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Segment reporting is the practice of breaking down accounts in an annual report to detail activity in particulars section of a business. In many countries, accounting rules mean this must be done where a business can clearly identify sections of a certain size. The idea is to give investors a better insight into the way a company is being run and any potential problem areas.
Most countries which have such rules do so under International Financial Reporting Standards. These are rules and principles agreed by international bodies with the aim of making it easier to compare the performance of companies in different countries. The rules on segment reporting appear in IFRS statement number 8, first issued in 2006 and updated at several points since. In the United States, these rules build upon and replace previous domestic rules known as Statement of Financial Accounting Standards number 131.
Under IFRS 8, there are three situations in which a business segment must be detailed in accounts. The first is if it makes up 10% of more of the company's total revenue. The second is if its operating profit makes up 10% or more of the company's total operating profit; this does not include general company expenses which can't be accurately allocated to a particular area of the business. The third situation is if the segment's assets make up 10% or more of the business' total assets.
There are some limitations on these segment reporting requirements. One is that a company should generally only detail up to 10 different segments in its annual report, even in the rare situation where more than 10 segments meet the qualifying limits. In this situation, the 10 largest segments overall should be listed.
Another rule is that all the segments which are listed should combine to make up at least 75% of a company's total revenue. If this isn't the case, more segments must be detailed, even if they wouldn't normally qualify. Segment reporting isn't needed if a company gets at least 90% of its revenue from a single area of business which can't be divided. There is also a rule that once a segment is detailed, it should usually continue to be detailed in future years, even if it has dropped below the qualifying criteria.
For each segment which is detailed, a company should list all the major relevant factors. These can include government contracts, overseas business and major clients. The report should give enough detail that the segment's strengths and weaknesses can be assessed by investors.
I work at an accounting firm, and we do segment reporting for our clients all the time. Although segment reporting is designed to give shareholders insight to how the company is performing, I think that the main reason a company should do segment reporting is for self evaluation.
It is important for any business to know how its internal segments are operating. When it has this information, it can make the decisions necessary to further nurture its growth. Additionally, reporting can help the company decide which areas it needs to make improvements on, or cut altogether.
@john1478 - I can understand why you think segment reporting, or any other business legality, can become too tedious to handle. There are a lot of state and government regulations, and it can be a headache trying to deal with them all. However, I do not think that you should stunt the growth of your future business because you do not want to do detailed reporting.
I was once in your shoes. I started my business about fifteen years ago. Since then the types of services and the clients I serve have increased in value. You are absolutely right in thinking that with a bigger business comes bigger legal responsibilities. Thankfully, I do not have to handle these things on
When it comes time to do my annual segment reporting, I just higher an accounting firm to do it for me. That way, I can keep my focus on the operations of my company, while still complying to legal regulations. Every year, it seems as if either the number of segments my company, or the money made by the existing segments, is growing.
You should not hinder your growth because you are afraid of growing legal matters. There is help out there for dealing with that. Just focus on your company and everything else will fall into place.
Reading this article makes me realize that the more a business expands, the more complicated book keeping and recording becomes. I had no idea what segment reporting was until I stumbled across this article. I am an aspiring entrepreneur, so I am doing some online research to see what it takes to run a business.
There are so many rules in regards to segment reporting. I do not pay that much close attention to detail. So, if my business ever got big enough to need to be segmented, I am sure I would be out of compliance when it came to proper reporting.
Maybe I should just keep my business small. The fewer things I have to deal with, the better. I would rather spend my time perfecting my services for my customers.
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