Segment reporting

June 24, 2014

All businesses are not created equally. Apple and Google have massive operations in multiple geographic regions across the world, while a small manufacturing company might only own a single factory in Michigan. Should these three companies produce the exact same financial statements? In this article, we’ll look at how diversified companies are required to report operating segment results.

1. What is a reportable segment?

There are three rules to follow when determining what constitutes a segment that must be separated from the rest of the business for reporting purposes. First, a segment must generate revenues and incur expenses. Second, the segment’s results must be reviewed by the chief operations officer. Third, the segment must have readily identifiable financial information.

You should be aware that only publicly traded corporations need to report segment results.

2. How many segments need to be reported separately?

The FASB has established several tests for companies to use when determining which reportable segment results actually need to be separately disclosed. The first set is the three “10% threshold” tests. First, a segment should be separated if it comprises at least 10% of the company’s total assets. Second, a segment should be separated if it brings in at least 10% of the company’s total revenue - this includes both external revenue and revenue from intersegment transactions.

Finally, a segment should be separately reported if the numerical value of its profit or loss is at least 10% of the greater of the combined profit for all profitable segments or the combined loss of all unprofitable segments. Let’s look at a quick example of this last test below:

Segment

Segment Profit (Loss)

Segment A

$58,000

Segment B

($25,000)

Segment C

($71,000)

Segment D

$90,000

Segment E

$11,000

Segment F

$46,000

Segment G

($9,000)

According to the table of profits and losses, profitable segments brought in $205,000 while unprofitable segments lost $105,000. That means a segment must be separately reported if profit or loss was greater than $20,500. For this example, results for all but Segment E and G need to be disclosed separately.

The last rule says that at least 75% of external revenue needs to be covered by separately reported segments. Any remaining segments can be combined into an “Other” category in the notes. Information and procedures about what to report for each segment is beyond the scope of this article.

Not a member?
See why people join our
online accounting course:
Lecture Contents:
Free Study Notes
Download free accounting study notes by signing up for our free newsletter (example):
First Name:
E-mail:
We never share or sell your e-mail to third parties.
Ask a Question
Suggest a Topic
Do you have an interesting question or topic?
Suggest it to be answered on Simplestudies.com: