Advanced Accounting by Hoyle et al, 6th Edition

Chapter EightSegment and Interim Reporting

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Rationale for Segment ReportingLearning Objective 8-1: Understand how an enterprise determines its operating segments and the factors that influence this determination.Segment reporting provides information to help users of financial statements to:Better understand the entitys performance.Better assess the entitys prospects for future net cash flow.Make more informed judgments about the enterprise as a whole.8-2Rationale for Segment ReportingSegment reporting provides information to help users of financial statements to:Better understand the entitys performance.Better assess the entitys prospects for future cash flow.Make more informed judgments about the enterprise as a whole.The Management ApproachAn 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.8-3Determining SegmentsAn operating segment is a component of an enterprise:That engages in business activities from which it earns revenues and incurs expensesWhose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisionsFor which discrete financial information is available

Determining SegmentsLearning Objective 8-2: Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.Management must consider these aggregation criteriato determine whether to combine operating segments:nature of products or services provided by each segment.nature of the production process.type or class of customer.distribution methods.nature of the regulatory environment.8-4Management must consider these aggregation criteria to 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.

Quantitative ThresholdsA Segment is considered reportable if it satisfies one of these tests:Revenue - Its revenues are 10% or more of the combined revenue of all segments.Profit or Loss - Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit.Asset - Its assets are 10% or more of the combined assets of all operating segments.8-5An operating segment is considered to be significant if it meets anyone of the following tests:1. Revenue test. Segment revenues, both external and intersegment, are 10 percentor more of the combined revenue, internal and external, of all reported operatingsegments.2. Profit or loss test. Segment profit or loss is 10 percent or more of the larger (in absoluteterms) of the combined reported profit of all profitable segments or the combinedreported loss of all segments incurring a loss.3. Asset test. Segment assets are 10 percent or more of the combined assets of all operatingsegments.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.8-6Operating 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.

Required Segment DisclosuresLearning Objective 8-3: List basic disclosure requirements for operating segments.For each reportable segment of a company, it must disclose general information about:Segment profit or lossRevenuesInterest revenue and expenseDepreciation, depletion and amortization expenseSignificant noncash and unusual items Income Tax expense or benefitInvestment in equity method affiliatesTotal assetsCapital expenditures8-7Required Segment DisclosuresFor each reportable segment, a company is required to disclose:General informationSegment profit or lossRevenues.Interest revenue and expense.depreciation, depletion and amortization expense.Significant noncash and unusual items. Income Tax expenseInvestment in equity method affiliates.Total assets.Capital expenditures.

Geographic Areas Learning Objective 8-4: Determine when and what types of information must be disclosed for 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.8-8Revenues 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.

Major CustomersLearning Objective 8-5: Apply the criterion for determining when disclosure of a major customer is required.When 10% or more of a companys revenue is derived from one or more customer, the company MUST disclose all of the companies as major customers.IDENTITY of a major customer need not be disclosed.8-9When 10% or more of a companys 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.IFRS and Segment ReportingLearning Objective 8-6: Recognize differences between U.S. GAAP and IFRS in segment reporting.IFRS and GAAP are substantially the same, exceptIFRS 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.

8-10IFRS and GAAP are substantially the same, exceptIFRS 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.

Interim ReportingLearning Objective 8-7: Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.To report expenses that do not occur evenly throughout the year, 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. The SEC requires quarterly financial statements from publicly-traded companies in the U.S. FASB ASC 270 requires companies to use the Integral Approach.

8-11To 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??

Interim Reporting - RevenuesRevenues 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.8-12Revenues 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.

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-MarketInventory write-downs should be reflected in interim period numbers if the market value is not expected to recover by year-end.8-13LIFO LiquidationsInterim period gross profit should not reflect gains resulting from temporary LIFO liquidations.Lower -of-Cost-or-MarketInventory write-downs should be reflected in interim period numbers if the market value is not expected to recover by year-end.Standard Costing Variances that are expected to be absorbed by year-end should not be recognized in the interim period.

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.8-14To 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.

Interim Reporting Minimum Disclosures8-15Sales or Gross RevenuesProvision for Income Taxes (and significant changes in estimates)Earnings per shareSeasonal Revenues & ExpensesDisposal of a Business SegmentContingent itemsOther significant changesUnusual or Extraordinary ItemsNet IncomeLearning Objective 8-8: List the minimum disclosure requirements for interim financial reports.Many companies provide summary financial statements and notes in their interim reportsthat contain less information than is included in the annual financial statements.Authoritative accounting literature requires companies to provide the following minimuminformation in their interim reports: Sales or gross revenues, provision for income taxes, extraordinary items, and netincome. Earnings per share. Seasonal revenues and expenses. Significant changes in estimates or provisions for income taxes. Disposal of a segment of a business and unusual or infrequently occurring items. Contingent items. Changes in accounting principles or estimates. Significant changes in financial position.Interim Reporting Segment DisclosuresGAAP requires the following interim disclosure for each reportable operating segment:Revenues from external customersIntersegment revenuesSegment 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 areas8-16GAAP requires the following interim disclosure for each reportable operating segment:Revenues from external customersIntersegment revenuesSegment profit or lossTotal assets (if there has been a material change from the last annual report)

IFRS - Interim ReportingLearning Objective 8-9: Recognize differences between U.S. GAAP and IFRS in 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.8-17IAS 34 requires the following minimum components in an interim report: A condensed statement of financial position (balance sheet). A condensed statement of comprehensive income, presented as:A condensed single statement of net income and comprehensive income, or b. Separate condensed statements of net income and comprehensive income. A condensed statement of changes in equity.A condensed statement of cash flows.Selected explanatory notes.IFRS -- Interim ReportingIAS 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 b. Separate condensed statements of net income and comprehensive income. Condensed statement of changes in equity. Condensed statement of cash flows. Selected explanatory notes.8-18IAS 34 requires the following minimum components in an interim report: A condensed statement of financial position (balance sheet). A condensed statement of comprehensive income, presented as:A condensed single statement of net income and comprehensive income, or b. Separate condensed statements of net income and comprehensive income. A condensed statement of changes in equity.A condensed statement of cash flows.Selected explanatory notes.