Intersegment sales refer to revenue generated by means of a transaction between segments within the same business. It is generally the case with large conglomerates that engage in several lines of business. Such companies manage segments that have interconnect operations either vertically or horizontally.
Companies are required to disclose all intersegment sales under a specific heading, usually referred to as “Intersegment Reporting,” or “Intersegment Sales,” in the notes to the financial statements in their annual reports. Several accounting standards boards around the world require companies to disclose such sales in order to provide full disclosure or an accurate picture of the business’ financial health.
Revenue generated from transactions between two segments that belong to the same business is known as intersegment sales.
Companies are required to disclose all intersegment sales under a specific heading in the notes to the financial statements.
Intersegment sales and segment sales reporting are related, but are composed of different amounts and are reported differently in the audit report.
Intersegment Sales vs. Segment Reporting
When a company operates a business with multiple branches of operations, and each branch, or segment, generates revenue independently through its operations, the individual revenue results are recorded under the “segment reporting” section in the company’s annual report. If that same company generates revenue by means of sales between segments, those amounts are reported in the notes to the financial statements in a section normally called intersegmental sales revenue.
Companies generally divide their operations into different geographical segments, or different operative or functional segments, and so on. The key difference between the two terms basically relates to the nature of the transactions and how they are disclosed. For example, when a company is operating three segments, such that, segment A deals in raw materials for the production of product A, which the company exclusively sells under segment B, and provides services on the product under Segment C.
In such a case, when the company is transacting between segment A and segment B for the production of product A, it is engaging in intersegment sales, as segment A is booking revenue by selling to segment B.
On the other hand, when multinational companies are divergent in their operations and generate revenue through different operational segments, and not internally but externally by making sales in the market, it will fall under segment reporting.
Benefits of Disclosing Intersegment Sales
1. Provides an accurate financial picture
When a company discloses its intersegment sales, it provides an accurate financial picture of its sales and operations through its annual reports.
2. Helps navigate internal operations
Diligently reporting intersegment sales helps in the smooth navigation of the company’s internal operations. The practice gives an accurate financial, as well as operational picture, of the interdependency of the operating segments of the company – and eventually helps in efficient planning and management.
3. Helps in sales/revenue planning
Full and precise disclosure of intersegment sales accurately segregates the revenue that the company is generating externally and internally. It helps in knowing how much revenue comes from where – which essentially helps the management in making financial and operational decisions.
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