Even if you have read the SAP Help notes, attended conferences and Webinars, talked to experts and searched Google every now and then, I wouldn’t be surprised if you still were not clear on the exact purpose of Segments.
Let me try to provide some clarity on this topic. Note that I am not speaking on behalf of SAP or anyone else, just on my experience with several clients and the putting together of information that I have garnered from the various sources mentioned above.
First of all let us look at the definition of Segment by SAP:
“Division of a company for which you can create financial statements for external reporting”
This concept was introduced by SAP to satisfy the requirement by the Securities and Exchange Commission (S.E.C.) in the United States and the International Accounting Standards Board (IASB), which stipulates that companies should report financial information by business or geographic area.
In SAP, the one guaranteed way of creating full financial statements, is to set up the segment as a company code. However, this would mean that company codes would need to be created for each business segment, some which themselves will span several company codes. This could lead to a rather cumbersome and complex set up of the company code structure.
Two existing SAP objects could go some way to facilitating the production of financial statements. They are as follows:
(1) Business Areas: This is the division of a company for which you can create financial statements for external reporting. By definition, this seems to satisfy the requirement specified by the SEC and IASB. However, for the past decade, there has been talk in SAP circles, that Business Areas will cease to be supported by SAP in the future (at what point in the future this will happen, is left to be seen);
(2) Profit centers: This is an organizational unit in accounting that reflects a management-oriented structure of the organization for the purpose of internal control. Profit Centers have transitioned through the years from being part of the Controlling module (for Profit and Loss Management reporting) to being part of the Enterprise Controlling module (for P&L as well as certain Balance sheet items) to being part of the general ledger (for full financial statement reporting using document splitting).
A question that I have been asked several times is, since there are already two objects that can be used to create financial statements (albeit partially), then why did SAP introduce a brand new object (i.e. Segments) to satisfy the segment reporting requirement.
The answer that I found is that most SAP customers are using Profit centers and Business areas for other purposes (for example, I have seen clients using profit centers as cost centers, plants, or Sales areas) and therefore it may be difficult to switch these objects to full financial statement reporting entities. This is particularly relevant in cases where companies have hundreds (or even thousands) of Profit Centers/Business Areas. This is why segments have been introduced so that you can have a brand new object which can be used solely for “Segment” reporting.
One thing that I caution clients about is that they should not think that Segment reporting can only be satisfied by the use of segments. In fact, if you are carrying out a brand new SAP implementation I recommend that you use profit centers (along with document splitting functionality) for segment reporting. I would leave business areas alone, if you are a new company, since (as mentioned above) the future of this functionality is still uncertain.