Reportable Segment

Reportable Segment Business Segment Segmental Reporting Financial Reporting Accounting Standards Disclosure Requirements
A business segment for which information is required to be disclosed in financial reports, as dictated by accounting standards and regulations.
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Reportable Segment

A reportable segment is a distinguishable component of a company that engages in business activities from which it may earn revenues and incur expenses. These segments’ individual financial information is disclosed separately in the company’s financial reports to provide clarity and detailed insight to investors, analysts, and regulators.

Characteristics of Reportable Segments

  1. Engages in Business Activities: These segments have revenue and expense-generating activities.
  2. Performance Evaluation: They regularly have their results assessed by the company’s chief operating decision maker to decide on future operations.
  3. Financial Information Availability: Discrete financial information is available for these segments.
  4. Meets Size Thresholds: Typically, it meets specified quantitative thresholds defined by standards such as IFRS 8 or US GAAP (ASC 280).

Examples

  1. A Manufacturing Company:
    • Automotive Segment: Involves designing, manufacturing, and selling vehicles.
    • Aerospace Segment: Focuses on manufacturing parts and systems for aircraft.
  2. Technology Corporation:
    • Consumer Electronics Segment: Engages in the production and sale of smartphones, tablets, and laptops.
    • Software Solutions Segment: Develops and markets enterprise software products.

Frequently Asked Questions

Q: Why is segment reporting important?

A: Segment reporting provides a detailed breakdown of a company’s performance, allowing stakeholders to understand where revenue is generated and which operations are most profitable.

Q: What determines a reportable segment?

A: A segment is deemed reportable if its revenues, profits, or assets meet specific thresholds outlined by applicable financial reporting standards.

Q: What are the main financial standards covering segment reporting?

A: Key standards include IFRS 8 “Operating Segments” and ASC 280 “Segment Reporting” under US GAAP.

Q: How does a company determine the profitability of each segment?

A: Profitability is assessed by dissecting revenues and expenses directly attributable to each segment, including relevant financial data.

  • Business Segment: A unique subset within a company having identifiable income and expenditure, central to determining reportable segments.
  • Segmental Reporting: The disclosure of financial and operational information by business segments within a company’s financial statements.
  • Chief Operating Decision Maker (CODM): The individual or group responsible for allocating resources to, and assessing the performance of, the many segments of a business.

Online References

Suggested Books for Further Reading

  1. “Financial Accounting, IFRS Edition” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
  2. “Segment Reporting Under IFRS and US GAAP” by Peter Olsson

Accounting Basics: “Reportable Segment” Fundamentals Quiz

### What is the primary reason companies are required to disclose information about reportable segments? - [x] To provide clear and detailed insights into financially distinguishable elements of the business. - [ ] To ensure competition among different business activities within the company. - [ ] To allocate greater resources to less profitable segments. - [ ] To make it mandatory for companies to run in a single segment. > **Explanation:** The primary reason for segment reporting is to give stakeholders insight into the financially distinguishable parts of a business, enhancing the understanding of a company's performance. ### Which standard is predominantly used under US GAAP for segment reporting? - [ ] IFRS 8 - [x] ASC 280 - [ ] ASC 605 - [ ] GAAP 101 > **Explanation:** ASC 280 (Segment Reporting) is primarily used under US GAAP for guiding and defining requirements for segment reporting. ### What quantitative thresholds typically define a reportable segment? - [x] Revenues, profit, or assets meeting certain predefined thresholds. - [ ] Market share or geographic coverage. - [ ] Number of employees or production facilities. - [ ] Age of the segment or legacy operations. > **Explanation:** Reportable segments are defined by revenues, profit, or assets that meet specific predefined thresholds set by financial reporting standards. ### According to IFRS, which standard is relevant for operating segments? - [ ] IFRS 7 - [x] IFRS 8 - [ ] IFRS 9 - [ ] IFRS 15 > **Explanation:** IFRS 8 (Operating Segments) is the relevant standard for the reporting of operating segments under international financial reporting standards. ### What role does the Chief Operating Decision Maker (CODM) play in segment reporting? - [ ] Setting price policies - [ ] Ensuring legal compliance - [x] Allocating resources and assessing performance of segments - [ ] Managing human resources > **Explanation:** The CODM is responsible for allocating resources to segments and assessing their performance, which is a cornerstone of identifying and managing reportable segments. ### Which of the following is a characteristic of a reportable segment? - [ ] Primarily driven by non-business activities - [x] Engages in revenue and expense generating activities - [ ] Must operate internationally - [ ] Owned by a subsidiary > **Explanation:** A reportable segment engages in revenue and expense-generating activities that distinguish it financially from other parts of the organization. ### Where is detailed segment information commonly found in a company's financial report? - [x] Notes to the financial statements - [ ] Executive summary - [ ] Statement of cash flows - [ ] Auditor’s report > **Explanation:** Detailed segment information is commonly disclosed in the notes to the financial statements, providing further breakdowns beyond primary statements. ### How does segmental reporting impact investment decisions? - [ ] It standardizes all segments’ outputs. - [ ] It limits shareholder access to divisional performance. - [ ] It anonymizes division profits. - [x] It provides detailed performance insights aiding investment decisions. > **Explanation:** Segmental reporting offers detailed insights into individual segments, assisting investors in making well-informed decisions. ### What is an example of a non-reportable segment? - [ ] A significant new product line - [x] A minor R&D project not meeting threshold criteria - [ ] International sales department - [ ] Key geographic region with considerable revenue > **Explanation:** A minor R&D project that does not meet revenue, profit, or asset thresholds typically is considered a non-reportable segment. ### What primary attribute of a business segment makes it reportable? - [ ] Its historical legacy within the company - [ ] Its geographical location - [x] Being evaluated separately for performance and having available financial data - [ ] High level of executive interaction > **Explanation:** A reportable segment is primarily characterized by being regularly evaluated separately based on its performance, and availability of its specific financial information.

Thank you for delving into the intricacies of reportable segments in accounting and taking part in our informative quiz! Keep advancing your accounting acumen!

Tuesday, August 6, 2024
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