10.3 Segment disclosures
5 min read•august 19, 2024
Segment disclosures provide crucial insights into a company's performance across different business units or geographic areas. This information helps investors and analysts understand how various parts of the business contribute to overall results and assess potential risks and opportunities.
Companies must identify based on internal organizational structure and financial reporting. They're required to disclose specific information about each segment's revenues, profits, assets, and other key metrics, as well as provide entity-wide disclosures about products, geographic areas, and major customers.
Defining reportable segments
- Reportable segments are distinct components of a company that engage in business activities from which they may earn revenues and incur expenses
- Segment managers are held accountable for the operating results and are responsible for allocating resources within their segment
- Reportable segments are determined based on the management approach, which considers how the company is organized and how financial information is reported internally
Quantitative thresholds for segments
- A segment must meet certain quantitative thresholds to be considered reportable
- The segment's reported , including both sales to external customers and intersegment sales or transfers, should be 10% or more of the combined revenue of all operating segments
- The absolute amount of the segment's reported profit or loss should be 10% or more of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that reported a loss
- The segment's assets should be 10% or more of the combined assets of all operating segments
Management approach to segmentation
- The management approach focuses on how management organizes the company for making operating decisions and assessing performance
- Segments are identified based on the structure of the company's internal organization and financial reporting system
Organizational structure considerations
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- The company's organizational structure, such as divisions, departments, or subsidiaries, is considered when identifying reportable segments
- Segments may be based on products and services, geographic areas, regulatory environments, or a combination of factors
Internal reporting practices
- The identification of reportable segments is based on the regular internal financial reports reviewed by the chief operating decision maker (CODM)
- The CODM is the function or individual responsible for allocating resources and assessing the performance of the operating segments
Required segment disclosures
- Companies are required to disclose certain information about their reportable segments in the notes to the financial statements
General information
- Description of the factors used to identify the reportable segments, including the basis of organization and types of products and services
- Information about how the operating segments were determined and aggregated
Profit or loss amounts
- Measure of profit or loss for each reportable segment
- Basis of accounting for any transactions between reportable segments
- Reconciliation of the total of the reportable segments' measures of profit or loss to the company's consolidated income before income taxes and discontinued operations
Assets and liabilities
- Total assets for each reportable segment if such amounts are regularly provided to the CODM
- Total liabilities for each reportable segment if such amounts are regularly provided to the CODM
Reconciliations to financial statements
- Reconciliations of the totals of the reportable segments' revenues, measures of profit or loss, assets, liabilities, and other significant items to corresponding items in the company's consolidated financial statements
Aggregation criteria for segments
- Operating segments may be combined into a single reportable segment if aggregation is consistent with the objective and basic principles of segment reporting
- Aggregated segments must have similar economic characteristics and be similar in terms of the nature of products and services, the nature of the production process, the type or class of customer, the methods used to distribute the products or provide the services, and the nature of the regulatory environment
Changes in reportable segments
- If there are changes in the structure of the company's internal organization that cause the composition of its reportable segments to change, the corresponding information for prior periods should be restated
Restatement of prior periods
- Prior period should be restated to conform to the current period's segment structure unless it is impracticable to do so
- If prior periods are not restated, segment information for the current period should be reported on both the old basis and the new basis of segmentation in the year in which the change occurs
Entity-wide disclosures
- In addition to segment-specific disclosures, companies are required to provide entity-wide disclosures about their products and services, geographic areas, and major customers
Products and services
- Revenues from external customers for each product and service or each group of similar products and services (unless impracticable)
Geographic areas
- Revenues from external customers attributed to the company's country of domicile and attributed to all foreign countries in total
- Revenues from external customers attributed to an individual foreign country, if material
- Long-lived assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts located in the company's country of domicile and located in all foreign countries in total
- Long-lived assets in an individual foreign country, if material
Major customers
- Information about major customers, including the total amount of revenues from each major customer and the identity of the segment(s) reporting the revenues (if revenues from a single external customer amount to 10% or more of the company's total revenues)
Segment reporting examples
- Companies may have different levels of complexity in their segment reporting, depending on their organizational structure and internal reporting practices
Single vs multiple segments
- A company with a single reportable segment will have limited segment disclosures, focusing primarily on entity-wide disclosures
- Companies with multiple reportable segments will provide more extensive segment-specific disclosures, including information about each segment's revenues, profit or loss, assets, and liabilities
Auditing segment disclosures
- Auditors are responsible for evaluating the appropriateness and adequacy of a company's segment disclosures
- Auditors should consider the consistency of segment information with other parts of the financial statements and their understanding of the company's business
- Auditors may perform procedures such as inquiries of management, analytical procedures, and tests of details to assess the reliability and completeness of segment information
Segment disclosures vs disaggregated revenue
- Segment disclosures provide information about a company's reportable segments, which are determined based on the management approach and internal reporting structure
- Disaggregated revenue disclosures, as required by ASC 606 (Revenue from Contracts with Customers), provide information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers
- While there may be overlap between segment disclosures and disaggregated revenue disclosures, they serve different purposes and are based on different criteria
Key Terms to Review (18)
Accounting Principles: Accounting principles are the foundational guidelines and standards that govern financial reporting and accounting practices. These principles ensure consistency, transparency, and reliability in financial statements, which are crucial for stakeholders to make informed decisions. They encompass various concepts such as recognition, measurement, and disclosure, guiding how financial transactions are recorded and presented in a company’s financial reports.
Asc 280: ASC 280 is the Accounting Standards Codification section that governs the reporting of segment information. It outlines how companies should identify and report operating segments, ensuring that stakeholders have a clear view of a company's financial performance across its different areas of business. This standard also emphasizes the importance of providing disclosures about reportable segments and enterprise-wide information, facilitating better transparency and understanding of a company’s operations.
FASB: The Financial Accounting Standards Board (FASB) is a private-sector organization responsible for establishing and improving financial accounting and reporting standards in the United States. Its guidelines shape how companies prepare their financial statements, impacting various areas such as the treatment of pushdown accounting, the assessment of goodwill impairment, and the reporting of intercompany transactions. FASB standards also play a crucial role in determining the primary beneficiary in consolidation scenarios and defining classifications for held-for-sale assets, as well as segment disclosures within financial statements.
Full costing: Full costing, also known as absorption costing, is an accounting method that captures all manufacturing costs, both fixed and variable, associated with producing a product. This method is important because it provides a comprehensive view of the total cost of production, which can help in pricing decisions and profitability analysis. By including all costs, full costing affects how segment disclosures present financial information and impacts decision-making in various areas of business management.
Geographical segment: A geographical segment refers to a part of an organization’s operations that is based on the geographic location of its business activities. This concept is crucial for analyzing the performance and profitability of different regions, allowing businesses to understand market dynamics and tailor their strategies accordingly. By breaking down financial data by geographical segments, companies can assess regional risks, opportunities, and resource allocation more effectively.
IASB: The International Accounting Standards Board (IASB) is an independent body that develops and establishes International Financial Reporting Standards (IFRS), which aim to bring transparency, accountability, and efficiency to financial markets around the world. It plays a crucial role in shaping the accounting principles that govern financial reporting, which directly impacts pushdown accounting, goodwill impairment testing, intercompany transactions, primary beneficiary determination, held-for-sale classification, and segment disclosures.
IFRS 8: IFRS 8 is an International Financial Reporting Standard that requires companies to report financial information based on their internal management reporting structures. This standard emphasizes the importance of operating segments, aligning reported information with how management evaluates performance and allocates resources. By focusing on internal reporting, it enhances transparency for investors and stakeholders, linking financial results to the actual operations of the business.
Intersegment transactions: Intersegment transactions refer to the exchanges of goods, services, or capital that occur between different segments of a business. These transactions are essential for understanding how different parts of a company interact and contribute to the overall financial performance. They can affect the financial statements, especially when it comes to segment disclosures, as they need to be reported in a way that provides clarity on each segment's profitability and resources.
Operating Profit: Operating profit is the amount of money a company makes from its normal business operations, excluding any income derived from other sources like investments or sales of assets. It is calculated by subtracting operating expenses, such as wages and rent, from gross profit. This metric is crucial as it reflects the efficiency of a company in generating profit through its core activities and is often used to evaluate segment performance.
Operating Segment: An operating segment is a component of a company that engages in business activities from which it earns revenues and incurs expenses, and for which discrete financial information is available. These segments allow companies to report their financial performance in a more detailed manner, breaking down operations into distinct areas that reflect the company's structure. This granularity is essential for stakeholders to assess the organization's performance and make informed decisions.
Performance measurement: Performance measurement refers to the process of evaluating the efficiency and effectiveness of an organization’s operations, programs, and strategies. It involves using specific metrics and indicators to assess how well various segments or divisions within a company are performing. This evaluation can help stakeholders make informed decisions about resource allocation, strategy adjustments, and operational improvements.
Reportable segments: Reportable segments are distinct parts of a business that are identified for financial reporting purposes, providing insight into the performance and financial health of different areas of an organization. These segments allow stakeholders to assess how various operations contribute to overall profitability, and they help in making informed investment and management decisions. The classification of reportable segments is based on internal management reports, which reflect how resources are allocated and how performance is evaluated.
Resource allocation: Resource allocation is the process of distributing available resources among various projects or business units to achieve optimal efficiency and effectiveness. This concept is vital in decision-making, as it helps organizations determine where to invest their resources—be it capital, personnel, or time—in order to maximize performance and profitability.
Revenue: Revenue is the income generated from normal business operations, primarily from the sale of goods and services to customers. It serves as a crucial indicator of a company’s financial performance, affecting profitability and operational decision-making. Understanding revenue is essential for analyzing a company's financial health, particularly in the context of segment disclosures, where companies must report revenue from different segments to provide clarity on performance across various business areas.
Segment information: Segment information refers to the data presented by a company that breaks down its operations into distinct parts, known as segments, to provide clearer insights into its performance. This information helps stakeholders understand how different areas of a business contribute to overall financial results, and it is essential for evaluating management effectiveness and making informed investment decisions.
Segment profitability: Segment profitability refers to the assessment of the financial performance of specific divisions or units within a company. Understanding segment profitability helps organizations evaluate which segments contribute positively to overall profits and which might be underperforming, providing insights for better resource allocation and strategic decision-making.
Transparency: Transparency refers to the clarity and openness with which an organization presents its financial information and operations to stakeholders. It is a key principle that helps to build trust and confidence, as it allows investors, regulators, and the public to understand the true financial position and performance of an entity. When transparency is prioritized, it encourages accountability and can significantly impact decision-making processes in finance-related contexts.
Variable costing: Variable costing is an accounting method that assigns only variable manufacturing costs—such as direct materials, direct labor, and variable overhead—to the cost of a product. This approach treats fixed manufacturing costs as period expenses, which means they are expensed in the period they are incurred rather than being allocated to the product. This method is particularly useful for internal decision-making and performance evaluation, allowing for clearer insights into the impact of production volume on overall profitability.