tion must be supplied based on products and services, the geographic areas in which
the company operates, and major customers. The objective of the standard is to pro-
vide information about the different types of business activities of an enterprise to
help users of financial statements:
- Better understand the enterprise’s performance
- Better assess its prospects for future net cash flows
- Make more informed judgments about the enterprise as a whole
Two important aspects of the new standard include: (1) how management chooses
to disaggregate the company into operating segments and (2) the items of informa-
tion that are required to be disclosed for each operating segment.
(b) Operating Segments. An operating segment is defined by the FASB as a com-
ponent of an enterprise:
- That engages in business activities from which it earns revenues and incurs ex-
penses. - Whose operating results are regularly reviewed by the enterprise’s chief operat-
ing decision maker to assess the performance of the individual segment and
make decisions about resources to be allocated to the segment. - For which discrete financial information is available that is generated by or
based on the internal financial reporting system.
Two or more operating segments may be aggregated into a single operating seg-
ment if aggregation is consistent with the objective and basic principles set forth in
SFAS 131, the segments have similar economic characteristics, and the segments are
similar in each of the following areas:
- The nature of the products and services
- The nature of the production process
- The type or class of customer for their products and services
- The methods used to distribute their products or provide their services
- If applicable, the nature of the regulatory environment
Separate information must be reported for any operating segment that meets any
one of the following quantitative thresholds:
- Its reported revenue is 10% or more of the combined revenue of all other re-
portable segments. - The absolute amount of its reported profit or loss is 10% or more of the greater,
in absolute amount, of (1) the combined reported profit of all operating seg-
ments that did not report a loss or (2) the combined reported loss of all operat-
ing segments that did not report a loss. - Its assets are 10% or more of the combined assets of all operating segments.
Information about operating segments that do not meet any of the above thresh-22.3 SEGMENTAL STANDARDS IN THE UNITED STATES 22 • 7