Accounting for Segment Reporting & Discontinuation

Segment reporting enables stakeholders to make informed decisions.

Segments are distinct units of a business classified on the basis of their geographical location or their product lines. Segment reporting provides information on performance of the different business units, providing a wider perspective of the company. Reporting for related parties such as business segments would be incomplete without accounting for discontinuation of business operations. Accounting for discontinuation is mainly important for the distinction of profits between continuing and discontinued operations.

Accounting procedure for segments

IAS (International Accounting Standards) 14 guides accounting for business segments. A business must look at its organizational structure and its internal reporting system to identify reportable segments. An organization must identify allocable assets and liabilities and allocate them to the relevant segments. Revenues and operating expenditure generated are also broken down on a segment basis in order to compute the net earnings of each segment. Assets used jointly by the segments attract a proportional share of the revenues derived from the assets.

Applicability

Financial statements of a company consolidate and summarize the financial position for the company as a whole. Business segments may operate in different industries and in different geographical areas. Segments are likely to enjoy varying levels of profitability, bear different levels of risks and have different growth potentials. Segment reporting facilitates a thorough analysis of an organization's performance.

Discontinuation

Discontinuation is the withdrawal from a non-performing business operation whether a segment or a subsidiary. Certain conditions must be satisfied for an operation to constitute discontinuity. The discontinuity must be complete, permanent and should be material to the company in operational, physical and financial terms. In addition, the assets, liabilities, results of operations and activities should be clearly distinguishable for financial reporting purposes.

Disclosure requirements

While preparing financial statements a detailed disclosure of post-tax profit/loss, revenues, expenses, pre-tax profit/loss and related income tax expenses is required either in the notes or on the face of the statement of comprehensive income. There should be a clear distinction between disclosures of discontinued operations and continuing operations. Users of financial information are therefore in a better position to make decisions regarding the company’s operations.

References

• “Advanced Financial Accounting”, Richard Lewis, David Pendrill; 2002
• “Financial Accounting”; A. R Jennings; 2000
• “Advanced Financial Accounting”; Richard Baker, et al; 2010
• “Advanced Accounting”; Paul Fischer, et al; 2008