What Is Business Segment Reporting?
Business segment reporting breaks out a company's financial data by company divisions, subsidiaries, or other kinds of business segments. In an annual report, business segment reporting provides an accurate picture of a public company's performance to its shareholders. Management uses business segment reporting to evaluate the income, expenses, assets, and liabilities of each business division to assess its general health—including profitability and potential pitfalls.
Understanding Business Segment Reporting
A segment is a component of a business that generates its own revenues and creates its own product, product lines, or service offerings. In general, if a unit of a business can be lifted out of the larger company and remain a self-sufficient entity, then it may be classified as a business segment.
The Financial Accounting Standards Board (FASB) sets the accounting standards for business segment reporting. FASB Accounting Standards Codification (ASC) 280-10-10-1 requires that all segments of a company's business align with the company's reporting structure. A company does not need to report all of its business segments, however. According to U.S. Generally Accepted Accounting Principles (GAAP), public companies must report a segment if it accounts for 10% of total revenues, 10% of total profits, or 10% of total assets. International standards differ somewhat.
- Business segment reporting breaks out a public company's financial data by company divisions, subsidiaries, or other kinds of business segments.
- The Financial Accounting Standards Board (FASB) sets the accounting standards for business segment reporting.
- Business segment reporting offers a complete picture of a company's operations for shareholders, upper management, and investors—which can be important for their decision-making.
The Importance of Business Segment Reporting
For Shareholders and Management
Segment reporting can help a company's shareholders gain a complete picture of the firm's operations. Segment reporting adds a detailed perspective that is critical for upper management's decision-making.
Segment reporting provides information about the different types of business activities in which a public company engages and the different economic environments in which it operates. This information helps investors to
- better understand and evaluate a company's performance,
- assess its prospects for future net cash flows,
- understand the business as a whole,
- make more informed judgments about the company, and
- make clearer decisions about their investments.
Business segment reporting generally appears as a series of footnotes to a company's financial statements. Investors and other financial statement users view the segment footnote as very important to their investment decisions.
Example of Business Segment Reporting
Most large banks are comprised of multiple divisions based on their various business functions. As an example, say a bank has three divisions: consumer lending, commercial lending, and credit cards. When compiling the bank's financial statements, its financial officer would be required to separate all three of these divisions in terms of their income items as well as the assets listed on the balance sheet.
After breaking them out, the officer then would combine all of the divisions into a large income statement and balance sheet. This results in a set of consolidated financials, which is easier to read. However, if an investor wanted to read deeper into the numbers provided, then they would be able to see which business segments were most successful. If the bank had operations in both North America and Latin America, it might report on those separately as well.