Basic Understanding Of Segmental Reporting

November 13th, 2006 Comments off
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In a Company’s Annual Report, we see a section in the Notes to the Accounts pertaining to Segmental Reporting.

This article seeks to give a basic understanding of what’s segmental reporting all about.

Segmental Reporting

· As we know that The Notes To The Accounts assists the investors/readers of the financial statements with both complementary and supplementary materials whether it’s qualitative or quantitative.

· One such supplementary material is the provision of the Segmental reporting. Here, it provides a further dimension to the financial statements through analysis of turnover, operating profit and net assets, by BUSINESS CLASS & GEOGRAPHICAL SEGMENTS. Most large companies are usually comprised of diverse businesses, rather than being engaged in a single type of business activity, that supply different products and services. Each type of business activity may have:

· a different structure

· different levels of profitability

· different levels of growth potential

· different levels of risk exposure

  • GAAP accounting rules also require reporting at the Reporting Segment level, generally defined as the level at which operations are managed and performance measured by senior management.

  • Reporting segments may be defined by product, by geography, by customer or other similar criteria, alone or in combination with other factors.

  • The reporting segment selection is based on they way a particular company operates.

For example:

· A company producing one product but in multiple regions, with somewhat autonomous management and functions by region, may be required to define its reporting segments by geographic region or

· A company with multiple products in one geographic market, with generally autonomous management by product unit, may define its reporting segments by product.

  • Note that not all items are required to be reported by reporting segment. For example, income statements may have to be disclosed by reporting segment, but not balance sheets.

Objectives of Segmental reporting:

Enables:

  • the further analysis of segmental performance to determine more accurately the likely growth prospects for the business as a whole
  • evaluation of the impact on the company of changes in conditions relating to particular activities
  • improvements in internal management performance, because it may be monitored through disclosure of segmental information to shareholders
  • evaluation of the acquisition and disposal performance of the company

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Financial Accounting

 
 

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