What Are Intersegment Sales?
Intersegment sales are the transfer or exchange of goods for monetary compensation from one segment of a company to another within the same company. Intersegment sales exist when a corporation has multiple segments or divisions, and product sales occur between these segments. Disclosures of intersegment sales are typically included in the notes to the financial statements.
- Intersegment sales are the transfer or exchange of goods for monetary compensation between one segment of a company to another segment within the same company.
- Large companies with many different divisions and business operations experience intersegment sales.
- A typical intersegment sale would be the sale of raw materials from one division to create the products that another division sells to the market.
- Intersegment sales need to be disclosed in a company's financial statements.
- The reporting of intersegment sales helps bring clarity to internal operational processes as well as for allowing management to make operational decisions.
Understanding Intersegment Sales
According to International Accounting Standards (IAS) 14, a segment is "a component of an entity that (a) provides a single product or service or a group of related products and services and (b) that is subject to risks and returns that are different from those of other business segments."
Intersegment sales occur when one segment sources products or materials from another unit of the company instead of purchasing them from a third party. If such sales transactions of an entity represent 10% or more of total sales, IAS 14 requires a breakdown of segment sales.
When segment A sells to segment B, segment A books those revenues. In a typical segment sales note, segment A's total revenues, inclusive of revenues from segment B, are displayed on top, then intersegment sales (to B or other units of the company) are deducted to arrive at a net sales figure for the segment. Some companies will disclose gross segment revenues and intersegment revenues without netting them out for the reader of the financial statements.
The disclosure of intersegment sales benefits the operational processes of a company. Reporting intersegment sales allows for financial clarity of each business division as well as shedding light on how internal operations work and the reliance of one business division on another. The reporting of intersegment sales also shows the proportion of revenues being generated internally and externally and allows management to make certain business decisions off of this information.
Real World Example
Exxon Mobil Corporation (XOM) operates three main segments: Upstream, Downstream, and Chemical. The Upstream division explores and produces crude oil and natural gas; the Downstream unit manufactures and markets petroleum products, and the Chemical segment makes and sells petrochemicals.
In its 2016 fiscal year, the company recorded Downstream segment sales of $172 billion, $31 billion of which were intersegment sales. These intersegment sales, one can assume, were to the Chemical segment, which used Downstream's products as raw materials for the manufacturing of petrochemical products. The Chemical segment chose to purchase raw materials from within the company rather than from an external party, most likely at some cost-benefit.