What Are the Segment Reporting Requirements?

Segment reporting is the disclosure of financial information for a company’s distinct operational units. This practice is required for publicly traded companies under U.S. Generally Accepted Accounting Principles (GAAP) and provides investors with a deeper view into the business activities that generate revenue. The purpose is to allow financial statement users to see the company through the eyes of its management. By breaking down consolidated data, analysts can evaluate the growth potential and risk profile of each business line to better forecast future cash flows.

Identifying Operating Segments

The identification of operating segments is guided by the “management approach,” which aligns external reporting with the company’s internal organizational structure per Accounting Standards Codification (ASC) Topic 280. An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, including transactions with other components of the same company.

A component qualifies as an operating segment if its operating results are regularly reviewed by the company’s chief operating decision maker (CODM) to allocate resources and assess performance. Additionally, discrete financial information must be available for the segment.

The chief operating decision maker (CODM) is a function that identifies who within the organization is responsible for strategic decision-making regarding the segments. This role could be filled by the chief executive officer, a committee of executives, or even the board of directors. Companies are also required to disclose the title and position of the CODM.

Applying Quantitative Thresholds

Once management identifies its operating segments based on the internal reporting structure, it must determine which of these segments are significant enough to require separate disclosure. This determination is made by applying a series of quantitative tests. An operating segment is considered reportable if it meets any one of three 10% thresholds outlined in ASC 280. These tests ensure that the disclosed segments are substantial contributors to the company’s overall financial results.

The first test is the revenue test, where a segment is reportable if its reported revenue, including both sales to external customers and intersegment sales, is 10% or more of the combined revenue of all operating segments. The second is the profit or loss test; a segment is reportable if the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of the combined reported profit of all segments that did not report a loss or the combined reported loss of all segments that did report a loss. The third is the asset test, which designates a segment as reportable if its assets are 10% or more of the combined assets of all operating segments.

For example, imagine a company has four operating segments. To apply the profit test, it would first sum the profits of the profitable segments and, separately, the losses of the unprofitable ones. If the total profit is $200,000 and the total loss is $50,000, the 10% threshold would be based on the larger absolute value, which is $200,000. Any segment with a profit or loss exceeding $20,000 (10% of $200,000) would be a reportable segment.

After applying the 10% tests, companies must perform one final check known as the 75% revenue test. The external revenues of all separately reported segments must total at least 75% of the company’s total consolidated revenue. If this threshold is not met, the company must identify and disclose additional operating segments, even if they did not meet the 10% tests, until the 75% level is reached. Companies may also aggregate two or more operating segments into a single reportable segment if they have similar economic characteristics and are similar in areas such as the nature of products, production processes, and customer types.

Required Segment Disclosures

For each reportable segment, a company must disclose several specific pieces of financial information for both annual and interim financial statements. The reconciliation must bridge the total of the reportable segments’ measures of profit or loss to the company’s consolidated income before taxes.

Required disclosures include:

• A measure of profit or loss and total assets.
• Revenues from external customers and revenues from transactions with the company’s other segments, known as intersegment revenues.
• Significant segment expenses that are regularly provided to the CODM.
• A disclosure for an “other segment items” category.
• Interest revenue, interest expense, and depreciation, depletion, and amortization expense.

Entity-Wide Disclosure Requirements

Beyond the information for individual segments, accounting standards mandate certain disclosures that apply to the entire entity. These entity-wide disclosures are required for all public companies, even those that operate as a single reportable segment, and provide context about the company’s operations.

Information About Products and Services

A company must report the revenues from external customers for each product and service or each group of similar products and services. If providing this information is impracticable, the company must disclose that fact. This helps investors understand the sources of a company’s revenue streams.

Information About Geographic Areas

Companies must disclose revenues from external customers attributed to the company’s country of domicile and to all foreign countries in total. If revenues from an individual foreign country are material, those revenues should be disclosed separately. A similar disclosure is required for long-lived assets, separating assets in the home country from those in foreign countries.

Information About Major Customers

If a company generates 10% or more of its total revenues from a single external customer, it must disclose that fact. The company must also report the total amount of revenues from each such customer and the identity of the segment or segments reporting the revenues. The name of the major customer does not need to be disclosed.