Introduction to Operating Segments

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The statements of financial accounting standards requires public companies to make an additional disclosure in its financial statements for its reportable operating segments. The management of a public company must disclose in its notes to the financial statements the results of the operations of a reportable operating segment in order to provide a sufficient information to understand the company’s operating results and financial strength. This will provide users enough data to evaluate the company’s future cash flows and come up with a realistic financial picture of the company.

Operating Segment. An operating segment is an entity within an entity. Its operation can be separately identifiable from the main entity. Its revenue and expenses must also be separately identifiable. Its operations are being separately reported to the officers as it is an an identifiable component of the company. Only reportable operating segments are required to be disclosed.

If a company has many operating segments which are deemed to be related and are identical in terms of their operations (e.i., same customers, same products and services, same methods), they may be considered as a single operating segment.

Reportable Operating Segment. Not all operating segments are to be disclosed. The following criteia are to be used to determine if they are reportable operating segments or not:

  • The total operating segment revenue is more than 10% of the company’s total revenue or

  • The net income (or loss) of the operating segment is 10% or more than the total company’s net income (or loss) or

  • Assets of the operating segment is 10% or more than the company’s assets

If an operating segment meets any of the above three criteria, it qualifies as a reportable segment. The company may report all its reportable segments as the standard does not set a limit to the number of reportable segments to be disclosed. In some cases when one reportable operating segment contributes 90% or more of the total reportable segment assets, income (or loss) and revenue, there is no need to disclose any of the operating segments.

Disclosure. When reportable segments are identified, the management is required at a minimum to disclose the following:

  • Description of the reportable operating segment including its operations, products, reporting requirements and how it was determined to be an operating segment

  • The operating results of the reportable operating segment including its assets and their components (i.e., major customers, demography of sources of revenue, major suppliers)

This is just an overview of the Opearting Segments. A detailed discussion of this topic will soon be published. 

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