Intersegment Sales

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.

Key Takeaways

  • 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.
  • Companies with different divisions and business operations commonly 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.

A company will usually engage in intersegment sales as a way to quickly source the products or services they require. Since the product or service already exists within the company, procurement is often simple and can have additional benefits, such as the company trusting their supplier (themselves) as well as saving any upcharge a third party may add to the transaction in order to turn a profit.

Another benefit of intersegment sales is that a company may notice delivery issues that otherwise would have been received by another company or customer. Having the ability to "audit" your deliverables while receiving the benefit can be extremely useful.

Disclosing Intersegment 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 based on this information.

IAS 14 "Segment Reporting" was superseded by IFRS 8 "Operating Segments," taking effect from the annual period on or after Jan. 1, 2009.

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 2020 fiscal year, the company recorded Downstream segment sales of $140.89 billion, $27.4 billion of which was intersegment revenue. These intersegment sales, one can assume, were to the Chemical segment, which used the products from the Downstream division 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 a significant cost-benefit.

Exxon Mobil controls the means of production as well as product delivery. They will have a much deeper understanding of their own structures and as such, due to intersegment sales, they are able to refine the process from exploration to a finished product in the most streamlined and cost-efficient way possible.

What Is Segment Revenue?

Segment revenue is the revenue of an individual portion, or segment, of a company. For example, a paper company will have several different segments such as mill operation, forest land holdings, paper pulp production, and others. Each segment that makes revenue individually is reported in a separate section of a company's financial report.

Is Segment Reporting Mandatory?

Segment reporting is mandatory but some companies will choose to include their intersegment sales or revenues in the gross profits of that particular segment.

What Is Not Included in Segment Reporting?

There are certain items that are only required to be reported under certain circumstances, such as interest and dividend income gain. These are not included unless the company is a financial segment. Segment expenses do not include loss on sales of investments, debt extinguishments, income taxes, and general corporate administrative expenses that relate to the entity as a whole.

What Are the 4 Types of Market Segmentation?

The four types of market segmentation are geographic, demographic, psychographic, and behavior by benefit, use, or response. Companies segment markets in these ways in order to extend their market research to better identify those target groups the company will tailor its products and branding to.

The Bottom Line

Intersegment sales can be an excellent way for a company to control costs while supplying itself with a necessary product or service. There is a multitude of benefits to this approach and companies use it often to increase profit margins and revenues. The disclosure of intersegment sales is necessary to ensure comprehensive and accurate accounting.

Article Sources

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  1. IAS Plus. "IAS 14 Segment Reporting."

  2. ExxonMobil. "2020 Annual Report."

  3. IAS Plus. "IAS 14 Segment Reporting."

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