Segment Reporting Explained

Businesses often have operations with distinctly different purposes - they may target different markets, in terms of customers, products, or services. Each operational segment generally has assets, liabilities, earnings and expenses that are specific to the operation. For example, a company might engage in business-to-business and business-to-consumer enterprises. Operations for each market are likely to have significant differences; a computer manufacturer, for example, will not target consumers with marketing efforts for servers and server racks, but it will target consumers with marketing efforts for personal computers. Each portion of the enterprise will need different assets (such as specialized manufacturing equipment) and will incur expenses specific to the operation (such as the purchase of parts and targeted marketing efforts).

Management will need to know financial information about how each operating segment is performing, so companies generally collect this information for their own purposes. Naturally, investors are interested in this information, too; companies may not be terribly motivated to reveal this information, however, because the aggregated picture can help to hide poor performance in one operating segment. Additionally, competitors can use this information to mount more aggressive marketing efforts in an area where the company is already weak, forcing it out of a market where it may have otherwise turned an eventual profit.

Disclosure tends to win the battle in financial reporting, and both the SEC and the FASB have been involved in directing the reporting requirements for segments ("Segment Reporting," n.d.). SFAS 14 initially defined five salient reporting areas: industry segment, reportable segment, revenue, operating profit or loss, and identifiable assets. Continued controversy prompted the issuance of SFAS 131, which expanded the definition of an operating segment for financial reporting purposes; essentially, if a segment is important for financial reporting purposes to management, it is important to disclose (Schroeder, Clark, and Cathey, 2005).

References

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial accounting theory and analysis (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.

Segment reporting. (n.d.) Retrieved January 21, 2009, from the Lawyer Links Topic-Driven Database: http://www.lawyerlinks.com/.