9.1 Operating segments

Operating segments are a crucial aspect of financial reporting, providing insights into a company's diverse business activities. They enhance transparency by allowing stakeholders to evaluate the performance of different parts of a business, aiding in assessing risks and opportunities.

Reportable segments, a subset of operating segments, meet specific criteria for separate disclosure. They provide detailed financial information to users of financial statements, helping investors and analysts understand the company's performance at a granular level.

Definition of operating segments

• Operating segments form a crucial component of financial reporting in Intermediate Financial Accounting 2, providing insights into a company's diverse business activities
• Segment reporting enhances transparency and allows stakeholders to evaluate the performance of different parts of a business
• Understanding operating segments aids in assessing risks and opportunities within various aspects of a company's operations

Criteria for identification

Top images from around the web for Criteria for identification

• 

  Basic Accounting Procedures | OpenStax Intro to Business View original

  Is this image relevant?

• 

  Classes and Types of Adjusting Entries | Financial Accounting View original

  Is this image relevant?

• 

  Accounts Receivable | Boundless Finance View original

  Is this image relevant?

• 

  Basic Accounting Procedures | OpenStax Intro to Business View original

  Is this image relevant?

• 

  Classes and Types of Adjusting Entries | Financial Accounting View original

  Is this image relevant?

1 of 3

Top images from around the web for Criteria for identification

• 

  Basic Accounting Procedures | OpenStax Intro to Business View original

  Is this image relevant?

• 

  Classes and Types of Adjusting Entries | Financial Accounting View original

  Is this image relevant?

• 

  Accounts Receivable | Boundless Finance View original

  Is this image relevant?

• 

  Basic Accounting Procedures | OpenStax Intro to Business View original

  Is this image relevant?

• 

  Classes and Types of Adjusting Entries | Financial Accounting View original

  Is this image relevant?

1 of 3

• Engages in business activities generating revenues and incurring expenses
• Operating results regularly reviewed by chief operating decision maker (CODM)
• Discrete financial information available for the segment
• Segment may sell products or services to external customers or other segments within the entity
• Minimum size requirements not necessary for identification as an operating segment

Management approach

• Utilizes internal organizational structure to determine reportable segments
• Reflects how management views and organizes the business
• CODM allocates resources and assesses performance based on segment information
• Allows for flexibility in reporting as it aligns with internal decision-making processes
• May result in different segment structures across companies in the same industry

Reportable segments

• Reportable segments represent a subset of operating segments that meet specific criteria for separate disclosure
• Provide more detailed financial information to users of financial statements
• Help investors and analysts understand the company's performance at a granular level

Quantitative thresholds

• Revenue threshold requires segment revenue (internal and external) to be 10% or more of combined revenue
• Profit or loss threshold met if absolute amount is 10% or more of greater of combined profit or combined loss
• Assets threshold requires segment assets to be 10% or more of combined assets of all operating segments
• 75% test ensures reportable segments account for majority of entity's operations
• Segments not meeting thresholds may be combined or reported separately at management's discretion

Aggregation criteria

• Similar economic characteristics among segments
• Nature of products and services offered
• Production processes and distribution methods
• Types of customers served
• Regulatory environment in which segments operate
• Aggregation must be consistent with core principle of segment reporting

Segment information disclosure

• Segment disclosures provide users with detailed information about each reportable segment
• Enhances understanding of company's overall financial position and performance
• Allows for comparison between segments and assessment of their relative importance

Profit or loss measures

• Segment profit or loss reported as reviewed by CODM
• Basis of measurement explained if different from entity's accounting policies
• Interest revenue and expense reported separately unless majority of segment revenue from interest
• Depreciation and amortization expenses disclosed
• Material non-cash items other than depreciation and amortization reported
• Income tax expense or income reported if included in segment measure

Asset information

• Total assets for each reportable segment disclosed
• Additions to non-current assets reported if regularly provided to CODM
• Investments accounted for using equity method included if part of segment assets
• Reconciliation of segment assets to entity's assets provided

Geographic areas

• Revenue from external customers attributed to entity's country of domicile and foreign countries
• Non-current assets located in entity's country of domicile and foreign countries disclosed
• Individual foreign countries reported separately if material
• Basis for attributing revenue to individual countries explained

Reconciliations

• Reconciliations bridge the gap between segment-level information and entity-wide financial statements
• Ensure transparency and completeness of financial reporting
• Help users understand how segment information relates to overall company performance

Segment revenue vs total revenue

• Reconciliation of total reportable segment revenue to entity revenue
• Explanation of any differences between segment and entity revenue
• Unallocated items and eliminations of intersegment revenue disclosed
• Revenue from segments below quantitative thresholds included in reconciliation

Segment profit vs entity profit

• Reconciliation of total reportable segment profit or loss to entity profit or loss before tax and discontinued operations
• Material reconciling items identified separately
• Unallocated corporate expenses and intersegment profit eliminations disclosed
• Differences in measurement bases between segment and entity profit explained

Entity-wide disclosures

• Entity-wide disclosures provide additional information beyond reportable segments
• Offer a broader perspective on the company's operations and dependencies
• Required even if entity has only one reportable segment

Products and services

• Revenue from external customers for each product and service or group of similar products and services
• Disclosure based on products and services rather than segments
• Grouping of similar products and services allowed if impracticable to separate
• Consistency with other parts of financial statements maintained

Major customers

• Information about reliance on major customers disclosed
• Revenue from any single external customer amounting to 10% or more of entity's revenue reported
• Identity of major customer not required, but type of customer and total revenue disclosed
• Group of entities under common control considered a single customer

Interim reporting requirements

• Interim reporting provides updates on company performance between annual reports
• Segment information in interim reports helps users track segment performance throughout the year
• Enhances timeliness of financial information for decision-making

Consistency with annual reporting

• Segment information in interim financial reports consistent with annual reporting
• Same reportable segments used in interim reports as in most recent annual financial statements
• Changes in reportable segments reflected in both interim and annual reports
• Condensed segment information provided in interim reports (revenue, profit or loss, total assets)
• Material changes in segment information disclosed in interim reports

Changes in reportable segments

• Changes in reportable segments may occur due to internal reorganizations or acquisitions
• Reflect evolving business structures and management perspectives
• Require careful consideration of financial statement presentation and comparability

Restatement of comparative information

• Prior period segment information restated to reflect new structure unless impracticable
• Disclosure of fact that segments have changed and financial effect provided
• Current period segment information presented on both old and new bases in year of change
• Explanation of reasons for changes in reportable segments provided
• Discussion of impact on segment measures and overall entity performance included

Practical considerations

• Implementing segment reporting involves various practical challenges
• Requires judgment and careful analysis of company structure and operations
• Balances information needs of users with cost and complexity of reporting

Challenges in segment identification

• Determining appropriate level of granularity for segment reporting
• Aligning internal reporting structures with external reporting requirements
• Dealing with matrix organizations or complex business structures
• Ensuring consistency in segment identification across reporting periods
• Managing changes in organizational structure and their impact on segment reporting

Cost-benefit analysis

• Evaluating costs of collecting and reporting detailed segment information
• Assessing benefits of enhanced transparency and decision-usefulness for users
• Considering competitive concerns related to disclosing sensitive information
• Balancing level of detail with potential information overload for users
• Implementing systems and processes to efficiently gather and report segment data

IFRS vs US GAAP

• Understanding differences between IFRS and US GAAP crucial for global companies
• Impacts comparability of financial statements across jurisdictions
• Requires careful consideration in cross-border transactions and listings

Key differences in requirements

• IFRS uses management approach while US GAAP combines management and risks-and-rewards approaches
• Quantitative thresholds for reportable segments slightly different under US GAAP
• US GAAP requires disclosure of certain expenses at segment level not required by IFRS
• IFRS mandates entity-wide disclosures, while US GAAP has more limited requirements
• US GAAP has specific rules for reporting segments of equity method investees

Segment reporting examples

• Practical examples illustrate application of segment reporting principles
• Demonstrate how different industries approach segment identification and disclosure
• Help in understanding real-world implementation of segment reporting requirements

Manufacturing industry

• Segments based on product lines (automotive parts, industrial machinery, consumer goods)
• Geographic segments reflecting major markets (North America, Europe, Asia)
• Vertical integration leading to segments for different stages of production process
• Reporting of intersegment transfers and allocation of shared resources
• Disclosure of segment-specific capital expenditures and research and development costs

Retail sector

• Segments based on store formats (department stores, specialty stores, e-commerce)
• Geographic segments for different regions or countries
• Product category segments (apparel, electronics, home goods)
• Reporting of same-store sales growth for each segment
• Disclosure of segment-specific inventory levels and turnover ratios