Advanced accounting, 5th edition international student version ch14

Slide 14-7 Common Cost Allocation Standards of Financial Accounting and Reporting Standards of Financial Accounting and Reporting  Common costs should be allocated to a segment extern

Slide

14-2

1 Understand the need for disaggregated financial data.

2 Describe the basic requirements of public companies in

reporting segmental data.

3 Determine an operating segment.

4 Define a reportable segment.

5 Identify the information to be presented for each

reportable segment.

Learning Objectives

Learning Objectives

8 Compare the international accounting standards for

segmental reporting with the U.S requirements.

9 Describe current requirements for companies to report

interim information.

10 Indicate some problems with interim reporting and the

authoritative position on the issue.

Learning Objectives

Learning Objectives

Slide

14-4

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.

Need for Disaggregated Financial Data

Need for Disaggregated Financial Data

Disaggregated information is useful to assist in

analyzing uncertainties surrounding expected cash

flows

LO 1 The need for disaggregated financial data.

Slide

14-5

FASB ASC topic 280 (Segment Reporting):

Segmental disclosures have limitations as well as

strengths.

Primary benefit - unveiling information

Arguments against segmental disclosures include:

May be misleading due to accounting problems, lack of user knowledge, different measurement techniques

Disclosures to competing firms, labor unions, etc

Adds to already excessive amount of disclosures

Standards of Financial Accounting and

 Segmental profit or loss,

 Certain items of revenue and expense,

 Segmental assets, and

 Other items

Slide

14-7

Common Cost Allocation

Standards of Financial Accounting and

Reporting

Standards of Financial Accounting and

Reporting

 Common costs should be allocated to a segment

(external reporting purposes only) if they are

included in the segment’s profit or loss calculations

that are used internally by the chief operating

decision maker

 Two of the most difficult tasks in applying the

segment disclosure requirements are those of

Slide

14-9

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

Standards of Financial Accounting and

 Significant to an enterprise’s operations

 Has passed one of three 10% tests or

 Determined to be reportable by other

criteria

Slide

14-10

Determining Operating Segments

Standards of Financial Accounting and

Slide

14-11

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

Slide

14-12

Determining Operating Segments

Standards of Financial Accounting and

Reporting

Standards of Financial Accounting and

Reporting

Aggregation Criteria - entity is permitted 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.

Quantitative Thresholds - Segment is reportable if

it meets one or more of the following:

 Combined (external and internal) revenue is 10% or

more of combined revenue of all reportable segments.

 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.

Determining Operating Segments

LO 3 Determine an operating segment

segments for the most recent fiscal period follows:

Operating Operating I dentifiable Segment Total I ntersegment Profit (Loss) Assets

Problem 14-1: Determine which of the segments

must be treated as reportable segments

Operating % of Total Reportable Segment Revenue Revenue Segment

Problem 14-1: Determine which of the segments

must be treated as reportable segments

% of Largest Operating Operating Operating of Op Profit Reportable Segment Profit Loss or Op Loss Segment

Test

Problem 14-1: Determine which of the segments

must be treated as reportable segments

Operating I dentifiable Reportable Segment Assets % of Total Segment

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

LO 4 Determine a operating segment.

LO 3 Determine an operating segment.

Slide

14-19

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.

Operating Revenue from

Segment Total I ntersegment Nonaffi liates

Nonaffiliated revenue (reportable segments) $176,100

Nonaffiliated Revenue from reportable segments

$176,100

=

95.6%

Slide

14-21

For each reportable segments and in the aggregate for

the segments not separately reported

 Reconciliation of segment amounts and consolidated

amounts for revenue, profit or loss, assets, and other significant items.

 Enterprise wide disclosures.

 Product or service.

 Geographic area.

 Major customer (10%).

LO 5 Reportable segment information to be presented.

Standards of Financial Accounting and

Reporting

Standards of Financial Accounting and

Reporting

Information to be Presented

Where operations in foreign countries are grouped into

geographic areas, the groupings should consider

1 proximity,

2 economic affinity,

3 similarities of business environments, and

4 the nature, scale, and degree of interrelationship

of the operations in the various countries

Geographic Areas

LO 6 Reporting on geographical areas.

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,

that fact and the amount of revenue must be disclosed

Information about Major Customers

LO 7 Reporting on major customers.

Slide

14-24

Which of the following is not a consideration in

segment reporting for diversified companies?

Slide

14-25

Interim financial statements are presented to provide

information concerning financial status and progress for time periods of less than one year

Normal time period is a quarter of a year

Prepared for most recent interim period, as well as

on a cumulative or year-to-date basis

May consists of statements of financial position, income, and cash flows

SEC requires public companies to file Form 10-Q

LO 9 Current interim reporting requirements.

Interim Financial Reporting

Interim Financial Reporting

Short time period to determine interim results.

Some accountants hold that each interim period should stand alone (discrete view) as a basic

accounting period.

Other accountants view each interim period as essentially an integral part of the annual period.

LO 10 Problems in interim reporting.

Interim Financial Reporting

Interim Financial Reporting

Problems in Interim Reporting

In response to SEC complaints and general pressure, the

APB issued APB Opinion No 28 in May 1973 (now

included in FASB ASC topic 270, Interim Reporting).

Slide

14-27

The Board concluded that “each interim period should be viewed as an integral part of an annual period”

Financial statements for each interim period should

be based on accounting practices used for annual statements

Revenue should be recognized on same basis as used for the full year

Costs Associated with Revenue should be

similarly treated for interim purposes

Interim Financial Reporting

Interim Financial Reporting

LO 10 Problems in interim reporting.

Slide

14-28

Acceptable alternatives for inventory costing:

COGS can be estimated using gross profit rates

Liquidated LIFO base should be charged at replacement cost if expected to be replaced by year end

Inventory loss from market declines expected to recover before year end need not be recognized

Standard cost for determining inventory and product cost should be based on the procedures used for the fiscal year

Interim Financial Reporting

Interim Financial Reporting

LO 10 Problems in interim reporting.

Slide

14-29

Which of the following methods of inventory valuation

is allowable at interim dates but not at year-end?

a Estimated gross profit rates

b Retail method

c Specific identification

d Weighted average

Review Question

Interim Financial Reporting

Interim Financial Reporting

Slide

14-30

All Other Costs and Expenses (other than product

costs)

Charged to income as incurred or allocated based on

 an estimate of time expired,

 benefit received or

 activity associated with the periods.

If not readily identified with activities or benefits should

be charged when incurred.

Arbitrary assignment of costs should not be made.

Gains and losses that would not be deferred at end should not be deferred at interim periods

year-Interim Financial Reporting

Interim Financial Reporting

LO 10 Problems in interim reporting.

Slide

14-31

In considering interim financial reporting, how did the Accounting Principles Board conclude that such

reporting should be viewed?

a As useful only if activity is evenly spread

throughout the year so that estimates are unnecessary

b As a “special” type of reporting that need not

follow generally accepted accounting principles

c As reporting of an integral part of an annual

period

d As reporting of a basic accounting period

Review Question

Interim Financial Reporting

Interim Financial Reporting

Slide

14-32

The basic technique for computing income tax

provisions for interim financial statements is described

in FASB ASC subtopic 740-270 (Income Taxes – Interim

Reporting)

At the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year

The effective rate should reflect anticipated tax credits, foreign tax rates, percentage depletion, and other available tax planning alternatives

Interim Financial Reporting

Interim Financial Reporting

Provision for Income Taxes

LO 10 Problems in interim reporting.

Exercise 14-8: Spur Company’s actual earnings for the

first two quarters of 2008 and its estimate during each

quarter of its annual earnings are:

First-quarter estimate of annual earnings 1,350,000 Second-quarter estimate of annual earnings 1,420,000 Spur Company estimated its permanent differences between accounting income and taxable income for 2008 as:

The combined state and federal tax rate for 2008 is 42%.

Exercise 14-8: Prepare journal entries to record Spur

Company’s provisions for income taxes for the first two quarters of 2008.

Estimated Annual Earnings $ 1,350,000 Add: Environmental Violation Penalties 25,000 Deduct: Dividend I ncome Exclusion (180,000) Estimated Taxable I ncome $ 1,195,000 Estimated Annual I ncome Tax Payable * $ 501,900

Estimated Eff ective Combined Annual Tax Rate ** 37.2% Actual First Quarter Earnings 400,000 First Quarter I ncome Tax Provision (Expense) $ 148,800

* ($1,195,000 x 42%) ** ($501,900 / $1,350,000)

First Quarter

x

Exercise 14-8: Prepare journal entries to record Spur

Company’s provisions for income taxes for the first two quarters of 2008.

First Quarter Journal Entry

Exercise 14-8: Prepare journal entries to record Spur

Company’s provisions for income taxes for the first two quarters of 2008.

Estimated Annual Earnings $ 1,420,000 Deduct: Net Permanent Diff erence ($180,000- $25,000) (155,000) Estimated Taxable I ncome $ 1,265,000 Estimated Annual I ncome Tax Payable * $ 531,300

Estimated Eff ective Combined Annual Tax Rate ** 37.4% Cumulative I ncome to Date ($400,000 + $510,000) $ 910,000 Cumulative Tax Provision Needed 340,340 Tax Provision in 1st Quarter 148,800 Tax Provision in 2st Quarter $ 191,540

Second Quarter

x

Exercise 14-8: Prepare journal entries to record Spur

Company’s provisions for income taxes for the first two quarters of 2008.

Second Quarter Journal

Entry

1 st Quarter

tax provision =

$148,800

Year-to-Date tax provision

= $340,340

2 nd Quarter

tax provision =

$191,540 *

* $340,340 - $148,800

No restatement of previous interim reports.

Effect on earnings disclosed for current and subsequent interim periods

Current GAAP requires retrospective application to

financial statements of prior periods where practical

Interim Financial Reporting

Interim Financial Reporting

Accounting Changes in Interim Periods

LO 10 Problems in interim reporting.

Slide

14-39

• Gross revenues, provision for income taxes, extraordinary

items (including related income tax effects), and net income.

• Basic and diluted earnings-per-share data.

• Seasonal revenue, costs, or expenses.

• Significant changes in estimates or provisions for income

taxes.

• Disposal of a segment of a business and extraordinary,

unusual, or infrequently occurring items

• Contingent items.

• Changes in accounting principles or estimates.

• Significant changes in financial position.

Interim Financial Reporting

Interim Financial Reporting

Minimum Disclosures in Interim Reports

LO 10 Problems in interim reporting.

Slide

14-40

IAS 34, “Interim Financial Reporting”, does not state which

entities should prepare and publish interim financial statements

The standard determines the minimum content of the

interim reports if the entity elects or is required to prepare interim financial statements

IAS 34 generally requires that the interim period be a

discrete reporting period.

IAS 34 applies when an entity publishes an interim financial

report in accordance with International Financial Reporting Standards (IFRS).

International Issues in Interim

Reporting

International Issues in Interim

Reporting

Slide

14-41

Differences between IFRS and US GAAP

Differences between IFRS and US GAAP

The view of an interim period is conceptually quite different under U.S GAAP and under IFRS

discrete reporting period, with certain exceptions

part of the full year (again, with certain exceptions).

Slide

14-42

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