Wiley GAAP 2008

Perspective and Issues

With many companies organized as diversified holding companies or conglomerates, the presentation of basic consolidated financial statements on an aggregated basis does not provide users with sufficient information for decision‐making purposes. The objective of segment reporting, as set forth in FAS 131, is to

…provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates to help users of financial statements:

1. Better understand the enterprise's performance

2. Better assess its prospects for future net cash flows [and]

3. Make more informed judgments about the enterprise as a whole.

The primary benefit of segment reporting is the release of “hidden data” from consolidated financial information. Different segments may possess different levels of profitability, risk, and growth. This important information is merged and thus “averaged out” in the consolidated amounts. Assessing future cash flows and their associated risks can be aided by segment data. For example, knowledge of the level of reporting entity operations in a growing or declining product line can help in the prediction of cash flow, while knowledge of the scope of reporting entity operations in an unstable geographic area can help in the assessment of risk. In general, information about the nature and relative size of an enterprise's various business operations is considered useful by decision makers.

The managements ...