Reporting of organizational segments

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.

Business segment reporting breaks out a company’s financial data by company divisions, subsidiaries, or other kinds of business segments. In an annual report, business segment reporting provides an accurate picture of a public company’s performance to its shareholders. Management uses business segment reporting to evaluate the income, expenses, assets, and liabilities of each business division to assess its general health including profitability and potential pitfalls.

Large organizations divide their business into different units where these units are created based on their product or the geographical location wise. The units are termed as segments of the organization.

Segment reporting breaks down the operations of a company into manageable pieces, or segments. Public companies must then record detailed financial statements for each operating segment. The goal is to increase transparency for creditors and investors, especially regarding the company’s most important operating units. This shines a focused light on performance, helping investors make better decisions and predict future prospects for cash flow.

At the end of the year result of all units are to be merged with that of the organization, but certain units, as per the criteria mentioned has to be reported separately where the criteria for segment reporting is as follows:

• Profit of the segment is to be greater than or equal to 10 percent of the profit of the organization.
• Revenue of segment is to be greater than or equal to 10 percent of the revenue of the organization as a whole.
• Assets of the segment are to be greater than or equal to 10 percent of the organization’s total assets.

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. 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.

Included in Segment Reporting

• The types of products and services sold by each segment.
• The factors used to identify reportable segments.
• The basis of organization (such as being organized around a geographic region, product line, and so forth).
• Interest expense
• Revenues
• Depreciation and amortization
• Equity method interests in other entities
• Material expense items
• Income tax expense or income
• Profit or loss
• Other material non-cash items

Objectives

• To provide the information to the stakeholders about the important units of the organization to evaluate and make decisions about the investment.
• For a better understanding of the performance and evaluation of the results of the organization.
• To make the accounts more transparent and understandable.
• For a better analysis of the risk and returns of the organization.
• To make better decisions by taking in mind the business from different segments.
• To analyze the most profitable or Loss-making units.

Benefits

• The profit-making and loss-making units can be easily identified with the help of segmental reporting.
• Segmental Reporting gives a better understanding of the financial statements.
• It helps potential investors in better investment decisions.
• It helps in the optimum utilization of resources and better presentation.

Disadvantages

• The data presented can be misinterpreted by the investors or creditors.
• There are many disclosures required in the case of segmental reporting; hence it is a time-consuming process.
• Method of reporting Inter-segment transactions are different for each organization.
• The common costs are sometimes difficult to allocate.
• The base of the segment is also different as some organization divides the segment based on geographical location, and some organizations divide based on product-wise.