Transitioning from a private to a public company comes with increased accountability demands, particularly when it comes to financial reporting. One of the requirements for private companies is segmental, or segment reporting. Here’s what you need to know.
Understanding segment reporting
Segment reporting breaks down the operations of a company into manageable pieces, or segments. Public companies must then record detailed financial statements for each operating segment. The goal is to increase transparency for creditors and investors, especially regarding the company’s most important operating units. This shines a focused light on performance, helping investors make better decisions and predict future prospects for cash flow.
Details of the segment reporting requirements are outlined by the Generally Accepted Accounting Principles (GAAP), specifically in FASB Accounting Standards Codification (ASC) Topic 280. We’ll take a look at these below.
What qualifies as an operating segment?
According to GAAP, any unit that engages in business activities that result in incurred expenses or earned revenue qualifies as a segment. Furthermore, the company’s chief decision-maker should regularly review an operating segment’s results for assessment purposes for it to qualify as a segment.
Here are a few more segment reporting requirements:
If multiple segments have similar services, processes, products, distribution methods, and customers, they can be aggregated and reported as a single segment.
If a segment covers at least 10% of the entity’s profit or loss, 10% of its assets, or 10% of its revenues, it must be reported.
If your reported segments account for less than 75% of the company’s total revenue, you should add more segments to reach that reporting threshold.
Using the criteria above, you can see that some companies might only have one or two operating segments. For example, a company might have several different product categories, but if these don’t fall under regular review by the chief decision-maker, they wouldn’t necessarily qualify as operating segments. Furthermore, if these separate product categories are very similar in scope, they can be aggregated together into a single segment.
How to approach segment reporting in accounting
As with any financial statements, the information used for segment reporting in accounting should include all relevant data. This should start with the factors you’ve used to identify the reportable segments, as well as the basis of its organization. Background reporting information should also include the types of products or services sold.
With this background information, each segment report should list the same figures that would be listed in any financial accounts, including:
Profit or loss
Interest and depreciation
Equity method interests
Income tax expenses
Segment reporting: GAAP vs. IFRS
GAAP’s reporting requirements only apply to US-based companies, but the International Financial Reporting Standards (IFRS) – a set of accounting standards used by companies all around the world – are basically identical. This makes it easy to compile segment reports for multiple branches of a multinational company. In other words, segment reporting for GAAP vs. IFRS should be virtually the same.
Company-wide disclosure requirements
In addition to the segment reporting examples outlined above, companies are also required to disclose three types of entity-wide pieces of information to investors. These include:
Product and service information: This should outline the specific revenue earned for each type of service or product generated by the company.
Geographic area information: This disclosure requires the company to provide information about all geographic areas of operation, including revenue from its home country and abroad. Foreign assets should be revealed, as well.
Major customer information: This section reveals if a company’s revenue relies on a single major customer. The regulation states that if a company earns at least 10% of its external revenues from any one customer, this must be disclosed along with the applicable segment. However, the customer’s identity does not need to be revealed.
Segment reporting offers a way for companies to make financial statements easier to read and analyze. You can stay on top of these requirements by keeping detailed records of all transactions.
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