Picture a public company's annual report. The company has identified operating segments and provided separate financial statement information along with the aggregate financial statements. I would assume the totals from the operating segments, would be almost equal to the totals for that company. However if the company only included the segments that met the criteria for reporting operating segments the total may be less than 75% of the company total. As a reader of the financial statement, I would feel like I was missing important information.

Therefore, if the total combined revenue of the reportable operating segment is not greater than 75% of the total external revenue the company has to go back and identify the next largest segments until it reaches the 75% rule.

Test 1

Identify reportable operating segments (Satisfies at least 1 of 3 criteria)

1. Revenue test: Segment revenue (both external and internal) is 10% or more of combined segment revenues (both external and internal)

2. Operating profit/loss test: The absolute value of operating profit or loss is 10% or more of the greater of:

a. Combined operating profit for profitable segments or

b. Combined operating losses for non-profitable segments

3. Asset test: Identifiable segment assets are more than 10% of total combined segment assets.

Test 2

75% Test:

After reportable operating segments are identified, a final test is to compare combined external revenue to total external revenue.

If the combined revenue of the reportable operating segments if greater than 75% of total external revenue then the process is complete.

If not, additional operating segments should be added until this test is satisfied.