What Is the Total Revenue Test for Segment Reporting?

The total revenue test is a quantitative threshold used in financial accounting to determine if a business segment is significant enough to require separate disclosure in a company’s financial statements. Its purpose is to provide investors and other stakeholders with a more detailed view of a company’s distinct operations, helping them understand performance and assess future cash flows. This requirement, outlined in U.S. Generally Accepted Accounting Principles (GAAP) under Accounting Standards Codification (ASC) 280, ensures financial reports offer a transparent look at the different business activities. Recent updates to the standard have expanded these requirements, mandating more detailed public disclosures for each reportable segment to provide investors with deeper insights into segment expenses and overall performance.

Components of Revenue for the Test

The test considers the total revenue of an operating segment, which is composed of two distinct types of sales. The first component is revenue from sales to external customers, representing income generated from selling goods or services to third parties. The second component is intersegment sales or transfers, which are transactions that occur between a company’s different operating segments.

For example, if a manufacturing division produces a component and sells it to the company’s assembly division, that internal sale is recorded as intersegment revenue. Even though this transaction is eliminated from the company’s final consolidated financial statements, it is a fundamental part of the segment reporting analysis. Since a company’s chief operating decision maker (CODM) regularly reviews the total performance of a segment, including its internal sales activity, the test is designed to mirror that internal viewpoint.

Applying the 10 Percent Revenue Test

The application of the 10 percent revenue test is a methodical process to identify significant operating segments.

• Calculate the total combined revenue of all operating segments within the company. This is accomplished by summing the total revenues—both external and intersegment—for every operating segment before any corporate-level eliminations are made.
• Determine the 10 percent threshold. This is a direct calculation where the total combined revenue figure is multiplied by 10 percent, and the resulting number becomes the benchmark for measurement.
• Compare each individual segment’s total revenue to this benchmark. A segment’s total revenue is the sum of its sales to external customers and its intersegment sales.
• Identify any operating segment whose total revenue equals or exceeds the 10 percent threshold as a reportable segment.

For instance, if a company’s combined segment revenues are $50 million, the threshold would be $5 million. A segment with $4 million in external sales and $1.5 million in intersegment sales, for a total of $5.5 million, would meet the criteria and must be separately disclosed in the financial statements.

Role in Overall Segment Analysis

The 10 percent revenue test does not operate in isolation; it is one of three quantitative tests used to identify reportable segments. An operating segment only needs to meet the criteria of one of these three tests to require separate disclosure, ensuring that segments significant in ways other than revenue are also captured.

A second test is the 10 percent profit or loss test. This assessment compares the absolute amount of a segment’s reported profit or loss to 10 percent of the greater of two figures: the combined profit of all segments that did not report a loss, or the combined absolute loss of all segments that did report a loss. This test identifies segments that have a substantial impact on the company’s overall profitability.

The third quantitative measure is the 10 percent asset test. Under this test, a segment’s assets are compared to 10 percent of the combined assets of all operating segments. This is particularly relevant for capital-intensive industries where a segment might hold a significant portion of the company’s assets without necessarily generating proportional revenue or profit in a given period.

After applying these three 10 percent tests, there is an overarching requirement known as the 75 percent revenue test. The reportable segments identified must collectively account for at least 75 percent of the company’s total consolidated revenue from external customers. If the segments do not meet this threshold, the company must identify and disclose additional operating segments until the threshold is met.