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Chapter Eight: Segment and Interim Reporting

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190 views30 pages

Chapter Eight: Segment and Interim Reporting

Chap 008

Uploaded by

soozbooz
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter Eight

Segment and Interim Reporting

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO 1

Rationale for Segment Reporting


Segment reporting provides information to help users of financial statements to: Better understand the entitys performance. Better assess the entitys prospects for future cash flow. Make more informed judgments about the enterprise as a whole.

8-2

Determining Segments
An operating segment is a component of an enterprise: That engages in business activities from which it earns revenues and incurs expenses,

Whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions,
For which discrete financial information is available.
8-3

Determining Segments
Operating segments should be combined based on the: nature of the products or services provided by each operating segment. nature of the production process. type or class of customer.

distribution methods.
nature of the regulatory environment.
8-4

LO 2

Quantitative Thresholds
A Segment is considered reportable if it satisfies one of these tests:
Revenue test Profit

- Its revenues are 10% or more of the combined revenue of all segments.

or Loss test - Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit.
test - Its assets are 10% or more of the combined assets of all operating segments.
8-5

Asset

Reportable Segments - Example


Revenue Test: Atkinson Company is a business with the following six segments.

8-6

8-7

Reportable Segments - Example


Based on the test for revenue, three of the following segments will be reportable (they exceed 10% of $97.8 million):

*In millions
8-7

8-8

Reportable Segments - Example


Atkinsons six segments had the following financial results:

8-8

8-9

Reportable Segments - Example


The individual profits and losses are compared to 10% of the LARGER of the profit and loss totals, and four are determined to be reportable because they are greater than $1.65 million = ($16.5 X .10).

8-9

8-10

Reportable Segments - Example


Atkinsons segments have the following total assets in each segment. Any segment with assets that are 10% or more of the combined assets total is reportable.

8-10

Reportable Segments - Example


Three of Atkinsons segments have at least 10% of the total assets ($4.43 million):

8-11

Reportable Segments - Example


Because four of Atkinsons operating segments meet at least one of the quantitative tests, they are considered reportable.

8-12

Operating Segment Tests Other Guidelines


The combined sales revenues of the disclosed segments must be at least 75% of total company sales, excluding intra-entity sales. Segments must be added until the 75% test is met (even if the additional segments do not meet the reportable segment criteria). Although a maximum number is not prescribed, authoritative literature suggests that 10 separately reported segments might be the practical limit.
8-13

LO 3

Required Segment Disclosures


For each reportable segment, a company is required to disclose: General information Segment profit or loss
Revenues Interest revenue and expense Depreciation, depletion and amortization expense Significant noncash and unusual items Income Tax expense or benefit

Investment in equity method affiliates Total assets Capital expenditures


8-14

Other Enterprise Disclosures


The company must also disclose additional information regarding . . . Products & Services

Geographic Areas

Major Customers
8-15

Products & Services

GAAP requires disclosure of revenues derived from transactions with external customers from each product or service if operating segments have not been determined based on differences in products and services.

8-16

8-17

LO 4

Geographic Areas
Revenues from external customers and longlived assets must be disclosed for: The domestic country. All foreign countries where the enterprise derives revenue or holds assets. Each foreign country in which a material amount of revenue is derived or assets are held.

8-17

8-18

LO 5

Major Customers
When 10% or more of a companys revenue is derived from a single customer, the company must disclose that it has a major customer.
The IDENTITY of the major customer need not be disclosed.

8-18

LO 6

IFRS and Segment Reporting


IFRS and GAAP are substantially the same, except IFRS requires disclosure of total assets AND liabilities if that information is provided to the chief decision maker. IFRS specifically includes intangible assets as long-lived assets. In a company with a matrix form of organization, IFRS permits operating segments to be based on geographic area, as opposed to products/services.
8-19

LO 7

Interim Reporting
To provide more timely information, the SEC requires quarterly statements from publicly-traded companies in the U.S.
But how do the statements fairly reflect expenses that do not occur evenly throughout the year?

8-20

Interim Reporting
There are two possible approaches: Discrete the accounting period stands on its own. Integral treat the accounting period as a portion of a longer period. Current GAAP requires companies to use the Integral Approach.
8-21

Interim Reporting - Revenues


Revenues are recognized in the interim periods in which they are earned. Revenues from long-term contracts should be recognized using the same methodology as used on an annual basis. A company should recognize projected losses on long-term contracts to their full extent in the interim period in which it becomes apparent that a loss will arise.
8-22

Interim Reporting - Inventory and Cost of Goods Sold


LIFO Liquidations Interim period gross profit should not reflect gains resulting from temporary LIFO liquidations.

Lower -of-Cost-or-Market Inventory write-downs should be reflected in interim period numbers if the market value is not expected to recover by year-end.

Standard Costing Variances that are expected to be absorbed by yearend should not be recognized in the interim period.

8-23

Interim Reporting - Expenses


To provides for less volatility of information: Expenses that are not incurred evenly throughout the year should be predicted early in the year and allocated to each of the interim reporting periods. Costs not directly matched to revenues should be allocated among interim periods on a reasonable basis through the use of accruals and deferrals.
8-24

Interim Reporting Other Items


Extraordinary Items should be reported separately and in full in the interim period in which they occur. Income Taxes for each interim period should be computed based on an estimated annual effective tax rate. A change in accounting principles should be reported as if it occurred in the first interim period shown. (This may require restatement.)

8-25

LO 8

Interim Reporting Minimum Disclosures


Sales or Gross Revenues Provision for Income Taxes (and significant changes in estimates)

EPS
Unusual or Extraordina ry Items

Seasonal Revenues & Expenses Contingent items

Disposal of a Business Segment

Other significant changes

Net Income
8-26

Interim Reporting Segment Disclosures


GAAP requires the following interim disclosure for each reportable operating segment: Revenues from external customers Intersegment revenues Segment profit or loss Total assets (if there has been a material change from the last annual report)

There are no interim disclosure about major customers or geographic areas


8-27

LO 9

IFRS -- Interim Reporting


IAS 34 requires the following minimum components in an interim report: A condensed statement of financial position (balance sheet). A condensed statement of comprehensive income, presented as: a.A condensed single statement of net income and comprehensive income, or b.Separate condensed statements of net income and comprehensive income. A condensed statement of changes in equity. A condensed statement of cash flows. Selected explanatory notes.
8-28

IFRS -- Interim Reporting


IAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized. Expenses that are incurred in one quarter are recognized in full in that quarter, even though the expenditure benefits the entire year. No accrual of expenses in earlier quarters for expenses expected to be incurred in a later quarter of the year. The only exception to this rule is the accrual of income tax expense at the end of each interim period.

8-29

Summary
Segment reporting provides more detailed information about the components of a business combination for decision makers. Three quantitative tests used to identify reportable segments: revenue, profit or loss, and asset.

Companies must report specific information for each reportable operating segment, and parameters determine the number of segments it reports. With interim reporting, GAAP requires an integral approach, but the IASBs requires that each interim period be treated as a discrete period in determining amounts to be recognized.
8-30

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