Segment Reporting
ACCT301-D04
Darlene Mix
Professor Lauffer
December 13, 2021
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There are many types and sizes of businesses in the world today and having an accurate
method of accounting is important in illustrating how an organization stands in the financial area.
This is important because stockholders, financial institutions, and the general public who is
interested in either investing in the company or who purchases products or services from that
business. Without an honest, verifiable method of accounting for the financial records of that
business, the public would not be able to know if the organization is stable financially or is in
danger of going bankrupt. Businesses range in size from the small “mom and pop” stores on the
corner in small towns, massive brick and mortar stores, internet businesses, to the huge world-
wide automobile makers and pharmaceutical corporation just to name a few. The accounting
process for these organizations can range from a very simple accounting method to an extremely
complicated and difficult process in which they must report different segments of their operation
in different ways. The way these massive organizations follow guidelines is through segment
reporting.
When companies have different segments in their organizations and may be required to
use segment reporting. These could include computer manufacturers and health care systems.
General Accepted Accounting Principles (GAAP) says that management can determine what
segments of an organization are reportable separately from others [ CITATION Spi20 \l 1033 ].
The textbook, Intermediate Accounting says that a component is defined as an “operating
segment” and is part of the business because it earns revenue and incurs expenses related to that
segment of the business [ CITATION Spi20 \l 1033 ]. Management has the decision to report
these segments in separate areas instead of just the business. When management does report
segments, they must be at lease 10% or more of that organizations revenues, assets, or net
income in order to be reported [ CITATION Spi20 \l 1033 ]. When reporting those segments
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though, the company must show enough segments to account for at least 75% of their revenues
[ CITATION Spi20 \l 1033 ].
The Securities and Exchange Commission (SEC) has rules which are also important for
segment reporting. In a proposed rule for segment reporting, from 1998, it states in SFAS No.
131 that an operating segment is a component of a business; when it earns revenue and incurs
expenses relating to operations in that business, when management makes the decisions about the
performance and what resources are allocated to that segment, and when there is discrete
financial information available for that segment [ CITATION Pro21 \l 1033 ].
People who may want to invest in an organization or financial institutions; who may
determine whether a business can pay for loans; want to know information about the different
segments of a business in order to determine whether the business has a profit, what the short-
term and long-term liquidity risk is for that business[ CITATION Pau05 \l 1033 ]. These places
and people want to know what part of the segments refers to the operating part of the business or
the financial section [ CITATION Pau05 \l 1033 ].
One of the requirements when an organization uses segment reporting is that the
company must report the identity of a major customer if one customer accounts for more than
10% of the revenue from that segment [ CITATION Spi20 \l 1033 ]. The textbook reports that the
Lockheed Martin Corporation had to report a major customer in its 2017 disclosure because they
had obtained 69% of its revenues from the United States government [ CITATION Spi20 \l
1033 ]. If there would be a major decrease in the government needing aircraft from Lockheed
Martin, it would greatly affect the financial reporting of the organization.
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One example of an organization that uses segment reporting is the Johnson & Johnson
which is a world-wide corporation. This corporation incorporated in 1887 in the state of New
Jersey [ CITATION Uni21 \l 1033 ]. “Johnson & Johnson’s website which includes the Form 10-
K from 2010, states their operating companies are organized into three business segments:
Consumer, Pharmaceutical, and Medical Devices and Diagnostics” [ CITATION Uni21 \l 1033 ].
Johnson & Johnson break down their business segments by geographic areas which include the
United States, Europe, the Western Hemisphere, and Africa, Asia, and the Pacific which amounts
to 143 facilities worldwide in 2010 down to 90 manufacturing facilities in 2020 [ CITATION
Uni21 \l 1033 ].
On pages 75-80 of the most recent SEC report, there are breakdowns of the three
different segments for Johnson & Johnson’s consumer health, pharmaceutical, and medical
devices & diagnostics [ CITATION For21 \l 1033 ]. The consumer health segment indicates an
increase of 1.1% in sales to customers from 2019 to 2020 [ CITATION For21 \l 1033 ]. In the
total pharmaceutical department, there is an increase of 8.0% for the same period, while the total
medical device segment indicates a 0.6% over the same period from 2019 to 2020 [ CITATION
For21 \l 1033 ]. When financial institutions, investors, and potential investors review the
financial statement for Johnson & Johnson, it allows them to have a better understanding of the
financial condition of the corporation.
A second example of a company that uses segment reporting is Walmart. Walmart
engages in business in many countries besides the United States. In the segment reporting from
the corporate website which includes the 10-K report from 2020, it breaks down income among
different segments. Some of the more prevalent segments include Walmart U.S., Walmart
International, and Sam’s Club [ CITATION cor21 \l 1033 ]. Between the years of 2018 to 2020,
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the illustration on page 75 shows more net sales from the U.S. Walmart segment with 5 times the
net sales than Sam’s Club [ CITATION cor21 \l 1033 ]. When an investor or potential investor
reviews the 10-K statement, there is a clear indication of the profit and loss for all segments of
the Walmart organization.
In an article written by John Dudovskiy, he indicates that the way Walmart markets
include the segmentation, targeting, and positioning of groups which helps Walmart to be
successful in how they market their products [ CITATION Wal16 \l 1033 ]. One way of
segmenting their products is through demographics. Products could be changed depending on the
location of the store, such as a large city or a small rural area. These two factors could present
different needs for the people living in those areas. In addition to the geographic segment,
Walmart also researches the demographics on an area. This enables the correct kinds of products
and foods to be delivered to those areas.
There have been companies that have reported segment reports that became subject to
fraud in their accounting. Two of these companies were Enron and WorldCom. In the case of
Enron, the SEC charged the former president, Jeffrey Skilling, with fraud in 2004 [ CITATION
SEC21 \l 1033 ]. In the report, it says that Enron used its business segments to hide losses from
the retail energy part of the business [ CITATION SEC21 \l 1033 ]. By hiding losses from one
segment by fraudulent reporting, Enron was able to give the company a better financial picture
than what the company had.
WorldCom was another corporation which had one of the largest frauds in accounting
history. The way in which WorldCom fraudulently reported earning was to reduce the line costs
of the corporation while increasing revenues which were fraudulent entries [ CITATION Rep21 \l
1033 ]. According to the report by the SEC, the corporation’s network, technology, or the
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engineering of the corporation were not involved [ CITATION Rep21 \l 1033 ]. The fraud
occurred by the way the Chief Executive Officer, Bernard Ebbers ran the company and his
reporting of fraudulent entries which increase revenues, but also decreased the liabilities of the
corporation.
The SEC has a task force within itself called the SEC Enforcement Division’s Financial
Reporting and Audit (FRAud) Group which supports identifying and prosecuting violations of
the laws in financial reporting [CITATION sec21 \l 1033 ]. There have been actions filed against
a few different holding companies for fraudulent reporting and against an energy management
company for violations of its segment reporting [ CITATION sec21 \l 1033 ]. This latest action
was filed on November 7, 2016, against the PowerSecure International, Inc. in which the order
states that PowerSecure violated it segment reporting from 2012 to 2014 [ CITATION sec16 \l
1033 ]. In the cease-and- desist proceedings, it states in paragraph 10 that PowerSecure reported
two separate segments from 2007 to 2012, but the Energy Service was being fraudulently
reported as a stand-alone segment [ CITATION sec16 \l 1033 ]. As a result of this proceeding,
PowerSecure was ordered to pay a civil penalty of $470,000 to the SEC for the false reporting
[ CITATION sec16 \l 1033 ].
In conclusion, segment reporting allows a company to provide more complete
information about the financial stability of the organization for the public to find a reliable
business that will be financially stable for a long term and is safe for investment or to patronize
the business in the foreseeable future. It is important for every business to be truthful in their
accounting for the products and/or services they provide. When an organization is truthful in
everything they do and report, they are not only following the rules and regulations set out by
GAAP; but they are also doing what is right in God’s eyes. 2 Corinthians 8:21 teaches man that;
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“For we are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes
of man.” [ CITATION NIV73 \l 1033 ] .
References
(2016, Novembeer 7). https://www.sec.gov/litigation/admin/2016/34-79256.pdf
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corporate.walmart.com. (2021, December 12). https://corporate.walmart.com/media-
library/document/2020-walmart-annual-report/_proxyDocument?id=00000171-a3ea-
dfc0-af71-b3fea8490000
Form 10-K. (2021, December 12).
https://www.sec.gov/Archives/edgar/data/0000200406/000020040621000008/jnj-
20210103.htm#i26b7b3066a4848f5be790a5478bde067_103
NIV Bible. (1973).
Paul, J., & Largay, J. (2005). Does the "management approach" contribute to segment reporting
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Report of Investigation. (2021, December 12).
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991902_2
SEC charges Jeffrey K. Skilling, Enron's former president, chief executive officer and chief
operating officer with fraud. (2021, December 12).
https://www.sec.gov/news/press/2004-18.htm
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sec.gov. (2021, December 12). https://www.sec.gov/spotlight/financial-reporting-and-audit-task-
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United States Securities and Exchange Commission. (2021, December 12). Johnson&Johnson:
https://johnsonandjohnson.gcs-web.com/node/35691/html#101
Walmart segmentation, targeting and positioning. (2016, April 2). https://research-
methodology.net/walmart-segmentation-targeting-and-positioning/
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