Segment Reporting or analysis is very crucial, since business organizations have grown more complicated over time and the conglomerate business model is becoming more commonplace and streamlined. It is now necessary to admit that financial statements that show the complete range of operations within an organization have seen a significant decline in their value.
Meaning of Segment Reporting
Segment reporting is the publication of information regarding an organization’s operations in different sectors, its foreign operations, export sales, and its most important customers. Reporting on every aspect of the enterprise has grown to be an essential requirement in recent times to inform users of financial statements of the operational performance of every segment of the company for better analysis and understanding of the business’s performance as well as its interpretation in different and varied actions.
Although it is possible to determine the total financial health of the company by utilizing financial statements, it takes a lot of work to assess managerial strategies for financial and operational management, specifically with respect to their focus on specific segments of the business. This is the reason that segment reporting has been emphasized. The purpose of reporting information through sections is to supply readers in financial reports with details about the size, profitability, contribution, and growth trends of various industries and geographic regions in which the business operates, allowing them to make better-informed judgments about the company in general.
Objectives of Segment Reporting
The purpose of the Standard is to set the guidelines for reporting financial information concerning various. Kinds of services and products that an enterprise offers and the different geographical regions in the regions in which the company is located. This information is helpful to those who use financial statements to:
- Be aware of the efficiency of the company.
- Make sure you are aware of the risk and return of the company.
- Make better-informed judgments on the business in general.
Many companies offer various services and products or operate in geographic areas with multiple profitability rates, the potential for growth, future perspectives, and risk. Information on the various types of services and products of an organization and its activities across different geographic areas commonly referred to as segment information – is essential to evaluate the potential risks and benefits of a multi-location or diversified company.
Thus, the reporting of segment data is widely believed to be necessary to meet the requirements of those who use financial statements. Still, it is not determined from aggregated data.
Segment Reporting Users in Segment Reports
They are interested in educating them with reporting segments on risk, profitability growth, and return across various segments. This aids investors in evaluating the future potential of the business.
Employees are interested in the perspective of wage negotiations and the security of their jobs. They are focused on the success of various services and products and diverse geographical locales. Also, it helps assess the potential future of the company.
3) Internal Management
Management wants to assess the performance of each product to determine its profitability. They use segment reporting to aid in making decisions. Additionally, performance based on geographical location is considered. Based on the results, the management determines whether to maintain or discontinue the product.
4) Government Agencies
At the country and world levels, people are more concerned about an organization’s product-wise and geographical-area-wise performance, quality, quantity, and balance of payment.
5) Customer Satisfaction
Customers Are fascinated by the quality, availability, and accessibility of goods at an affordable price to purchase and use.
What Terms are Used in Segment Reporting?
These terms are utilized within this Standard with specific meanings:
1) Business Segment
It is a distinct element of an enterprise that provides the product or service or a collection of related services or products. It is susceptible to risks and returns that differ from various business areas. The factors to be considered when determining whether the products or services are linked include:
- What is the nature and purpose of the product or the nature of the services or products?
- What is the nature of manufacturing methods:
- The kind or class of the customers who purchase the product or services:
- The technique used to sell the product or to provide the services
- If relevant, what is the regulatory framework, e.g., banking insurance, public utilities?
2) Geographical Segment
It is a distinct element of an enterprise that is involved in providing services or products in a specific economic area and is exposed to risk and returns that differ from the components that operate in different economic contexts. It is very crucial in segment reporting. The factors to be taken into consideration in determining geographic segments include:
- The similarity between political and economic conditions.
- Interactions between operations within other geographical regions.
- The proximity of operations.
- Risks specific to activities in a particular region.
- Exchange control regulations.
- The currency of the underlying is at risk.
3) Reportable Segment
It’s an industry or geographical segment identified based on the above definitions that require segment-specific information to be disclosed under this Standard.
4) Enterprise Revenue
The revenue generated from sales to customers outside of the company is reported in the report of profits and losses. Enterprise revenue plays important role in segment reporting.
5) Segment Revenue
This is the summation of the following:
- The percentage of the enterprise revenue directly attributable to a specific segment.
- The appropriate amount of revenue from the enterprise can be allocated on a proper basis to a particular segment.
- The income is generated from other divisions of the company.
6) Segment Expenses
This is the summation of the following:
- The expense that results from the operating segment and the activities of a piece directly relate to the areas.
- Part of the enterprise’s expense can be assigned reasonably to the segment, including expenses related to transactions involving other business divisions.
Segment Expenses do not include:
These are some factors that are not used in segment reporting:
- Extraordinary items as defined by AS 5, net profit or loss for the prior period items, and changes to accounting policies.
- Interest expense includes interest on advances and credit from another segment if the activities carried out by the segment are mainly focused on financial matters.
- Loss from the sale of investments or losses from the cancellation of debt unless the activities for the sector are predominantly economic.
- Income tax expense.
7) Segment Result
This is segment’s revenue defines the segment cost and it is very important in segment reporting.
8) Segment Assets
They are the operating assets utilized by a segment during its operational activities and can be directly attributed to the segment or could be assigned by the division on an acceptable basis.
9) Segment Liabilities
These are operating liabilities that arise from the operating actions of a segment and are either directly related to the segment or may be assigned reasonably. If the results of a segment comprise interest expenses, the segment’s liabilities comprise the associated interest-bearing obligations. Segment liabilities do not include income tax liabilities.
10) Segment Accounting Policies
This is the set of accounting rules used to prepare and present an accounting statement for a company and the accounting practices that are specific to segment reports. Segment Accounting Policies is also related to segment reporting.
What is Meant by Segment Reporting?
Segment reporting is financial reporting that shows information about a company’s different business segments. This information is typically broken down into revenue, expenses, assets, and liabilities. Segment reporting can help identify opportunities for operational improvement by providing more granular information about company performance.
What are the Objectives of Segment Reporting?
1. To provide meaningful information to different groups of users.
2. Compare the performance of different parts of the business.
3. Enable the identification of areas of risk within the business.
4. Identify the most profitable parts of the business.