3.1 Segment Reporting

AICPA CPA Exam — Financial Accounting & Reporting FAR

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1 Chapter 1: Conceptual Framework and Standard Setting

1.1 Conceptual Framework 1.2 Standard Setting and GAAP vs. IFRS 1.3 Special Purpose Frameworks

2 Chapter 2: Financial Statement Presentation

2.1 Balance Sheet and Income Statement 2.2 Statement of Cash Flows 2.3 Retained Earnings and Comprehensive Income

3 Chapter 3: Disclosure and Analysis

3.1 Segment Reporting 3.2 Interim Reporting and Disclosures 3.3 Financial Statement Analysis and Ratios

4 Chapter 4: Accounting Changes and Corrections

4.1 Accounting Changes 4.2 Error Corrections 4.3 Subsequent Events

5 Chapter 5: SEC Reporting Requirements

5.1 SEC Forms and Regulations 5.2 SEC Filing Deadlines and Large Accelerated Filers 5.3 SEC Disclosures and MD&A

6 Chapter 6: State and Local Governmental Accounting Foundations

6.1 Governmental Accounting Principles 6.2 Fund Accounting 6.3 Budgetary Accounting

7 Chapter 7: Governmental and Not-for-Profit Reporting

7.1 GASB 34 Government-Wide Financial Statements 7.2 Not-for-Profit Financial Reporting 7.3 Not-for-Profit Special Accounting

8 Chapter 8: Cash and Receivables

8.1 Cash and Cash Equivalents 8.2 Accounts Receivable and CECL 8.3 Notes Receivable and Factoring

9 Chapter 9: Inventory Management

9.1 Inventory Valuation and Cost Flows 9.2 Lower of Cost or Market (LCM) and Lower of Cost or Net Realizable Value (LCNRV) 9.3 Retail Inventory Method and Gross Profit Estimation

10 Chapter 10: Property, Plant, and Equipment

10.1 Acquisition and Depreciation of PP&E 10.2 Impairment and Disposal of PP&E 10.3 Asset Retirement Obligations (ARO)

11 Chapter 11: Investments and Financial Instruments

11.1 Debt Investments 11.2 Equity Investments and Equity Method 11.3 Fair Value Option and Disclosures

12 Chapter 12: Intangibles and Goodwill

12.1 Intangible Assets 12.2 Goodwill Impairment 12.3 Research and Development and Software Costs

13 Chapter 13: Liabilities and Debt Financing

13.1 Current Liabilities and Accruals 13.2 Bonds Payable and Debt Issuance 13.3 Debt Extinguishment and Convertible Debt

14 Chapter 14: Stockholders' Equity and EPS

14.1 Stockholders' Equity and Treasury Stock 14.2 Dividends and Retained Earnings 14.3 Earnings Per Share (EPS)

15 Chapter 15: Revenue Recognition

15.1 The ASC 606 Five-Step Revenue Recognition Model 15.2 Allocation and Satisfaction of Performance Obligations 15.3 Special Revenue Recognition Scenarios

16 Chapter 16: Leases

16.1 Lessee Accounting 16.2 Lessor Accounting 16.3 Special Lease Transactions

17 Chapter 17: Business Combinations and Consolidations

17.1 Business Combinations 17.2 Consolidated Financial Statements 17.3 Noncontrolling Interest and Variable Interest Entities (VIEs)

18 Chapter 18: Income Taxes

18.1 Deferred Taxes and ASC 740 18.2 Valuation Allowances and NOLs 18.3 Unrecognized Tax Benefits

19 Chapter 19: Compensation and Benefits

19.1 Pension Plans 19.2 Stock-Based Compensation 19.3 Other Postretirement Benefits (OPEB)

20 Chapter 20: Specialized Financial Topics

20.1 Derivatives and Hedging 20.2 Foreign Currency Transactions and Translation 20.3 Nonmonetary Exchanges and Restructuring

3.1 Segment Reporting

Key Takeaways Explain This Topic AI

Segment reporting under ASC 280 is required only for public business enterprises and uses the management approach.

An operating segment is reportable if it meets any of the three 10% tests: Revenue (including intersegment), Assets, or Profit/Loss.

The 75% external revenue test requires that reportable segments account for at least 75% of total consolidated external revenue.

ASU 2023-07 expanded segment disclosures to require public entities to disclose significant segment expenses and 'other segment items' quarterly.

Intersegment sales must be recorded internally but are fully eliminated at the consolidated level, including unrealized inventory profits.

Last updated: July 2026

Segment Reporting (ASC 280)

Segment reporting provides financial statement users with information about the different types of business activities in which an enterprise engages and the economic environments in which it operates. Under ASC 280 (Segment Reporting) , segment disclosures are required only for public business enterprises . Nonpublic (private) entities are exempt from these disclosure requirements, although they may choose to disclose them voluntarily.

The Management Approach

ASC 280 utilizes the management approach to identify reportable segments. This approach aligns segment reporting with the company's internal organizational structure. Operating segments are identified based on how management makes operating decisions and assesses performance. The key figure in this process is the Chief Operating Decision Maker (CODM) . The CODM is not necessarily a single individual (such as the CEO or COO); rather, it refers to a function within the entity that allocates resources and evaluates the performance of the operating segments.

Defining an Operating Segment

An operating segment is a component of a public business enterprise that meets all three of the following criteria:

It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise).

Its operating results are regularly reviewed by the enterprise's CODM to make decisions about resources to be allocated to the segment and assess its performance.

Discrete financial information is available (i.e., a separate balance sheet or income statement is compiled internally).

Notably, startup operations that have not yet earned revenues can still qualify as operating segments if they meet the remaining criteria. However, corporate headquarters or certain functional departments (like corporate HR or IT) that do not earn revenues or are only incidental to the utility of the company are not operating segments.

Quantitative Thresholds: The 10% Tests

An operating segment is considered a reportable segment and must disclose separate financial information if it meets any one of the following three quantitative thresholds:

1. The Revenue Test

Its reported revenue—including both external customer sales and intersegment sales or transfers —is 10% or more of the combined revenue (internal plus external) of all operating segments. Segment Revenue (External + Intersegment) ≥ 10 % × Combined Segments Revenue \text{Segment Revenue (External + Intersegment)} \ge 10\% \times \text{Combined Segments Revenue} Segment Revenue (External + Intersegment) ≥ 10% × Combined Segments Revenue

2. The Asset Test

Its assets are 10% or more of the combined assets of all operating segments. Segment Assets ≥ 10 % × Combined Segments Assets \text{Segment Assets} \ge 10\% \times \text{Combined Segments Assets} Segment Assets ≥ 10% × Combined Segments Assets

3. The Profit or Loss Test

The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute value, of:

The combined reported profit of all operating segments that did not report a loss.

The combined reported loss of all operating segments that did report a loss. Absolute Segment Profit or Loss ≥ 10 % × max ⁡ ( ∣ Combined Profits ∣ , ∣ Combined Losses ∣ ) \text{Absolute Segment Profit or Loss} \ge 10\% \times \max(|\text{Combined Profits}|, |\text{Combined Losses}|) Absolute Segment Profit or Loss ≥ 10% × max ( ∣ Combined Profits ∣ , ∣ Combined Losses ∣ )

The 75% External Revenue Test

Once reportable segments are identified using the 10% tests, the entity must apply the 75% external revenue test (also known as the 75% reporting threshold). The combined external (customer) revenue of all identified reportable segments must constitute at least 75% of total consolidated external revenue . ∑ External Revenue of Reportable Segments Total Consolidated External Revenue ≥ 75 % \frac{\sum \text{External Revenue of Reportable Segments}}{\text{Total Consolidated External Revenue}} \ge 75\% Total Consolidated External Revenue ∑ External Revenue of Reportable Segments ≥ 75%

If the reportable segments do not meet this 75% threshold, management must identify additional operating segments as reportable segments (even if they do not meet any of the 10% quantitative thresholds) until the 75% threshold is satisfied. Generally, ASC 280 suggests that if the number of reportable segments increases above 10 , the entity should consider whether segment information is becoming too detailed and consolidated tables are losing utility.

Aggregation Criteria

Operating segments that do not meet the 10% thresholds may be aggregated into a single reportable segment if they have similar economic characteristics and are similar in each of the following five areas:

The nature of the products and services.

The nature of the production processes.

The type or class of customer for their products and services.

The methods used to distribute their products or provide their services.

The nature of the regulatory environment (e.g., banking, insurance, or public utilities).

ASU 2023-07 Disclosure Enhancements

In November 2023, the FASB issued ASU 2023-07 (Segment Reporting - Topic 280: Improvements to Reportable Segment Disclosures) . The update was designed to improve disclosures about a public entity's reportable segments and address financial analysts' demands for more detailed information regarding segment expenses. Under ASU 2023-07, public entities must disclose:

Significant Segment Expenses : Public entities must disclose, on both an interim and annual basis, the significant segment expenses that are regularly provided to the CODM and included in each segment's measure of profit or loss.

Other Segment Items : Entities must disclose an amount representing 'other segment items' for each reportable segment, which represents the difference between segment revenue and the sum of significant segment expenses and segment profit or loss.

CODM Details : The title and position of the CODM must be disclosed, along with an explanation of how the CODM uses the reported measure(s) of segment profit or loss to assess performance and allocate resources.

Multiple Measures of Profit/Loss : If the CODM uses more than one measure of segment profit or loss to assess performance, the entity may disclose those additional measures, provided at least one measure is determined in accordance with GAAP measurement principles.

These disclosures are now required for both annual and interim periods, representing a major expansion of interim reporting requirements.

Accounting for Intersegment Transactions

Segment measurements must reflect the actual accounting policies used for internal reporting to the CODM. If a segment sells inventory or services to another segment, the sales price is determined based on internal transfer pricing policies. However, for consolidated financial statement presentation, all intersegment sales, cost of goods sold, receivables, and payables must be fully eliminated. Any unrealized profit in inventory resulting from intersegment transfers must also be eliminated.

Worked Example & Journal Entries

Assume Segment Alpha sells inventory to Segment Beta for $100,000. The inventory cost Segment Alpha $60,000 to manufacture. By the end of the fiscal year, Segment Beta has not yet sold this inventory to any external customers.

Internal entries made by the segments during the year:

Segment Alpha (Seller): Debit: Intersegment Accounts Receivable - Segment Beta $100,000
Credit: Intersegment Sales Revenue $100,000

Debit: Cost of Goods Sold (Intersegment) $60,000
Credit: Inventory $60,000
Segment Beta (Buyer): Debit: Inventory (from Segment Alpha) $100,000
Credit: Intersegment Accounts Payable - Segment Alpha $100,000

At the corporate consolidated level, the intersegment receivable and payable must be eliminated, and the $40,000 of unrealized profit in Segment Beta's inventory must be eliminated. The elimination entries in the consolidation workpaper are:

Consolidation Elimination Entry 1 (Balance Sheet Accounts): Debit: Intersegment Accounts Payable $100,000
Credit: Intersegment Accounts Receivable $100,000

Consolidation Elimination Entry 2 (Income Statement and Asset Adjustments): Debit: Intersegment Sales Revenue $100,000

Credit: Cost of Goods Sold (Intersegment) $60,000
Credit: Inventory (unrealized profit adjustment) $40,000

Without these workpaper adjustments, consolidated revenues and inventory would be overstated, and profit would be prematurely recognized before an arm's-length transaction with an external party took place.

Summary of 10% Quantitative Test Application

Consider the following financial data for five operating segments of a public company:

Segment External Revenue Intersegment Revenue Total Revenue Segment Profit (Loss) Segment Assets
A $800,000 $200,000 $1,000,000 $150,000 $1,200,000
B $500,000 $0 $500,000 $60,000 $700,000
C $200,000 $100,000 $300,000 ($20,000) $400,000
D $100,000 $0 $100,000 ($160,000) $300,000
E $50,000 $0 $50,000 $10,000 $100,000
Total $1,650,000 $300,000 $1,950,000 ($180,000 - Net loss) $2,700,000

Let's apply the three 10% tests step-by-step:

Revenue Test : Combined total revenue is $1,950,000. The 10% threshold is $195,000 . Segments A ($1,000,000), B ($500,000), and C ($300,000) exceed this threshold and are reportable.

Asset Test : Combined assets are $2,700,000. The 10% threshold is $270,000 . Segments A ($1,200,000), B ($700,000), C ($400,000), and D ($300,000) exceed this threshold and are reportable.

Profit or Loss Test :

Total profit of profitable segments (A, B, E) = $150,000 + $60,000 + $10,000 = $220,000 .

Total loss of loss segments (C, D) = |-$20,000| + |-$160,000| = $180,000 .

The greater absolute sum is $220,000 . The 10% threshold is $22,000 .

Segment profit/losses (absolute value): A ($150,000), B ($60,000), C ($20,000), D ($160,000), E ($10,000).

Segments A , B , and D are reportable because their absolute profit/loss is $22,000 or greater.

Reportable Segments : A, B, C, and D meet at least one test. Segment E does not meet any threshold.

Now, apply the 75% external revenue test :

External revenues of reportable segments (A, B, C, D) = $800,000 + $500,000 + $200,000 + $100,000 = $1,600,000 .

Total consolidated external revenue = $1,650,000 .

Ratio = $1,600,000 / $1,650,000 = 96.97% .

Since 96.97% is greater than 75%, no additional segments need to be reported separately. Segment E can be aggregated inside the 'All Other' reconciliations.