Intersegment Sales
Intersegment sales are the transfer or exchange of goods for monetary compensation from one segment of a company to another within the same company. In a typical segment sales note, segment A's total revenues, inclusive of revenues from segment B, are displayed on top, then intersegment sales (to B or other units of the company) are deducted to arrive at a net sales figure for the segment. Intersegment sales are the transfer or exchange of goods for monetary compensation between one segment of a company to another segment within the same company. If such sales transactions of an entity represent 10% or more of total sales, IAS 14 requires a breakdown of segment sales. In its 2016 fiscal year, the company recorded Downstream segment sales of $172 billion, $31 billion of which were intersegment sales.
What Are Intersegment Sales?
Intersegment sales are the transfer or exchange of goods for monetary compensation from one segment of a company to another within the same company. Intersegment sales exist when a corporation has multiple segments or divisions, and product sales occur between these segments. Disclosures of intersegment sales are typically included in the notes to the financial statements.
Understanding Intersegment Sales
According to International Accounting Standards (IAS) 14, a segment is "a component of an entity that (a) provides a single product or service or a group of related products and services and (b) that is subject to risks and returns that are different from those of other business segments."
Intersegment sales occur when one segment sources products or materials from another unit of the company instead of purchasing them from a third party. If such sales transactions of an entity represent 10% or more of total sales, IAS 14 requires a breakdown of segment sales.
When segment A sells to segment B, segment A books those revenues. In a typical segment sales note, segment A's total revenues, inclusive of revenues from segment B, are displayed on top, then intersegment sales (to B or other units of the company) are deducted to arrive at a net sales figure for the segment. Some companies will disclose gross segment revenues and intersegment revenues without netting them out for the reader of the financial statements.
The disclosure of intersegment sales benefits the operational processes of a company. Reporting intersegment sales allows for financial clarity of each business division as well as shedding light on how internal operations work and the reliance of one business division on another. The reporting of intersegment sales also shows the proportion of revenues being generated internally and externally and allows management to make certain business decisions off of this information.
Real World Example
Exxon Mobil Corporation (XOM) operates three main segments: Upstream, Downstream, and Chemical. The Upstream division explores and produces crude oil and natural gas; the Downstream unit manufactures and markets petroleum products, and the Chemical segment makes and sells petrochemicals.
In its 2016 fiscal year, the company recorded Downstream segment sales of $172 billion, $31 billion of which were intersegment sales. These intersegment sales, one can assume, were to the Chemical segment, which used Downstream's products as raw materials for the manufacturing of petrochemical products. The Chemical segment chose to purchase raw materials from within the company rather than from an external party, most likely at some cost-benefit.
Related terms:
Accounting Principles
Accounting principles are the rules and guidelines that companies must follow when reporting financial data. read more
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Corporation
A corporation is a legal entity that is separate and distinct from its owners and has many of the same rights and responsibilities as individuals. read more
Downstream
Downstream operations are oil and gas functions that occur after the production phase to the point of sale. Read how downstream companies make money. read more
Financial Statements , Types, & Examples
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. read more
Fiscal Year (FY)
A fiscal year is a one-year period of time that a company or government uses for accounting purposes and preparation of its financial statements. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
International Accounting Standards (IAS)
International Accounting Standards are an older set of standards that were replaced by International Financial Reporting Standards (IFRS) in 2001. read more
Raw Materials
Raw materials are commodities companies use in the primary production or manufacturing of goods. read more