Segment and Interim Financial Reporting Chapter 14

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Learning Objective 1 Understand the management approach to segment reporting.

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Identifying Reportable Segments

Segments determined by the management approach are called operating segments. Statement 131 characterizes an operating segment as a component of an enterprise

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Identifying Reportable Segments

(1) that engages in business activities from which it may earn revenues and incur expenses; (2) whose operating results are regularly reviewed by the chief decision maker; and (3) for which discrete financial information is available.
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Aggregation Criteria

An enterprise may combine similar operating segments if aggregation is consistent with the objectives of Statement No. 131 and the segments have similar economic characteristics.

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Quantitative Thresholds
Operating segments are reportable if they meet materiality thresholds.

Once reportable segments are identified, all other operating segments are combined with other business activities in an all other category for reporting purposes.
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Reconsideration of Reportable Segments

Reported segments must include 75% of all external revenue. If reportable segments do not meet this criterion, additional segments must be identified as reportable, even if they do not meet the quantitative thresholds.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Learning Objective 2 Apply reportable operating segment tests.

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Illustration of the Tests for Reportable Operating Segments

Phil-Brown Corporation applies the three materiality tests.

Revenue test

Asset test

Operating profit test

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Revenue Test

Operating Segments Revenue

Reportable Intersegment Test Value Segment Under Revenue (10% $670,000) Revenue Test?

Food Paper Copper Finance Total

$150,000 170,000 40,000 60,000 $420,000

0 200,000 0 50,000 $250,000

$67,000 67,000 < 67,000 67,000

Yes Yes No Yes

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Asset Test
Operating Segments Identifiable Assets Reportable Segment Under Asset Test?

Test Value (10% $1,010,000)

Food Paper Copper Finance Total

$ 200,000 250,000 60,000 500,000 $1,010,000

<

$101,000 101,000 101,000 101,000

Yes Yes No Yes

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Operating Profit Test

Operating Segments Operating Profit Operating Segments Operating Loss

Reportable Segment Under Test Value Operating (10% $130,000) Profit Test?

Food Paper Copper Finance Total

$ 25,000 55,000

$(10,000)
50,000 $130,000 $(10,000)

<

$13,000 13,000 13,000 13,000

Yes Yes No Yes

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Learning Objective 3 Comprehend segment disclosure and enterprisewide disclosure details.

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Segment Disclosures
The basis of organization used by the chief operating decision maker to determine operating segments must be disclosed. Any aggregation of operating segments used in arriving at these reportable segments must also be disclosed.

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Segment Disclosures
Profit/loss and asset information Measurement
Reconciliation requirements
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Enterprisewide Disclosures
Products and services Geographic information
Major customers
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Learning Objective 4 Understand the similarities and differences of interim reporting and annual reporting.

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Interim Financial Reporting

Interim financial reports are commonly issued on a quarterly basis. They typically include cumulative, year-to-date information, as well as comparative information for corresponding periods of the prior year.

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Nature of Interim Reports

Interim financial reports provide more timely, but less complete, information than annual financial reports.

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Product Costs

A company can use this method for interim reporting purposes when it does not use the perpetual inventory method.

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Product Costs

LIFO inventory layers can be liquidated during an interim period but expected to be replaced by year end. Cost of sales can include the replacement cost of the liquidated LIFO layer if the reduction is determined to be temporary.
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Product Costs

Permanent inventory market declines are recognized in the interim period.

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Product Costs

Planned variances under a standard cost system that are expected to be absorbed by year end are usually deferred at the interim date.

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Expenses Other Than Product Costs

Annual expenses Advertising costs
Income taxes
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Learning Objective 5 Compute interim-period income tax expense.

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Computation of the Estimated Annual Effective Tax Rate

Small Corporation bases its estimate on the following assumed tax-rate schedule:
If Taxable Income Is: Over 0 $ 50,000 75,000 100,000 355,000 But Not Over Pay $ 50,000 75,000 $ 7,500 100,000 13,750 335,000 22,250 The Tax Is: Of the + Excess Amount Over 15% 0 + 25 $ 50,000 34 75,000 39 100,000 34 0

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Small Corporation Estimated Quarterly Income Tax

Quarter Estimated Income First $ 20,000 Second 30,000 Third 25,000 Fourth 25,000 Totals $100,000 Rate Estimated Tax 15% $ 3,000 15 4,500 25 6,250 34 8,500 $22,250

$22,250 $100,000 = 22.25%

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Small Corporation Estimated Quarterly Income Tax

First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal $20,000 $50,000 $75,000 $100,000 $100,000 $20,000 $30,000 $25,000 $ 25,000 $100,000 4,450 6,675 5,563 5,563 22,250 $15,550 $23,325 $19,438 $ 19,438 $ 77,750

Income year-to-date Quarterly period income Tax expense (22.25%) Net income

$20,000 22.25% = $4,450

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Learning Objective 6 Grasp both GAAP and SEC interim reporting requirements.

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Guidelines for Preparing Interim Statements

At a minimum (per APB Opinion No. 28), publicly traded companies should report: 1 a Sales or gross revenues b Provision for income taxes c Extraordinary items net of income taxes d Cumulative-effect-type changes in accounting principles e net income
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Guidelines for Preparing Interim Statements

2 Basic and diluted earnings per share 3 Seasonal revenue, costs, or expenses 4 Significant changes in estimates of income tax expense 5 Disposal of a segment of a business and extraordinary and unusual items 6 Contingent items 7 Changes in accounting principles and estimates 8 Significant changes in financial position
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Segment Disclosures in Interim Reporting

1 2 3 Revenue from external customers

Intersegment revenues
A measure of segment profit or loss

Total assets for which there has been a 4 material change since the last annual report

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Segment Disclosures in Interim Reporting

A description of any differences in the basis 5 of segmentation or measurement of segment profit or loss since the last annual report A reconciliation between segment 6 and total profits

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SEC Interim Financial Disclosures

The SEC requires that quarterly reports be prepared for the companys stockholders and for filing with the SEC. These reports are to be prepared using GAAP and are filed on Form 10-Q.

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SEC Interim Financial Disclosures

Part I of Form 10-Q contains the following summary of contents: Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 Managements Discussion of Financial Condition and Results of Operations
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SEC Interim Financial Disclosures

Companies present comparative balance sheets as of the end of the current quarter and at the prior year-end. Comparative income statements are presented for the current quarter and the same quarter of the prior year plus the current year-to-date and the prior year-to-date.
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End of Chapter 14

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