Segment reporting is a financial reporting method in which a company separates its operations into different segments and reports financial information for each segment separately. This is done to provide financial statement users with a better understanding of the company's performance and prospects by allowing them to assess each segment's growth potential, capital requirements, and profitability characteristics.
According to the Financial Accounting Standard Board (FASB) statement No. 14, diversified companies are required to prepare separate segment reporting. The FASB believes that this information will help financial statement users to analyze and understand the financial statements of the company by allowing them to better assess the company's past performance and future prospects.
In terms of the applicable accounting standards, segment information is generally based on the totals of consolidated financial statements. Therefore, the principles governing consolidations are used for segment reporting. However, transactions between segments are not eliminated for the purposes of segment disclosures, with the exception of inter-segment loans, advances, and related interest. These items are generally excluded from segment assets and revenues.
