The shift for a company from the private to the public sector brings numerous challenges. One of those includes creating accountability reports for various existing company segments, of which financial reporting is among the most popular.
Therefore, segment reporting is essential, especially for public companies. Many chartered accountant exams, like the ACCA exam, have included segment reporting in their curriculum to promote its real-life implications. Let's dive into this article to learn about segment reporting in detail!
What is Segment Reporting?
The procedure of generating reports for various operations segments of an organisation is termed Segment Reporting. This reporting also creates and discloses a company's entire financial statements. Segment Reporting is mostly required by public sector companies rather than private sector companies.
Creditors and investors wholly rely on a Segment Report as it provides them with authentic finance results and conditions of various working segments within a company. This reporting system is generally used to compute a company's assets, liabilities, expenditures and revenue. It also assists the managing team in evaluating the future profitability of the company as well as its pitfalls.
Why is Segment Reporting Essential for a Business?
Segment Reporting is essential for businesses and stakeholders as it helps to comprehend the company's total gain, revenue, and operation. It assists the management team to take better decisions for the benefit of the company's future.
Investors also receive advantages from segment reporting as they can get accurate details about the various activities of a business in which it is indulged and its economic status in which they are performing. This information allows an investor to understand the following elements:
- The performance and economic position of a company.
- This report assists them in making better decisions and making profitable investments.
- Investors can easily predict the future net cash flow of the company with the help of Segment Reporting.
Segment Reporting allows investors to see a wider and more vivid scenario before investing in the company.
Basic Rules that Are Followed While Generating a Segment Report for Business
The basic rules to generate a Segment Report have been enumerated below:
- To evaluate the final report, a company can calculate the average of two or more segments offering similar services or products. This also applies to segments with similar distribution procedures, working environments and customers.
- Those segments are eligible for a segment report if it contributes 10% of the entire revenue, profit, and loss of the company.
- Until and unless the selected segments for generating the segment report contribute 75% of the company's entire revenue, the report cannot be computed. If the percentage is less than 75%, more segments must be added.
- One of the most important rules while evaluating a segment report is that a company should try to incorporate not more than ten segments. If it crosses more than ten segments, then it must be curtailed.
What is the Essential information that is attached to a Business Segment Reporting?
There is a lot of information that is available within a company. However, all of this information is not required while determining a segment report. Here is a list of information that must be included in a segment report:
- Total revenue of a company
- The types of derivatives and services that are offered by various segments
- The geographic location of the company
- Material and interest expenditures
- Profit and loss of the company
- Total tax paid by the company
- Material non-cash items
Real-life Illustration of Segment Reporting
Bank is a perfect example of a public business which comprises multiple segments. The three main segments of a bank are commercial lending, consumer lending, and credit card section. Therefore, while evaluating the annual financial statement, the officers have to compute the three segments of the bank separately.
The balance sheet thus will contain three various incomes and assets data. After segregating the three segments, the officers integrate all three segments into a larger balance sheet and income statement. The outcome of the final and combined income statement will make things easier and more comprehensive.
An individual can easily identify which segment within the bank has performed profitably. Many banks in various Nations have already adopted Segment Reporting.
Limitation of Segment Reporting
There are many positive aspects of conducting Segment Reporting. However, there are certain limitations as well. These have been discussed down:
- Segment Reporting is time-consuming as a company must disclose confidential information.
- Sometimes the data from the report can be misinterpreted by the stakeholders because of its vastness.
- There are various techniques for evaluating a report. It depends upon the company and the method they are willing to choose. This can be tedious work.
- Finally, the computation of the report is time-consuming and not economical.
If an individual is willing to commence a career as a Chartered Accountant, they must know how to create a Segment Reporting. To learn this, one can enrol in an online programme for Certified Chartered Accountants. Imarticus Learning has brought the ACCA course online for individuals who wish to follow this path.
This course is globally recognised and is one of the oldest CA programmes. In this course, well-trained teachers will teach and provide comprehensive study materials. An individual will be able to learn all the required knowledge and skills.
The ACCA course has also guaranteed placement to every individual who has enrolled. So without any further delay, enrol yourself in this course to bag lucrative opportunities.