Question

Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports. An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit. Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.

Instructions

(b) Identify the reasons for requiring financial data to be reported by segments.

Short answer

The need for financial data to be reported by segments will result in more widespread disclosure of information.

Step-by-step solution

Meaning of Segment reporting

Segment reporting is a method of representing financial statement items by segment. Section-by-section findings are displayed later. Annual financial statements, augmented with segment data from segment reporting, give a more detailed picture of a company's financial position, asset position, and profit position.

Explaining the reason for acquiring financial data to be reported by segments

Following are some of the reasons why financial data is disclosed by segments:

1. Investors, creditors, and other consumers of financial statements would benefit from a more comprehensive disclosure of the information.
2. Before evaluating a firm in its entirety, appraisers can assess important aspects of the business.
3. Such information is not only relevant and desirable but also practical to calculate.
4. The growth potential of an enterprise can be assessed by looking at the growth potential of its priority sectors.
5. Users can make a more informed decision about whether to remove or add a part.
6. Since different segments can have different rates of growth, profitability, and degree of risk, forecasting future earnings power at the segment level is more effective.
7. Although management responsibility is usually segmented within the organization, segmental data is better at assessing managerial competence.