Intersegment Sales
It is the revenue generated through the transfer of goods between different segments within the company
What Are Intersegment Sales?
Revenue generated through the transfer of goods between different segments within the company is called intersegmental sales.
Large conglomerates are most likely to report such sales as they operate in several lines of businesses, which have interconnections between them either 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 would include the individual revenues generated by each branch of operations. This is done when the company is operating with multiple units of operation.
If those sales have been generated through intersegmental transfer of goods, then these sales need to be reported under the Intersegmental sales section in the annual reports.
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 split up their functionalities based on geography, operations or 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.
A transaction between two departments is recorded as intersegmental sales in such a scenario. 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 transparent analysis of a business division, how it depends on other business divisions, and how this dependency affects its efficiency.
Reporting of intersegmental sales helps the management make decisions according to the information about the sales generated by each division, both internally and externally.
1. 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.
2. 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.
3. 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 of 2020, $27.4 billion was reported as intersegmental revenue out of the total segment sales of $140.89 by the Downstream Division.
These intersegmental sales resulted from the Chemical division getting its raw materials from the Downstream division for the production of petrochemicals.
The raw materials were purchased from within the company by the Chemical division rather than an external party due to the higher cost of external raw materials.
Since Exxon controls the entire process of production as well as delivery, they can go through this process in the most cost-efficient manner possible. Thus, they have an extensive grip over their structures due to inter-segment sales.
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
Researched and Authored by Kunal Goel | Linkedin
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