One of our most asked about topics relates to the ins and outs of segment financial reporting. What is it? Who is it for? How do we manage it?
We enlisted the help of Big Bang ERP Senior Consultant Vincent Dinh to lift the lid on segment financial reporting.
What is segment financial reporting?
Segment reporting is the reporting of the operating segments or units of a company in its financial statements. Segment reporting is required for publicly held entities, but not required for privately held ones.
The objective of segment reporting is to provide information to investors and creditors regarding the financial results and position of the most important operating units of a company, which they can use as the basis for decisions related to the company.
The key advantage of segment reporting is transparency. Analysts, potential investors and other stakeholders need complete information to evaluate the sustainability and growth of a company and to monitor the performance of its management.
The risk for investment in equity of a company that discloses complete information is lower than a company that withholds information. Greater disclosure should therefore bring down the cost of capital for a firm.
Segment reporting also allows financial statement users to get a better sense of the fluctuations that might affect overall numbers for each segment. If a business shows much higher earnings than expected, for example, segment reporting shows where those earnings are coming from. A stakeholder can look at the same report to determine if the numbers are sustainable.
Under Generally Accepted Accounting Principles (GAAP), an operating segment engages in business activities from which it may earn revenue and incur expenses (generate its own cash flow), has discrete financial information available, or its activities are distinct from the rest of company’s activities. According to GAAP, these rules to determine which segments need to be reported are:
- Aggregate the results of two or more segments if they have similar products, services, processes, customers, distribution methods, and regulatory environments.
- Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity.
- If the total revenue of the segments you have selected under the preceding criteria comprises less than 75% of the entity’s total revenue, then add more segments until you reach that threshold.
Dimensions in Financial Force Accounting (FFA)
FFA supports the financial segment reporting with the use of Dimensions objects. In addition to external reporting, it also enables you to analyze the operation activities in many ways e.g. cost center, project, geographical location, employee or any other aspect of business important to you. Therefore, the managers may be able to work with relevant financial reports to make internal decisions in their day-to-day activities.
There are up to 4 different levels of dimensions. Each dimension can contain a number of values – way more than the number your business needs.
Each time you create a sales invoice, you can sub-analyze both the invoice total and the individual lines of the sales invoice by any of your custom dimensions. Similarly, you may indicate the related dimensions when you create your payable invoices.
Other FFA objects that are supported by dimension analysis are payable invoices, accounts (customers, vendors, etc.), products, tax codes and bank accounts.
Financial Force offers various tools supporting the segment reporting or analysis by dimensions: Salesforce reports, Financial Force Reports and the newest FFA feature Action Views. For ease of this post, I would provide one main report.
Here is an example of a Salesforce report: