BM2002

I. Accounting problems about the operating segment and reportable segment (local or internal
company)
Oil Horse, Inc. is a company engaged in upstream and downstream oil and gas operations. It has
been defining its operating segments as upstream, downstream, chemicals and financing. Due to
the sheer size of each segment, they all met the quantitative threshold for definition of reportable
operating segment. Subsequent to a recent management shakeup, the company modified its
management reporting framework and it now looks at its operations from a geographical point of
view. Using the following information, identify which of the operating segments are required to
be reported separately. All amounts are in billion CUs

Balai Esso Middle- Valino

Alphasia Novindus Total
a s earth r
Revenue 22 10 24 32 10 4 102
Profit/(loss) 3.2 -0.5 4 7 -1.3 -0.3 12.1
Assets 34 12 28 40 20 12 146

II. The solution to the problem

Identification of reportable segments requires calculation of each segment's percentage revenue,
profit and assets with reference to the sum of revenue, profit and assets respectively. Calculation
of percentage revenue and percentage assets is quite straightforward: divide each segment's
revenue/assets by total revenue/assets. Percentage profit/(loss) however, is tricky. It is calculated
by dividing each profit/(loss) figure by 14.2 billion, which is the greater of (a) all profits i.e.
(3.2+4+7=14.2 billion) and (b) all losses (i.e. 0.5+1.3+0.3=2.1 billion).

The results are summarized below:

Alphasi Middle- Novindu

Balaia Essos Valinor
a earth s
Revenue % 21.57% 9.80% 23.53% 31.37% 9.80% 3.92%
Profit % 22.54% 3.52% 28.17% 49.30% 9.15% 2.11%
Assets % 23.3% 8.2% 19.2% 27.4% 13.7% 8.2%
Reportable
Yes No Yes Yes Yes No
segment

Balaia and Valinor are not reportable operating segments because none of there percentages are
10% or greater. Novindus is an operating segment because the standards require any one of the
three criteria to be 10% or greater (and not all). Since reportable operating segments cover 86%
(=(22+24+32+10)/102) of the company's total revenue, the company meets the 75% revenue-
coverage threshold and no additional operating segments are to be disclosed.

At minimum, companies are required to disclose the policies they use in identification of
operating segments, aggregation of operating segments, calculation of segment revenues, profits
and assets. For reportable segments, segment revenue, profit, assets, liabilities and relevant
measurement methodology are required to be disclosed. On entity-wide basis, companies are
required to disclose information about products and services, information about geographical
areas and information about major customers.