2.6 Vertically Integrated Operations
ASC 280-10
50-2 An operating segment shall include components of a public entity that sell primarily or exclusively to
other operating segments of the public entity if the public entity is managed that way. Information about
the components engaged in each stage of production is particularly important for understanding vertically
integrated public entities in certain businesses, for example, oil and gas entities. This information is also
important because different activities within the entity may have significantly different prospects for future cash
flows.
Some operating segments may derive their revenues only from other segments
within the entity. Understanding how the CODM manages the business is the key factor
in identifying operating segments. As noted in ASC 280-10-50-2, a component is not
required to have external customers or revenues to be classified as an operating
segment for financial reporting purposes. In addition, entities with vertically
integrated operating segments will need to carefully consider the qualitative
criteria in ASC 280-10-50-11 when evaluating whether aggregation of the operating
segments is appropriate. See Section
3.2 for further discussion of aggregation.
Example 2-10
Company B is a vertically integrated manufacturer that sells processed food products to external customers.
Company B’s operations include a flour mill that sells refined flour to the food processing segment of B.
Although the flour mill has no external customers, the financial results of the milling operation are prepared
separately, and the CODM regularly reviews them to assess performance and make decisions regarding the
allocation of resources. The flour mill would therefore meet the definition of an operating segment.