advanced accounting 6e by jeter chaney chapter 14

Advanced
Accounting
Jeter ● Chaney

Reporting for
Segments and for
Interim Financial
Periods
1

Prepared by Sheila Ammons, Austin Community College


Learning Objectives
• Understand the need for disaggregated financial data.
• Describe the basic requirements of public companies in
reporting segmental data.
• Determine an operating segment.
• Define a reportable segment.
• Identify the information to be presented for each
reportable segment.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Learning Objectives
• Explain when and what types of geographic data must be
reported.
• Explain when information about major customers must be
reported.
• Compare the international accounting standards for segmental

reporting with the U.S. requirements.
• Describe current requirements for companies to report interim
information.
• Indicate some problems with interim reporting and the
authoritative position on the issue.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Need for Disaggregated Financial Data
• Users need information to determine conditions, trends, and
ratios that assist in predicting cash flows of firms.
• Different industries or geographic areas have different
– rates of profitability,
– opportunities for growth, and
– types of risk.
• Disaggregated information is useful to assist in analyzing
uncertainties surrounding the timing and amounts of expected
cash flows.
LO 1 The need for disaggregated financial data.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
• FASB ASC topic 280 (Segment Reporting): Segmental disclosures have
limitations as well as strengths.
• Primary benefit - unveiling information that has been merged and possibly
buried in the consolidated data.
• Arguments against segmental disclosures include:
– May be misleading or meaningless due to accounting and allocation

problems, lack of user knowledge, different measurement techniques.
– Disclosures to competing firms, labor unions, etc.
– Adds to already excessive amount of accounting detail.
• Most people believe the advantages outweigh the disadvantages.

LO 2 Basic disclosure requirements.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
• In general, the FASB implemented a management approach:
– Focusing on the way in which management organizes
segments internally
• To make operating decisions.
• To assess performance.
• The objective of the management approach:
– To facilitate consistence between internal and external
reporting.
LO 2 Basic disclosure requirements.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Basic Disclosure Requirements (Management Approach):
Objective is to facilitate consistency between internal and
external reporting.

Segmented by

Reporting
Requirement

Product or service,

Segmental profit or loss,

Geographic area,

Certain items of revenue and
expense,

Customer type, or
Legal entity.

Segmental assets, and
Other items.
LO 2 Basic disclosure requirements.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Operating Segment - Component of an enterprise that
– May earn revenues and incur expenses.
– Chief operating decision maker regularly reviews the
component’s operating results.
– Discrete financial information is available.

Reportable Segment
– Significant to an enterprise’s operations.
• Has passed one of three 10% tests or
• Determined to be reportable by other criteria.
LO 3 Determine an operating segment.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.

LO 4 Reportable segment.


Standards of Financial Accounting and
Reporting
Common Cost Allocation
– If portions of assets are allocated internally and used by the chief
operating decision maker,
• those amounts should be allocated on a reasonable basis and
disclosed for external reporting purposes as well.
– Two of the most difficult tasks in applying the segment
disclosure requirements are those of determining
1. An appropriate basis for the allocation of common costs and
2. Appropriate operating segments

LO 4 Reportable segments.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Question
A component of an enterprise that may earn revenues and incur

expenses, and about which management evaluates separate
financial information in deciding how to allocate resources and
assess performance is a(n)
a) identifiable segment.
b) operating segment.
c) reportable segment.
d) industry segment.
LO 4 Reportable segments.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Determining Operating Segments
Operating segments of the firm are determined using a modified
management approach.
– An operating segment is a component that exhibits all of the following
characteristics.
• Engages in business activities that may earn revenues and incur
expenses (including transactions with other components of the
entity).
• Results are reviewed regularly by the chief operating decision maker.
• Discrete financial information is available.

LO 3 Determine an operating segment.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting

Determining Operating Segments
• Aggregation Criteria - entity is permitted (but not required) to
aggregate operating segments that have similar economic
characteristics and are similar in all the following:
– Nature of their products or services.
– Nature of the production processes.
– Types or class of customers.
– Methods used to distribute products or provide services.
– Nature of the regulatory environment.
LO 3 Determine an operating segment.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Question
An entity is permitted to aggregate operating segments if
the segments are similar regarding the
a) nature of the production processes.
b) types or class of customers.
c) methods used to distribute products or provide
services.
d) all of these.
LO 3 Determine an operating segment.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and

Reporting
Determining Operating Segments
• Quantitative Thresholds - Segment is reportable if it meets one or
more of the following tests:
– Combined (external and internal) revenue is 10% or more of
combined revenue of all reportable segments.
– Absolute amount of its profit or loss is 10% or more of the greater
absolute amount of:
• Combined profit of all segments not reporting a loss.
• Combined loss of all segments that reported a loss.
– Assets are 10% or more of the combined assets of all segments.
LO 3 Determine an operating segment.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Problem 14-1: Significance Tests—Segmental Reporting
Bacon Industries operates in seven different segments. Information
concerning the operations of these segments for the most recent fiscal
period follows:

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Problem 14-1: Determine which of the segments must be treated as
reportable segments.
Revenue Test

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Problem 14-1: Determine which of the segments must be treated as
reportable segments.
Operating Profit Test

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Problem 14-1: Determine which of the segments must be treated as
reportable segments.
Identifiable Assets Test

Summary: Segments 3, 4, 5, 6, and 7
are reportable segments.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Seventy-Five Percent Combined Revenue Test
• The reportable segments taken together must represent a substantial
portion of the firm’s total operations.
– The combined revenue from sales to unaffiliated customers of all

reportable segments must constitute at least 75% of the combined
revenue from sales to unaffiliated customers of all operating
segments.
– If the 75% test is not satisfied, additional segments must be
identified until the test is met.
• The FASB standard implies that the number of reportable
segments should probably not exceed 10 segments.
LO 3 Determine an operating segment.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Review Question
To determine whether a substantial portion of a firm's operations are
explained by its segment information, the combined revenue from sales to
unaffiliated customers of all reportable segments must constitute at least
a) 10% of the combined revenue of all operating segments.
b) 75% of the combined revenue of all operating segments.
c) 10% of the combined revenue from sales to unaffiliated customers of
all operating segments.
d) 75% of the combined revenue from sales to unaffiliated customers of
all operating segments.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Problem 14-1 Data:

75% Test

Nonaffiliated
Revenue from
reportable
segments
$176,100

Nonaffiliated revenue (reportable segments)
Total nonaffiliated revenue
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.

$176,100
= 95.6%
$184,300


Standards of Financial Accounting and
Reporting
Information to be Presented
For each of a firm’s reportable segments, and in the aggregate for the
segments not separately reported.
 General information.

 Enterprisewide disclosures.

 Operating profit or loss.

 Product or service.

 Assets.

 Geographic area.

 Bases for measurement.

 Major customer (10%).

 Interim disclosures.
 Reconciliation of segment amounts and consolidated amounts for revenue,
profit or loss, assets, and other significant items.
LO 5 Reportable segment information to be presented.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Geographic Areas
• Where operations in foreign countries are grouped into
geographic areas, the groupings should consider
– proximity,
– economic affinity,
– similarities of business environments, and
– the nature, scale, and degree of interrelationship of the
operations in the various countries.
LO 6 Reporting on geographical areas.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.

Standards of Financial Accounting and
Reporting
Information about Major Customers
To provide information about the potential effects of dependency on one or
more major customers,
• If 10% or more of the revenue of a firm is derived from sales to any
single customer, or
• If 10% or more of the revenue is derived from sales to the federal
government, a state government, a local government, or a foreign
government,
– those facts and the amount of revenue must be disclosed.
• These disclosures are required even if the firm has only one
reportable segment.
LO 7 Reporting on major customers.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards of Financial Accounting and
Reporting
Review Question
Which of the following is not a consideration in segment
reporting for diversified companies?
a) Consolidation policy.
b) Defining the segments.
c) Transfer pricing.
d) Allocation of joint costs.

Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.