Advanced financial accounting by baker chapter 13

13
Segment and
Interim
Reporting

McGraw-Hill/Irwin

© 2009 The McGraw-Hill Companies, Inc. All rights reserved.


Segment Reporting Accounting Issues
•

FASB 131 - A management approach to the definition of segments

– Focus on financial information that an
enterprise’s financial decision makers use to
evaluate the entity’s operating segments

13-2


Segment Reporting Accounting Issues
•

FASB 131 defines an operating segment as having
three characteristics:
1. The component unit’s business activities generate
revenue and incur expenses, including any revenue or
expenses in transactions with other business units of
the company

2. The component unit’s operating results are regularly
reviewed by the entity’s chief operating decision
maker, who then determines the resources to be
assigned to the segment and evaluates it
3. Separate financial information is available for the
component unit
13-3


Segment Reporting Accounting Issues
•

Issues

– Generally, the corporate headquarters is not a
separate operating segment
– The company may choose to aggregate
several individual operating segments that
have very similar economic characteristics
– Management belief that aggregation will
provide more meaningful information to users
– Allocation of costs to specific segments

13-4


Segment Reporting Accounting Issues
•

International Financial Reporting Standards for operating

segments

– IFRS 8 specifies segment reporting
– This standard requires disclosure of
information about an entity’s reportable
operating segments both in its annual and its
interim financial statements
– International standards are similar to those of
U.S. GAAP although there are several
differences
13-5


Information about Operating Segments
•

10 percent quantitative thresholds:

•

Separate disclosures required for segments meeting at least one
of the following tests:

1. 10 percent revenue test
2. 10 percent profit (loss) test
3. 10 percent assets test

13-6

Information about Operating Segments
•

10 percent revenue test

– Applied to each operating segment’s total
revenue as a percentage of the combined
revenue of all segments before elimination of
intersegment transfers and sales
– If an operating segment’s total revenue is 10
percent or more of the combined revenue of
all segments, then the segment is separately
reportable and supplementary disclosures
must be provided for it in the annual report
13-7


Information about Operating Segments
•

10 percent profit (loss) test

– Determine whether a segment’s profit or loss
is equal to or greater than 10 percent of the
absolute value of either the combined
operating profits or the combined operating
losses of the segments, whichever is greater

13-8

Information about Operating Segments
•

10 percent assets test

– Determine if the segment’s assets are 10
percent or more of the total assets of all
operating segments
– Items composing each segment’s assets are
defined by management, as used for internal
decision-making purposes

13-9


Information about Operating Segments
•

Comprehensive disclosure test

– 75 percent consolidated revenue test
– Applied after determining which segments are
reportable under any of the 10 percent tests
– The total revenue from external sources by all
separately reportable operating segments
must equal at least 75 percent of the total
consolidated revenue

13-10

Information about Operating Segments
•

Other considerations

– An upper limit of about 10 segments is used
– Above this, a company should consider
aggregating the closely related segments

13-11


Information about Operating Segments
•

Other considerations
–

Exercising judgement in determining segments
•

•
•

Companies should separately report segments that have
been reported in prior years but fail the current period’s
significance tests because of abnormal occurrences
Companies need not separately report a segment that has

met a 10 percent test on a one-time basis only
If a segment becomes reportable in the current period but
has not been reported separately in earlier periods, the
prior years’ comparative segment disclosures, which are
included in the current year’s annual report, should be
restated

13-12


Information about Operating Segments
•

Information to be disclosed for a segment determined to be
separately reportable:

– General information
– Amounts for each separately reportable
segment
– Measures of segment profit or loss
– Segment assets
– Reconciliations to consolidated totals

13-13


13-14


Enterprisewide Disclosures

•

FASB 131 established enterprisewide disclosure standards to
provide users more information about the risks of the company

– Typically made in a footnote to the financial
statements

13-15


Enterprisewide Disclosures
•

Information about products and services

– A company is required to report the revenues
from external customers for each major
product and service, or each group of similar
products and services, unless it is
impracticable for it to do so
– The reason for this requirement is that the
company may have organized its operating
segments on a basis different from its product
lines
13-16


Enterprisewide Disclosures
•

Information about geographic areas

•

If practical to do, the company must report:

– Revenues from external customers attributed
to the company’s home country of domicile
and the revenue from external customers
attributed to all foreign countries in which the
enterprise generates revenues
•

If revenues from external customers generated in
an individual country are material, then the
revenues for that country shall also be separately
disclosed
13-17


Enterprisewide Disclosures
•

Information about geographic areas

– Long-lived productive assets located in the
entity’s home country of domicile and the total
assets located in all foreign countries in which
the entity holds assets

•

If assets in an individual foreign country are
material, then the amount of assets held in that
specific country shall also be disclosed
separately

– FASB 131 specified no materiality threshold
for specific country disclosures
– The 10 percent has gained acceptance
13-18


Enterprisewide Disclosures
•

Information about major customers

– Defining an individual customer
– An individual customer could be:
•

Any single customer, the federal government, a
state government, a local government, or a
foreign government

– Materiality is not defined, but the 10 percent
guideline has gained the support of practice

13-19

Interim Financial Reporting
•

Interim reports cover a time period of less than one year

– Publicly held companies are required to
publish quarterly reports
– The quarterly report is, in many ways, a
smaller version of the annual report

13-20


Interim Financial Reporting
•

Form 10-Q is the SEC’s quarterly report

– This must be filed within 35 days after the end
of each of the first three quarters for publicly
owned companies classified as “accelerated
filers”
– Quarterly financial statements need not be
audited
– Selected quarterly financial data must be
reported in a footnote in the annual financial
report
13-21

The Format of the Quarterly Financial
Report
•

Items in quarterly financial reports:

1. An income statement for the most recent
quarter of the current fiscal period and a
comparative income statement for the same
quarter for the prior fiscal year
2. Income statements for the cumulative year-todate time period and for the corresponding
period of the prior fiscal year
3. A condensed balance sheet at the end of the
current quarter and a condensed balance
sheet at the end of the prior fiscal year
13-22


The Format of the Quarterly Financial
Report
•

Items in quarterly financial reports (cont.):

4. A statement of cash flows as of the end of the
current cumulative year-to-date period and for
the same time span for the prior year
5. Footnotes that update those in the last annual

report
6. A report by management analyzing and
discussing the results for the latest interim
period

13-23


Accounting Issues
•

Interim reporting presents several technical and conceptual
measurement issues

– Most of these center on the accounting
concept of periodicity and the division of the
annual period into interim periods

13-24


Accounting Issues
•

Discrete versus Integral view

– The discrete theory of interim reporting views
each interim period as a basic accounting
period to be evaluated as if it were an annual
accounting period

– Any end-of-period adjustments and deferrals
are determined using the same accounting
principles used for the annual report

13-25