Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. Segment reporting is intended to give information to investors and creditors regarding the financial results and position of the most important operating units of a company, which they can use as the basis for decisions related to the company.
Under Generally Accepted Accounting Principles (GAAP), an operating segment engages in business activities from which it may earn revenue and incur expenses, has discrete financial information available, and whose results are regularly reviewed by the entity's chief operating decision maker for performance assessment and resource allocation decisions. Follow these rules to determine which segments need to be reported:
- Aggregate the results of two or more segments if they have similar products, services, processes, customers, distribution methods, and regulatory environments.
- Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity.
- If the total revenue of the segments you have selected under the preceding criteria comprise less than 75% of the entity's total revenue, then add more segments until you reach that threshold.
- You can add more segments beyond the minimum just noted, but consider a reduction if the total exceeds ten segments.
The information you should include in segment reporting includes:
- The factors used to identify reportable segments
- The types of products and services sold by each segment
- The basis of organization (such as being organized around a geographic region, product line, and so forth)
- Interest expense
- Depreciation and amortization
- Material expense items
- Equity method interests in other entities
- Income tax expense or income
- Other material non-cash items
- Profit or loss
The segment reporting requirements under International Financial Reporting Standards are essentially identical to the requirements just noted under GAAP.