Segment Reporting

Question 1

Segment Reporting: What information should disclosed about the sales of a particular segment?

Answer 1

Disclose separately :

• The amount of sales to outside customers
• The amount of sales to other internal segments (intercompany sales)

Question 2

Segment Reporting: Do public companies have to report segments in their financial statements, and if they do according to which criteria would the segments be broken down?

Answer 2

Yes. According to GAAP and IFRS they have to report segments, and they could break down their segments according to the following criteria:

1- Operations
2- Products and Services
3- Geographical Areas
4- Major Customers

Question 3

Segment Reporting: What does Segment Operating Income include and what does it NOT include?

Answer 3

In general to define what is included in Segment Operating Income we use the “Management Approach”, so for that, what would be included in the internal reports to the “ Chief Operating Decision Maker” would be included or otherwise it won’t.

• It generally includes Segment Sales internal and external, and Segment Directly Traceable Expenses.
• It generally does NOT include the following :

1- Equity in NI from another company
2- General corporate expenses
3- Int. expense or Int. Revenue 
4- Income tax expense 
5- Gains and losses on discontinued operations

(Unless this is not how it is reported to the Chief)

Question 4

Segment Reporting: When would the disclosure of Major Customers be required under Segment Reporting and what needs to be disclosed ?

Answer 4

It would be required if revenue from a single external customer is 10% or more of total enterprise revenue (both internal and external).

What needs to be disclosed:
1- Identity of the customer
2- Total amount of Rev. from customer.
3- Segments reporting the revenue

Question 5

Segment Reporting: What is the difference between inter company transactions and intra company transactions?

What is the proper treatment of “Intercompany Transactions” when preparing Segment Reports?

Answer 5

• Inter company transactions is between two or more related legal entities, usually under the same control (Latin “inter” means “between”). Intra company transactions is within the same legal entity (Latin “intra” means “within”).
• In segment Reporting we do NOT eliminate intercompany transactions. It is relevant to see how much a segment sells to outsiders and how much it sells to other segments. Therefor intercompany transactions should be included in segment reporting.

Question 6

Segment Reporting: When would an Operating Segment be considered a Reportable Segment?

Answer 6

An Operating Segment is considered a separate Reportable Segment if it fulfills ANY ONE of the Materiality Tests, also known as the “10%” Size Tests, and it reports directly to the “chief operating officer”.

Question 7

Segment Reporting: List the Materiality Tests, also known as the “10%” Size Tests for the purpose of separate Segment Reporting?

Answer 7

A segment would be considered a qualified reportable unit if it meets ANY of the following thresholds:

1- The 10% Revenue Test: reported operating income including both sales to outside customers and internal segments exceeds 10% of combined revenue internal and external of all operating segments.
(Hint - non operating income like interest revenue is not included in the 10% revenue test)

2- The 10% Profit/Loss Test: the absolute value of its reported profit or loss is MORE THAN the Greater of : the combined Profit of all operating segments that did report a Profit ,or the combined Loss of all operating segments that did report a Loss.

3- The 10% Asset Test: a segment’s assets are 10% or more of the combined assets of all operating segments.

Question 8

Segment Reporting: What is the “Reporting Sufficiency” requirement under segment reporting?

Answer 8

We keep stacking up segments till the total external (consolidated) revenue of the reported segments reaches 75% of total external(consolidated) revenue of the firm. Additional operating segments would be added to reach up to that threshold even if they do not meet the requirements of the Materiality Tests.