How can you use segment reporting to evaluate your business unit's performance?

1 What is segment reporting?

Segment reporting is a requirement for public companies under the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). Segment reporting aims to provide more transparency and relevance to investors, creditors, regulators, and other stakeholders who want to understand the different sources of income and risk within a company. Segment reporting also helps managers and employees to monitor and improve the performance of their business units.

2 How to identify segments?

According to the IFRS and GAAP, a segment is a component of a company that engages in business activities that generate revenues and incur expenses, has discrete financial information available, and is subject to regular review by the chief operating decision maker. A segment can be based on products or services, geographical areas, customers, or channels. For example, a company that sells clothing, footwear, and accessories may have segments based on product categories, regions, or retail and online channels.

3 How to allocate revenues and costs?

To measure the profitability of each segment, you need to allocate revenues and costs that are directly attributable or reasonably allocable to the segment. Directly attributable revenues and costs are those that are specifically generated or incurred by the segment, such as sales revenue, cost of goods sold, or marketing expenses. Reasonably allocable revenues and costs are those that are shared or common among segments, such as corporate overhead, interest income, or taxes. The allocation method should be consistent and reasonable, and disclosed in the segment report.

4 How to analyze segment profitability?

One of the most common ways to analyze segment profitability is to use the segment margin, which is the segment revenue minus the segment expenses. The segment margin shows how much profit the segment contributes to the company after covering its own costs. You can compare the segment margin with other segments or the company's overall margin to assess the relative profitability of your business unit. You can also use the segment margin percentage, which is the segment margin divided by the segment revenue, to measure the profit margin of your business unit.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?