The Financial Accounting Standards Board (FASB) has outlined three key tests to identify operating segments that warrant separate disclosure in financial reporting. These tests are designed to assess the significance of a particular operating segment within a larger entity, helping stakeholders gain a comprehensive understanding of the company's financial performance and risks.
Importantly, meeting just one of these tests is sufficient for an operating segment to be considered of significant size, triggering the need for separate disclosure.
- Revenue Test: This test focuses on the revenue generated by an operating segment. If a segment's revenue is 10% or more of the combined internal and external revenues of all operating segments, it is deemed significant.
- Profit or Loss Test: This test evaluates the profit or loss generated by an operating segment. If the reported profit or loss of a segment is 10% or more of the greater, in absolute value, of the combined reported profits of all operating segments that did not incur a loss or the combined reported losses of all operating segments that did incur a loss, it is considered significant.
- Asset Test: The asset test assesses the assets employed by an operating segment. If the segment's assets are 10% or more of the combined assets of all operating segments, it qualifies as significant.
By employing these tests, the FASB aims to ensure that investors and other stakeholders receive relevant and detailed information about the different facets of a company's operations, allowing for a more informed analysis of its financial health and performance.