Advanced accounting 10th by a beams athony ch14

publishing as Prentice Hall 14-11 10% Revenue Test Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue of all operating segments.. publishin

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by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

Segment and Interim Reporting:

Objectives

1 Understand how the management approach is used to identify potentially reportable operating segments.

2 Apply the threshold tests to identify reportable operating segments: the revenue test, the asset test, and the operating profit test.

3 Apply the 75% external revenue test to determine whether additional segments must be reported.

4 Understand the types of information that may be disclosed for segments and the reasons that the levels of disclosure may vary across

companies.

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Objectives (cont.)

5 Understand what segment disclosures are reconciled to the consolidated amounts.

6 Know the types of enterprise-wide disclosures related to products and services, geographic areas of operation, and major customers that are

required to be disclosed.

7 Understand the similarities and differences in the reporting of operations in an interim versus an annual reporting period.

8 Compute interim-period income tax expense.

1: Reportable Operating Segments

Segment and Interim Financial Reporting

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Operating Segments

• FASB Statement No 131 governs segment reporting

• Firm's internal reporting and evaluation system:

– If it is geographically based

• External segment reporting is

geographically based

– If it is product-line or industry based

• External reporting is product-line or

industry based

Operating Segment (def.)

• A component of a business enterprise

1 Engages in business activities

• Revenues and expenses

• Includes intercompany amounts

2 Operating results are reviewed by chief operating

decision maker

3 Discrete financial information is available

Excludes pension and post-retirement plans, general corporate headquarters

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Combining Segments

• Similar economic characteristics

– Products and services

• One test to see if sufficient segments have been identified

1 75% External revenue test

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Reportable Segments

• Operating segments are reportable and material if any one of the three threshold tests are met

1 Revenue test

2 Asset test

3 Profit or loss test

• Segments not meeting any of the three tests are combined into one "all other" category

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10% Revenue Test

Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue of all operating segments.

– Combined includes "all other" category

– Intersegment revenues are not eliminated so that

combined revenue may be > consolidated revenue

Example: 10% Revenue Test

A segment is reportable if its total revenue ≥ 10% of combined segment revenue

Total segment revenue Report- able? Transportation $360 $0 $360 Yes Oil refining 405 480 885 Yes

Total $1,000 $500 $1,500  

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10% Asset Test

Segment assets are 10% or more of combined 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

Example: 10% Asset Test

  Operating segment's identifiable assets Reportable?

A segment is reportable if its identifiable assets ≥ 10% of

combined segment assets

Threshold = 10%(3,000) = $300 Transportation, Oil refining, and Financing

are reportable segments.

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10% Profit or Loss Test

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

1 The combined reported profit of all segments reporting profits, or

2 The absolute value of the combined reported losses of all segments reporting losses.

– Operating segment profit or loss

• Not defined by GAAP

• Management decision making – May include or exclude common revenues and

costs

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 combined losses|.

$270 is greater than $100.

Threshold = 10%(270) = $27.

Transportation, Oil refining and Finance are reportable segments.

  operating profit Segment operating loss Reportable? Segment

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3: Test for Additional Segments

Segment and Interim Financial Reporting

75% External Revenue Test

• FASB Statement No 131 requires that the external revenue of reportable segments must be at least 75% of the total consolidated revenue.

– Exclude intersegment revenues

– If reportable segment external revenues do not

sufficient

• Add other segments until the 75% test is met

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Preliminary Segment Test Results

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

– Three reportable segments

Example: 75% External Revenue

Re-examining the schedule for the 10% segment revenue test, we now look at the

operating segment revenue without intersegment sales data.

Sufficient segments have been identified if reportable segment revenues ≥ 75%

Total segment revenue Report- able? Transportation $360 $0 $360 Yes Oil refining 405 480 885 Yes

Total $1,000 $500 $1,500  

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Disclose for Each Reportable

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Reconciliation schedules should be provided to explain the difference between segment amounts and consolidated totals

1 Reportable segment revenue to consolidated revenue

• Intersegment revenues

2 Reportable segment profit and loss to consolidated income before taxes

• Intersegment revenues, expenses, and common or

allocated costs

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6: Enterprise-wide Disclosures

Segment and Interim Financial Reporting

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Additional Disclosures

Additional enterprise-wide disclosures

– Needed if not already reported with segment

information

1 Products and services

• Revenues by product/product line, service

2 Geographic information

• Revenues and fixed assets

• Domestic and foreign

• Specific country if > 10%

Additional Disclosures (cont.)

3 Major customers

• Customer revenues > 10%

• Revenues

• Segment which has those revenues

• Not required: customer identity

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7: Interim versus Annual Reporting

Segment and Interim Financial Reporting

Accounting for Interim Periods

Question about interim periods

In terms of quarterly reports:

Is each quarterly report separate from the other three quarters of the year,

or is each quarterly report one of four integral parts of the annual report?

APB Opinion No 28 says it is an integral part of the annual report

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An Integral Part

• As an integral part of the annual report

– Basically follow annual reporting procedures

– May make some modifications to allow more

frequent reporting

• Integral to the annual report

– Quarterly taxes are a portion of the annual taxes,

probably use average effective rate

• Separate reports

– Each quarter bears its own taxes, probably use

marginal tax rate

Product Cost Modifications

• Use gross profit method to estimate inventory and cost of sales

• For LIFO inventories, may assume that liquidation of layers are temporary, with replacement of layers before year end

• Lower of cost or market for inventories may consider expected year end outcomes

• Standard costing variances may be deferred if expected to be absorbed by year end

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Other Expense Modifications

• Annual expenses may be allocated

• Advertising expenses may be deferred to later interim periods if clearly applies

– Only in the same fiscal year

• Income taxes from continuing operations

– Use an estimated effective annual tax rate

• Income taxes on unusual, infrequent and other items

– Calculate separately and include in the interim

period containing that item

8: Interim-Period Income Taxes

Segment and Interim Financial Reporting

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Effective tax rate = 30,050 / 120,000 = 25.042%

The 25.042% rate is used for all four quarters.

Interim Period Disclosures

Sales or gross revenues

Provision for taxes

Extraordinary items, net

1 Basic, diluted EPS

2 Seasonal revenues, costs

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Other Interim Disclosures

• Segment information disclosures are reduced for interim reporting

• SEC requires

– Q1, Q2, Q3 and annual reports

– Quarterly requirements similar to annual

– Comparative information

• Current quarter vs last year's

• Quarterly and year-to-date

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