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Chapter Eight Segment and Interim Chapter Eight Segment and Interim

Chapter Eight Segment and Interim - PowerPoint Presentation

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Chapter Eight Segment and Interim - PPT Presentation

Reporting Copyright 2015 McGrawHill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Learning Objective 81 ID: 647663

segments interim reporting segment interim segments segment reporting operating period reportable assets revenues income learning profit objective ifrs test

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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.