What are Intersegmental Sales?
Intersegmental sales refer to revenue generated by means of an exchange between segments that belong to the same business. It is generally the case with large companies that engage in several fields of business. Such companies oversee segments that are interconnected in their operations in some or the other way.
Companies are required by law to disclose all intersegmental sales under a specific heading, usually referred to as “Intersegment Reporting,” or “Intersegmental Sales,” 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 by means of an exchange between the segments that belong to the same business is known as intersegmental sales.
- Companies are required by law to disclose all intersegmental sales under a specific heading in their annual reports.
- Intersegmental sales and segment sales reporting are often regarded as the same financial aspect. However, as discussed below, it is often not the case.
Intersegmental 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 of the company’s annual report. On the other hand, if a company is operating in more than one segment and is generating revenue by means of exchange between segments, it is reported under 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. For example, when a company is operating under 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 intersegmental 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 Intersegmental Sales
1. Provides an accurate financial picture
When a company discloses its intersegmental sales, it provides an accurate financial picture of its sales and operations through its annual reports.
2. Helps navigate internal operations
Diligently reporting intersegmental 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 intersegmental 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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