Segment Reporting

Definition

Segment reporting is the disclosure of financial information about an organization's different business segments or operating divisions. It provides a more detailed view of a company's performance and allows users to better understand the contributions and risks associated with each segment of the business.

5 Must Know Facts For Your Next Test

1. Segment reporting helps users of financial statements better understand the performance, resources, and risks of a diversified company.
2. The chief operating decision-maker (CODM) is responsible for allocating resources and assessing the performance of a company's operating segments.
3. Reportable segments are determined based on quantitative thresholds related to the segment's revenue, profit or loss, and assets.
4. Segment information must be presented using the same accounting policies as the company's consolidated financial statements.
5. Segment reporting is required for public companies under accounting standards, such as IFRS 8 and ASC 280.

Review Questions

• Explain how segment reporting helps distinguish between financial and managerial accounting.
  • Segment reporting is primarily a managerial accounting tool, as it provides detailed information about a company's various business units or divisions to internal decision-makers. This information is not typically found in the company's consolidated financial statements, which are prepared for external users and focus on the organization as a whole. Segment reporting allows managers to make more informed decisions about resource allocation, performance evaluation, and strategic planning for each segment, whereas financial accounting information is geared towards providing a high-level, aggregated view of the company's overall financial position and performance.
• Describe the role of the chief operating decision-maker (CODM) in segment reporting.
  • The chief operating decision-maker (CODM) is the key individual or group responsible for allocating resources and assessing the performance of a company's operating segments. The CODM regularly reviews the operating results of each segment to make decisions about how to best utilize the organization's resources. The identification and designation of the CODM is a critical aspect of segment reporting, as the CODM's perspective directly shapes the way a company's operating segments are defined and reported on in the financial statements.
• Analyze how the quantitative thresholds for reportable segments impact the level of detail provided in segment reporting.
  • The quantitative thresholds for reportable segments, such as revenue, profit or loss, and asset size, determine the level of detail that must be disclosed in a company's segment reporting. Segments that meet these thresholds are considered reportable and must be presented separately, providing users with more granular information about the company's performance. Segments that do not meet the thresholds may be aggregated or not reported on individually, reducing the level of detail available. The selection of reportable segments is a critical decision that influences the usefulness and transparency of a company's financial reporting for internal and external stakeholders.

Related terms

Business Segment: A component of an organization that generates revenue, incurs expenses, and whose operating results are regularly reviewed by the chief operating decision-maker.

Operating Segment:

A business segment or component of an organization that engages in business activities, generates revenue and expenses, and whose operating results are regularly reviewed by the chief operating decision-maker.

Reportable Segment: An operating segment or aggregation of operating segments that meets specific quantitative thresholds, requiring separate disclosure in a company's financial statements.