For the financial accounting and reporting (FAR) test on the CPA exam, you need to understand segments. A segment of a business operates with some level of autonomy. Accountants use the term operating segment to describe a department or division of a business. To be considered an operating segment, an area of the company must meet each of these three criteria:
The entity generates revenue and expenses from its business activity.
Senior management reviews the operating results of the entity. The results allow management to allocate resources and assess performance.
Discrete, identifiable financial information is available.
A company is required to present separate financial information for reportable segments. Not all segments are large enough to be considered reportable segments. A segment is reportable if any of these criteria is true:
Revenue is at least 10 percent of the total revenue of all reported operating segments. The 10 percent revenue includes intersegment revenue — revenue from sales between two segments. Note that this rule specifies reported operating segments, not all operating segments.
Profit is at least 10 percent of the combined profit (or loss) of all reported operating segments.
Assets are at least 10 percent of the combined revenue, profit (or loss), or assets of all operating segments. Note that this asset calculation may be 10 percent of any of three elements. Note also that the rule includes all operating segments, whether or not they’re reportable.
A reportable segment can be a combination of segments that are similar. The segment may produce a similar product or service, or the segments may sell to the same type of customer.