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What is segment reporting

what is segment reporting

In June 1997, the FASB issued SFAS 131, revising SFAS 14 standards for reporting information about operating segments. The FASB and the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) collaborated on this project and reached the same conclusions. The IASC, which had also been working on a revision of IAS 14, reached somewhat different conclusions despite identical stated objectives. The exposure drafts for these standards are discussed in The Analysis and Use of Financial Statements (AUFS) Box 13-4, pages 717-718. Both final standards reduced the disclosure requirements proposed in the EDs.

SFAS 131 Requirements

The standard requires use of the management approach ; that is, segment reporting depends on the firm's internal organization. The standard defines an operating segment as a firm component

  1. that engages in business activities generating revenues and incurring expenses
  2. whose operating results are regularly reviewed by the enterprise's chief operating decision maker to allocate resources and assess performance
  3. for which discrete financial information is available

Reportable segments are operating segments that report any of:

  • revenues (including intersegment revenues) of at least 10% of total revenues (including intersegment revenues) of all reported operating segments
  • profit (loss) of at least 10% of the combined profit (loss) of all operating segments reporting a profit (loss)
  • assets of at least 10 percent of the combined revenues, profit or loss, or assets of all operating segments.

A reportable segment may aggregate two or more operating segments if their products and services, production processes, type of customer, distribution, and regulatory environments are similar. Reportable segments must total at least 75% of external revenues; if not, additional segments must be reported until that threshold is reached.

Required Disclosures

SFAS 131 requires four types of information:

1. General information about factors used to identify reportable segments, including the basis of organization and classes of products and services that are the sources of revenue for each reportable segment.

2. A measure of profit and loss and the following data for each reported segment:

  1. revenues from external customers
  2. intersegment revenues
  3. interest revenue and expense (which may be netted for financial businesses if reported that way to the chief operating decision maker)
  4. depreciation, depletion, and amortization expense and other significant non-cash items
  5. unusual items included in reported segment profit or loss
  6. equity in net income of equity method investees
  7. income tax expense
  8. extraordinary items
  9. total segment assets
  10. additions to long-lived assets (mainly property)
  11. investment in equity method investees
  12. Items i. through viii. must be reported only if they are included in the measure of

    profit or loss reported to the chief operating decision maker. Items x. and xi. must be reported only if included in the determination of segment assets reviewed by the chief operating decision maker.

3. Reconciliation of items i. through xi. above to the corresponding enterprise amounts.

4. Interim period financial statements must disclose for each reportable segment:

  1. revenues from external customers
  2. intersegment revenues
  3. segment profit or loss
  4. any material change in total assets from the prior annual report
  5. any differences from the prior annual report in the basis of segmentation or the measurement of segment profit or loss
  6. a reconciliation of segment data to total consolidated income from continuing operations before income tax

Measurement of segment profit or loss:

Because SFAS 131 mandates the use of segment data prepared for management use, such data may not be consistent with data reported for the enterprise as a whole. Principal differences may include:

  1. Omission of interest expense, research and development, employee benefit expense, and other income and expense categories not allocated by segment for internal reporting.
  2. Use of different accounting methods such as statutory methods for regulated subsidiaries and non-U.S. GAAP for foreign subsidiaries when adjustments for those differences are not made for internal reporting.
  3. Use of different accounting methods (e.g. inventories) when adjustments (such as LIFO) are made in consolidation.

These differences will be apparent from the reconciliation requirements. However in most cases users will not be able to allocate them by segment.

Lack of Symmetry:

The use of internal data may also result in asymmetry between assets and segment result. For example, segment assets may not include jointly used assets or unallocated assets. Yet segment result may include depreciation expense or other allocations related to those assets if such allocation is made for internal reporting.

Amendment to SFAS 94:

SFAS 131 eliminates the SFAS 94, Consolidation of All Majority-Owned Subsidiaries requirement to disclose summarized information about subsidiaries that were not consolidated prior to the effective date of SFAS 94. This elimination is a significant loss of information because firms are not required to disclose segment liabilities. Prior to the issuance of SFAS 94, the non-homogeneity exemption of Accounting Research Bulletin 51 was invoked to use the equity method to report highly leveraged financial subsidiaries.

Enterprise-Wide Disclosures:

I. Revenues from external customers for each product or service or each group of similar products or services.

II. Revenues from external customers in:

C. any material single foreign country

III. Long-lived assets (such as property) in:

A. the firm's home country

B. all foreign countries

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