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Slide1
Chapter Eight
Segment and Interim Reporting
Copyright © 2015
McGraw-Hill
Education.
All
rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Slide2
Learning Objective 8-1
Understand how an enterprise determines its operating segments and the factors that influence
this determination.Slide3
Rationale for
Segment ReportingSegment reporting provides information to help users of financial statements to:Better understand the entity’s performance.Better assess the entity’s prospects for future net cash flow.
Make more informed judgments about the enterprise as a whole.Slide4
The Management Approach
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.Slide5
Learning Objective 8-2
Apply the three tests that are used to determine which operating segments are of significant
size to warrant separate disclosure.Slide6
Determining Segments
Management must consider these aggregation criteriato determine whether to combine operating segments: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.Slide7
Quantitative Thresholds
A
Segment is considered reportable if it satisfies one of these tests:
Revenue test - Its
revenues are 10% or more of the combined revenue of all
segments.
Profit 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.
Asset test - Its
assets are 10% or more of
the
combined assets of all
operating
segments.Slide8
Reportable Segments - Example
Revenue Test:Atkinson Company is a business with the following six
segments. Slide9
Reportable Segments - Example
Based on the test for revenue, three of the following segments will be reportable (they exceed 10% of $97.8 million):Slide10
Reportable Segments - Example
Atkinson’s six segments had the following financial results:
Profit
or
Loss Test:Slide11
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).Slide12
Reportable Segments - Example
Atkinson’s 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.
The Asset
Test: Slide13
Reportable Segments - Example
Three of Atkinson’s segments have at least 10% of the total assets ($4.43 million):Slide14
Reportable Segments - Example
Because four of Atkinson’s operating segments meet at least one of the quantitative tests, they are considered reportable.Slide15
Operating Segment Tests -
Other GuidelinesThe 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.Slide16
Learning Objective 8-3
List the basic disclosure requirements for operating segments.Slide17
Required Segment Disclosures
A company is required to disclose general information about each operating segment. Segment profit or lossRevenues
Interest revenue and expenseDepreciation, depletion and amortization expenseSignificant noncash and unusual items
Income Tax expense or benefit
Investment in equity method affiliates
Total assets
Capital expendituresSlide18
Other Enterprise Disclosures
Products & Services
Geographic AreasMajor Customers
The company must also disclose additional information regarding . . . Slide19
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. Slide20
Learning Objective 8-4
Determine when and what types of information must be disclosed
for geographic areas.Slide21
Geographic Areas
Revenues from external customers and long-lived 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.Slide22
Learning Objective 8-5
Apply the criterion for determining when disclosure of a major customer is required.Slide23
Major Customers
When 10% or more of a company’s revenue is derived from one or more customer, the company
MUST disclose all of the companies as major customers.
The IDENTITY of the major customer need not be disclosed.Slide24
Learning Objective 8-6
Recognize differences between U.S. GAAP and IFRS in segment reporting.Slide25
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.Slide26
Learning Objective 8-7
Understand and apply procedures used in interim reports to treat an interim period as an
integral part of the annual period.Slide27
Interim Reporting
To provide more timely information, the SEC requires quarterly financial 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?Slide28
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.FASB ASC 270 requires
companies to use the Integral
Approach.Slide29
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.Slide30
Interim Reporting - Inventory
and Cost of Goods SoldLIFO LiquidationsInterim period gross profit should not reflect gains resulting from “temporary” LIFO liquidations.
Standard Costing Variances that are expected to be absorbed by year-end should
not
be recognized in the interim period.
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.Slide31
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.Slide32
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.)Slide33
Learning Objective 8-8
List the minimum disclosure requirements for interim financial reports.Slide34
Interim Reporting –
Minimum DisclosuresEPS
Seasonal Revenues & ExpensesProvision for Income Taxes (and significant changes in estimates)
Sales or Gross Revenues
Unusual or Extraordinary Items
Other significant changes
Net Income
Disposal of a Business Segment
Contingent itemsSlide35
Interim Reporting
– Segment DisclosuresGAAP requires the following interim disclosure for each reportable operating segment:Revenues from external customersIntersegment revenues
Segment profit or lossTotal assets (if there has been a material change from the last annual report)
There are no interim disclosure
about major
customers or geographic
areas.Slide36
Learning Objective 8-9
Recognize differences between U.S. GAAP and IFRS in interim reporting.Slide37
IFRS -- Interim Reporting
IAS 34 requires the following minimum components in an interim report:Condensed statement of financial position (balance sheet).Condensed statement of comprehensive income, presented as:A condensed single statement of net income and comprehensive income, or
Separate condensed statements of net income and comprehensive income.Condensed statement of changes in equity.Condensed statement of cash flows.
Selected explanatory notes.Slide38
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.