments must be similar enough to justify combined reporting.

6. Entity-wide disclosures

   • Disclose information about products and services, geographic areas, and major customers.
   • Provide a summary of the total revenues from external customers and inter-segment revenues.
   • Include information on the entity's reliance on major customers.

7. Reconciliation requirements

   • Reconcile total segment profit or loss to the entity's consolidated profit or loss.
   • Reconcile total segment assets to the entity's consolidated assets.
   • Disclose any adjustments made during the reconciliation process.

8. Interim reporting requirements

   • Report segment information in interim financial statements, similar to annual reporting.
   • Include segment revenues, profit or loss, and assets for the interim period.
   • Ensure consistency in the reporting format and measurement basis.

9. Management approach to segment identification

   • Segments are identified based on how management organizes the business for decision-making.
   • The CODM's perspective is crucial in determining the structure of segments.
   • Changes in management structure may lead to changes in segment reporting.

10. Disclosure of major customers

    • Disclose the identity of major customers if revenues from them exceed 10% of total revenues.
    • Provide information on the nature of the relationship with major customers.
    • Include any risks associated with reliance on major customers.

11. Geographic area reporting

    • Disclose revenues and assets by geographic area.
    • Include information on the location of customers and the location of assets.
    • Provide insights into the risks and opportunities in different geographic markets.

12. Product and service information

    • Disclose revenues from different products and services.
    • Provide a breakdown of revenue streams to understand the business's performance.
    • Highlight any significant changes in product/service offerings.

13. Segment profit or loss measurement

    • Measure segment profit or loss based on the same accounting policies used for the entity.
    • Include all revenues and expenses directly attributable to the segment.
    • Disclose the basis for measuring segment profit or loss.

14. Segment assets and liabilities reporting

    • Report assets and liabilities that are directly attributable to each segment.
    • Include any shared assets and liabilities, with appropriate allocation methods.
    • Ensure consistency in the measurement and reporting of segment assets and liabilities.

15. Consistency in segment reporting across periods

    • Maintain consistent reporting practices for segments across reporting periods.
    • Changes in segment structure or measurement should be disclosed and explained.
    • Ensure comparability of segment information over time for users of financial statements.