Segment reporting
A company improves the financial analysis information on risk and return by presenting disaggregated financial information about its operating segments. A company should provide should provide disaggregated information on segments if they are critical drivers of the company’s risks and opportunities.
The information reported should be based on the way in which a company uses the information for internal reporting to operate its business. The most useful segment information for investors is based upon economic and operating characteristics, rather than legal structure.
In light of the need for operating segment information, a company requires financial statements that that include certain disaggregated information about its operations.
A company’s financial statements might be disaggregated in a number of ways, such as by products, and services, geography, legal entity, or type of customer. The way a company identifies it operating segments for financial reporting is through the use of the management approach. The management approach is based on the way a company’s management organises the company’s segments for making operating decisions and for assessing performance. Thus, an operating segment is a component of a company:
- that engages in business activities that earn revenues and incur expenses.
- Whose operating results are regularly reviewed by the company’s chief operating officer to make decisions about allocating resources to the segment and assessing its performance, and
- for which financial information is available.
A company does not have to provide financial information about all its operating segments, however. Materiality determines whether or not a segment is a reportable segment – one whose operations are significant enough that its financial activities must be reported
