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to accompanyAdvanced Accounting, 11th edition

by Beams, Anthony, Bettinghaus, and Smith

Chapter 15

Segment and Interim

Financial Reporting

Copyright 2012 Pearson Education,Inc. Publishing as Prentice Hall

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Segment and Interim Financial Reporting:

Objectives

1. Understand how the management approach isused to identify potentially reportableoperating segments.

2. Apply the threshold tests to identify

reportable operating segments: the revenuetest, the asset test, and the operating profittest.

3. Apply the 75% external revenue test todetermine whether additional segments mustbe reported.

4. Understand the types of information that maybe disclosed for segments and the reasonsthat the levels of disclosure may vary across

companies.


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5. Understand what segment disclosures arereconciled to the consolidated amounts.

6. Know the types of enterprise-widedisclosures related to products andservices, geographic areas of operation, andmajor customers that are required to bedisclosed.

7. Understand the similarities and differences

in the reporting of operations in an interimversus an annual reporting period.8. Compute interim-period income tax

expense.

Segment and Interim Financial Reporting:

Objectives (cont.)


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1: REPORTABLE OPERATING

SEGMENTS

Segment and Interim Financial Reporting


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Operating Segments

According to GAAP, companies that havepublicly traded debt or equity instruments mustreport on their business segments.

Reporting is based on the structure used by

management to make decisions or evaluateperformance. For example, if the companys internal reporting and

evaluation system is geographically based,

the segment reporting is geographicallybased. if the internal reporting and evaluation system

is product-line based, the segment reporting

is product-line based.


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Operating Segment (def.)

A component of a business enterprise1. Engages in business activities

Revenues and expenses tracked

Intercompany amounts included2. Operating results are reviewed by chief

operating decision maker

3. Discrete financial information is available

Excludes pension and post-retirementplans, and general corporateheadquarters


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Combining Segments

Segments with similar economiccharacteristics may be combined. Products and services

Production processes Classes of customers

Distribution systems

Regulatory environment, if applicable


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2: THRESHOLD TESTS


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Reportable Segments

Operating segments are reportable andmaterial if any one of the three threshold testsare met

1. 10% Revenue test

2. 10% Asset test3. 10% Profit or loss test

Segments not meeting any of the three tests

are combined into one "all other" category.One additional test to see if a sufficient numberof segments have been identified

1. 75% External revenue test


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10% Revenue Test

Segment reported revenue, includingintersegment revenues, is 10% or more of thecombined revenue of all operating segments.

Combined includes "all other" category Intersegment revenues are not eliminated so that

combined revenue may be > consolidated revenue


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Example: 10% Revenue Test

A segment is reportable if its total revenue 10% of

combined segment revenue.Threshold = 10%(1,500) = $150

Transportation ($360) and Oil refining ($885) arereportable segments.

Operatingsegmentrevenue

Intersegmentrevenue

Totalsegmentrevenue

Report-able?

Transportation $360 $0 $360 YesOil refining 405 480 885 Yes

Insurance 95 20 115 NoFinancing 140 0 140 NoTotal $1,000 $500 $1,500


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10% Asset Test

Segment assets are 10% or more ofcombined assets of all operating segments. Combined includes "all other"

Use the segment's identifiable assets General corporate assets

May be excluded or included

Consider organization of assets for decision-

making purposes Combined assets of segments may be less than

total corporate assets


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Example: 10% Asset Test

Operating segment'sidentifiable assets Reportable?

Transportation $ 700 YesOil refining 950 YesInsurance 180 No

Financing 1,170 YesTotal $3,000

A segment is reportable if its identifiableassets 10% of combined segment assets.

Threshold = 10%(3,000) = $300

Transportation, Oil refining, and Financingare reportable segments.


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10% Profit or Loss Test

The absolute value of the segment's reportableprofit or loss is 10% or more of the greater of:

1. The combined reported profit of all segments

reporting profits, or2. The absolute value of the combined reportedlosses of all segments reporting losses.

Operating segment profit or loss

Is not defined by GAAP Is based on the calculation used by management

for decision making May include or exclude common revenues and

costs


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Example: 10% Profit or Loss Test

Separate profitable and unprofitable segments.

A reportable segment's |profit or loss| 10% of

the greater of |combined profits or combinedlosses|. $270 is greater than $100.Threshold = 10%(270) = $27.

Transportation, Oil refining, and Finance arereportable segments.

Segmentoperating profit

Segmentoperating loss Reportable?

Transportation (100) YesOil refining 200 Yes

Insurance 20 NoFinancing 50 YesTotal 270 (100)


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3: TEST FOR ADDITIONAL

SEGMENTS



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75% External Revenue Test

GAAP does not specify the number ofsegments that must be reported; however,the external revenue of reportable

segments must be at least 75% of the totalconsolidated revenue. Exclude intersegment revenues Add other segments until the 75% test is met Segments are typically aggregated so that

there are not more than ten separatesegments reported.


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Preliminary Segment Test Results:

Example (cont.)

Based on the 10% revenues, 10% assets,10% profit and loss tests: Three reportable segments

Transportation Oil refining Financing

One non-reportable segment which becomes"all other" Insurance

Now, check to see if the three are enough!


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75% External Revenue: Example

Now we examine the operating segment revenuewithout intersegment sales data. Have sufficient

segments been identified?

Threshold = 75%(1,000) = $750

$360 + 405 + 140 > $750 Yes!Operatingsegmentrevenue

Intersegmentrevenue

Totalsegmentrevenue

Report-able?

Transportation $ 360 $ 0 $ 360 YesOil refining 405 480 885 YesInsurance 95 20 115 NoFinancing 140 0 140 NoTotal $1,000 $500 $1,500


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4: SEGMENT DISCLOSURES


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Reportable Segment Disclosures

Profit or loss Total assets Revenue from external customers Revenue from other operating segments

Interest income and expense Depreciation and amortization expense Unusual items Income from equity method investments Income tax expense or benefit Extraordinary items Significant noncash items other than

depreciation


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Reportable Segment Disclosures (cont.)

Remember:GAAP is depending on the companys chiefoperating decision maker to determine the

most useful information.

Whatever data is required internally will also beused for external disclosures. However, the

company allocating expenses among theoperating segments should be continued forexternal segment disclosure purposes.


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5: RECONCILING SEGMENTS

TO CONSOLIDATED

AMOUNTS


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Reconciliations

Reconciliation schedules should beprovided to explain the differencebetween segment amounts andconsolidated totals for:

1. Reportable segment revenue toconsolidated revenue Intersegment revenues

2. Reportable segment profit and loss toconsolidated income before taxes Intersegment revenues, expenses, and

common or allocated costs


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Reconciliations (cont.)

3. Reportable segment assets toconsolidated assets

Corporate assets4. If other significant information is

disclosed, reconcile the segment

amounts with consolidated amountsfor each item


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6: ENTERPRISE-WIDE

DISCLOSURES


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Additional Disclosures

Additional enterprise-wide disclosures arerequired if not already reported with segmentinformation

1. Products and services

Revenues by product/product line, service2. Geographic information Revenues and fixed assets Domestic and foreign

And if >10%, the specific country must be disclosed3. Major customers Customer revenues > 10% Total Revenues Segment which has those revenues Not required: customer identity


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7: INTERIM FINANCIAL

REPORTING


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Accounting for Interim Periods

Are interim reports stand-aloneperiods, or an integral part of the

annual period?

GAAP has concluded that aninterim period is an integral part ofthe whole, and should be based on

the same accounting principles andpractices used in the annual

financial statements.


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Product Cost Modifications

Companies that determine Cost of Goods Sold via aphysical inventory may use the Gross Profit method

for interim periods.

LIFO inventory layers that are liquidated in an interim

period may be expensed at current cost if the layer will

be replaced by year end.

Inventory market declines are not required to be

recorded if the decline is temporary. Variances under a standard cost system that are

expected to be absorbed by year end may be deferred

at the interim date.


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Other Interim Modifications

Annual expenses may be allocated, such as

property taxes or major annual repairs.

Advertising expenses may be deferred to later

interim periods if the benefits clearly apply. Income taxes from continuing operations use an

estimated effective annual tax rate.

Income taxes on unusual, infrequent, and otheritems are calculated separately and included in the

interim period containing that item.


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8: INTERIM-PERIOD INCOME

TAXES


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Estimated Annual Effective Tax Rate

If expected annual taxable income = $120,000Taxes= $22,250 + .39(120,000100,000)= $30,050

Effec tive tax rate = 30,050 / 120,000 = 25.042%

The 25.042% rate is used for all four quarters.


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Interim Period Disclosures

Sales or gross revenues Provision for taxes

Extraordinary items, net of tax Net income and Comprehensive income

Basic and Diluted EPS Seasonal revenues, costs, or expenses Significant changes in estimated taxes Disposals, extraordinary, unusual, or

infrequent items Contingent items Changes in accounting principles or

estimates Significant change in financial position


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Other Interim Disclosures

Segment information disclosures arereduced for interim reporting

Certain information about definedbenefit pension plans

Certain information about the use offair value measurements, derivatives,

and other financial instruments Information about impairments


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SEC Interim Financial Disclosures

SEC requiresQ1, Q2, Q3 and annual reports

Quarterly requirements similar to

annual

Comparative information

Current quarter vs. prior year quarterQuarterly and year-to-date for

current and prior year


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