An operating segment in a business is a component that engages in revenue-generating activities and for which separate financial information is available. This information is reviewed regularly by the organization’s chief operating decision maker (usually the CEO or the COO) to make decisions about resources to be allocated to the segment and to assess its performance.
These segments can be based on several factors, including:
- Geographic Areas: A company may have different operating segments based on different regions or countries. For instance, a multinational corporation like Coca-Cola operates in many countries and each country can be considered a separate segment.
- Business Lines: If a company operates in multiple industries or has different product lines, each of these could be considered a separate operating segment. For example, Amazon has separate operating segments for its e-commerce business, cloud services (Amazon Web Services), and streaming services (Amazon Prime Video).
- Customer Types: A company may segment its operations based on the type of customers it serves. For instance, a software company might have separate segments for individual consumers and enterprise clients.
Publicly traded companies are required to disclose financial information about their operating segments in their annual reports, allowing investors to see how each part of the company is performing and how resources are being allocated. This requirement is part of the accounting standard known as ASC 280, Segment Reporting, established by the Financial Accounting Standards Board (FASB) in the United States. Similar regulations exist in other countries as well.
However, the level of detail that companies are required to provide about each segment can vary depending on the specific accounting standards and regulations they follow.
Example of an Operating Segment
Let’s consider a hypothetical multinational corporation, “GlobeTech Corp,” that operates in three different sectors and in multiple countries.
- Tech Division: GlobeTech Corp’s technology division designs, manufactures, and sells electronic gadgets.
- Pharma Division: The pharmaceutical division develops and markets various medicines and health products.
- Energy Division: This division is engaged in renewable energy production and infrastructure.
Further, each of these divisions operates in the United States, Europe, and Asia.
In this case, each of these divisions could be considered an operating segment of GlobeTech Corp because they each engage in business activities from which they may earn revenues or incur expenses, and their operating results are regularly reviewed by the company’s Chief Operating Decision Maker.
Additionally, each geographical region could also be considered a separate operating segment.
So, when GlobeTech Corp reports its annual financial results, it may need to provide separate reports for each of these operating segments. For example, it might need to report the revenues, profits, and assets of the Tech Division separately from those of the Pharma and Energy divisions. It might also need to provide a breakdown of revenues and profits for each geographical region.
This allows investors to see not just how GlobeTech Corp is doing as a whole, but how each of its divisions and each of its regional operations is performing. This can provide valuable insights into which parts of the company are driving its growth and which parts might be underperforming.