Intersegment Sales
Revenue generated through the transfer of goods between different segments within the company.
What Are Intersegment Sales?
Intersegmental Sales are revenue generated through the transfer of goods between different segments within the company.
Large conglomerates are most likely to report such sales as they operate in several business lines, which are interconnected horizontally or vertically.
In the notes to the financial statements section in the annual reports, a company needs to disclose the intersegmental sales under a heading called Intersegmental Reporting or Intersegmental Sales.
Several accounting boards worldwide have mandated disclosure of such sales to provide an accurate picture of the business' sales sources.
The Segment Reporting section in a company's annual reports includes the individual revenues generated by each branch of operations. This is done when the company has multiple units of operation.
If those sales have been generated through intersegmental transfer of goods, they need to be reported under the Intersegmental sales section in the annual reports.
Key Takeaways
- Intersegment sales refer to goods or services transactions between different segments or divisions within the same company. These transactions are reported in the company’s financial statements to provide a complete picture of internal operations.
- Internal controls evaluate the performance of individual segments within a company and assist management in making informed decisions about resource allocation and segment profitability.
- While intersegment sales are recorded in internal account segments, they are eliminated while preparing consolidated financial statements to avoid double counting.
- Companies often disclose intersegment sales in the notes to the financial statements under segment reporting to provide insights into the performance of different business units.
Intersegment Sales vs. Segment Reporting
When the company is operating in different countries with several branches of operations, and each division or segment reports its revenues for a period separately, that is, it is a multinational company. All these individual reports are collectively shown under the section Segment Reporting in the annual reports.
However, suppose a company is generating sales through the sale of goods between its departments. In that case, these amounts are recorded as intersegmental sales in the annual reports' notes to financial statements section.
Companies often divide their functionalities by geography, operations, functions, and so on. The main difference between Intersegmental sales and Segment Reporting is how they are disclosed and the types of transactions involved.
For example, if a company operates with three segments in a manner that Segment X is related to the raw materials for the production of a product that has to be sold by Segment Y and the company provides services under Segment Z.
In this scenario, a transaction between two departments is recorded as intersegmental sales. Thus, the company records such sales when department X sells to segment Y.
On the other hand, if different branches of a multinational company are dissimilar in their functions and product sales through different segments externally by selling goods in the market, it falls under segment reporting.
Benefits of Disclosing Intersegmental Sales
Disclosing such sales would help the company better function its processes. Intersegmental sales reporting helps transparently analyze a business division's dependence on other business divisions and how this dependency affects its efficiency.
Reporting of intersegmental sales helps management make decisions based on information about the sales generated by each division, both internally and externally.
- Provides an accurate financial picture: If a company discloses its intersegmental sales in its annual reports, it provides the readers with an accurate and fair picture of its operations.
- Helps navigate internal operations: Reporting intersegmental sales would indicate the interdependency between the departments, which would help the management efficiently manage departments. Thus, it allows the management to run the business smoothly.
- Helps in sales/revenue planning: Disclosures made by the company about the intersegmental sales would allow an analyst to identify the amount of revenue generated internally or externally and from which sources, thus helping make investment decisions.
- It also helps the management to make operational decisions by monitoring every department's performance individually.
Intersegmental Sales Example
Exxon Mobil Corporation operates in three segments: Chemical, Downstream, and Upstream.
The Chemical division produces and sells petrochemicals, whereas the Upstream division inspects and churns out natural gas and crude oil. The Downstream division generates its revenue by selling petroleum products.
During the fiscal year 2020, the downstream division reported $27.4 billion as intersegmental revenue out of the total segment sales of $140.89.
These intersegmental sales resulted from the Chemical division getting its raw materials from the Downstream division for the production of petrochemicals.
The chemical division purchased the raw materials from within the company rather than an external party due to the higher cost of external raw materials.
Since Exxon controls the entire production and delivery process, it can do this in the most cost-efficient manner possible. Thus, due to inter-segment sales, it has an extensive grip over its structures.
Intersegment Sales FAQs
While inter-segment would mean intercompany exchanges through a number of departments, intra-segment would include transactions with only one segment
The process through which a parent company needs to go through in order to remove the transactions with subsidiary companies is called intercompany elimination.
This process is conducted when the parent company wants to prepare the consolidated financial statements.
Intercompany payables and receivables are eliminated while preparing a consolidated balance sheet.
In contrast, while preparing the income statement, sales made through the intercompany transfer of products are eliminated along with the costs associated with those sales
Profit or loss generated due to intersegmental sales should be eliminated by an investor until profits and losses occurring due to transactions with third parties are recognized
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