Segment reporting gives you a peek behind the curtain of a company's different business units. It breaks down financial info by product lines, regions, or customer types, helping you understand how each part of the business is doing.

This section dives into the nuts and bolts of segment reporting. You'll learn how companies decide what to report, the rules they follow, and what info they have to share. It's all about getting a clearer picture of a company's diverse operations.

Operating Segments in Financial Reporting

Defining Operating Segments

• Operating segments represent distinct components of a business entity engaging in revenue-generating activities with discrete financial information available
• Segments align with the management approach reflecting internal organizational structure and decision-making processes
• Chief operating decision maker (CODM) regularly reviews segment information for resource allocation and performance assessment
• Segments may focus on specific products, services, geographic regions, or customer types

Purpose and Benefits of Segment Reporting

• Provides disaggregated financial information about an entity's diverse business activities and economic environments
• Enhances usefulness of financial statements by allowing users to better understand varied operations within a company
• Offers insights into management's perspective on the business through the management approach
• Facilitates more accurate forecasting and valuation by revealing performance of individual business units

Reportable Segments: Thresholds and Aggregation

Quantitative Thresholds for Reportable Segments

• Reportable segments meet specific quantitative thresholds or are considered material for separate disclosure
• 10% revenue test compares individual segment revenue to combined revenue of all operating segments
• 10% profit or loss test evaluates segment's reported profit/loss against combined profit of profitable segments or combined loss of loss-making segments
• 10% assets test compares segment's assets to combined assets of all operating segments
• 75% reportable segment test ensures reportable segments constitute at least 75% of entity's total external revenue

Aggregation Criteria and Considerations

• Aggregation of operating segments permitted if they have similar economic characteristics
• Segments must meet specific criteria for aggregation related to products/services, production processes, customer types, distribution methods, and regulatory environments
• Aggregation aims to balance detailed reporting with practical considerations of information overload
• Management judgment required in assessing similarity of economic characteristics and other aggregation criteria

Segment Reporting Disclosure Requirements

General Information and Profit/Loss Disclosures

• Disclosure of how operating segments were determined and types of products/services provided
• Segment profit or loss, total assets, and liabilities disclosed if regularly reported to CODM
• Revenue disclosures include external customer revenue and intersegment revenue
• Reconciliation required between segment revenue totals and consolidated entity revenue

Specific Item Disclosures

• Interest revenue and expense disclosed if included in segment profit/loss or regularly provided to CODM
• Depreciation and amortization, and income tax expense reported for each segment meeting criteria
• Material non-cash items other than depreciation and amortization require separate disclosure by segment
• Significant non-cash items may include inventory write-downs, restructuring charges, or impairment losses

Major Customer and Reconciliation Requirements

• Information about major customers disclosed if revenue from a single external customer exceeds 10% of total entity revenue
• Major customer disclosures help assess concentration risk and reliance on key accounts
• Reconciliations required between segment totals and consolidated entity amounts for revenue, profit/loss, assets, and other significant items
• Reconciliations provide transparency and ensure consistency with overall financial statements

Segment Disclosures: Performance and Risk Analysis

Profitability and Growth Analysis

• Segment disclosures provide insights into relative profitability and growth potential of different business units
• Analysis of segment revenue trends helps identify growth areas (expanding product lines) and declining segments (mature markets)
• Segment profit margins compared to assess relative efficiency and performance of different business units
• Profit margin analysis may reveal high-margin segments (luxury goods) vs. low-margin segments (commodity products)

Resource Allocation and Efficiency Metrics

• Asset utilization ratios calculated for individual segments reveal effective resource employment
• Examples include return on assets (ROA) or asset turnover ratios for each segment
• Comparison of capital expenditures across segments indicates investment priorities and growth expectations
• Analysis of intersegment revenue and transfer pricing policies provides insights into internal dynamics and synergies

Risk Assessment and Concentration Analysis

• Geographic segment information allows assessment of political, economic, and currency risks in different regions
• Example risks include political instability in emerging markets or currency fluctuations in foreign operations
• Concentration of revenue among major customers or specific segments indicates potential vulnerabilities
• High concentration in a single segment (over 50% of revenue) may signal increased business risk
• Analysis of segment-specific liabilities and off-balance-sheet obligations reveals financial risks within business units