prepare any necessary entries in e s and f s quarterly financial statements as at ma 613392

Combining internally reported operating segments with similar characteristics

In the information presented to the board of directors, a single-product company has six internally reported operating segments, Australia, France, Germany, Italy, UK and USA. The company dominates its markets in Australia and Germany and consequently enjoys superior operating profits. Its other markets are fragmented, competition is greater and therefore margins are lower. Can any segments be combined for external reporting purposes?

It would not be possible to combine operating segments with different underlying currency risks, as this is indicative of different economic characteristics. That would leave only France, Germany and Italy as candidates for combination, since they all operate within the Euro zone. However, Germany could not be included in a larger reportable segment because, whilst similar in all other ways, its long-term financial performance is not comparable to France and Italy, as evidenced by its superior operating profits. On this basis the company could only combine at this stage its operations in France and Italy for external segment reporting purposes.