CHAPTER
12
REPORTING
SEGMENT
AND RELATED
INFORMATION
FOCUS OF CHAPTER 12
• Objectives and Applicability of FAS 131
• Reporting Operating Segment
Information
• Reporting Enterprise-wide Information
– Products & services
– Geographic areas
– Major customers
Segment and Related Information
Reporting: Objectives
• To provide information about a reporting
entity’s different types of:
– Business activities.
– Economic environments.
Segment and Related Information
Reporting: Objectives
• This information should help financial
statement users:
– Better understand past performance.
– Better assess prospects for future net
cash flows.
– Make more informed judgments about
the entity as a whole.
Segment and Related Information
Reporting: Overview & Applicability
• Segment and related information reporting
under FAS 131 consists of disclosing the
following 4 informational items:
#1 Operating segments.
#2 Products & services.
FAS
131
#3 Foreign operations/sales.
#4 Major customers.
#2, #3, & #4 are “entity-wide disclosures.” They
apply to ALL entities—even those having only l segment.
Segment and Related Information
Reporting: Overview & Applicability
• Segment and related information reporting
is:
– Needed because of the limitations of
consolidated financial statements.
– Done in notes to the financial statements.
– Applicable to:
• Both ANNUAL & INTERIM statements.
• PUBLIC BUSINESS ENTERPRISES
ONLY (excludes not-for-profit entities).
Segment and Related Information
Reporting: Overview & Applicability
• Public business enterprises are
entities that:
–
Have issued debt or equity securities
that are traded in a public market,
– Are required to file financial
statements with the SEC, or
– Provide financial statements for the
purpose of issuing any class of
securities in the public market.
Segment and Related Information
Reporting: Overview & Applicability
• Segment and related information reporting
even applies to the following entities if they
issue “separate company ” statements that
are NOT in the same FINANCIAL REPORT
as a set of consolidated statements:
– Parent enterprises.
– Subsidiaries.
– Joint ventures.
– Investees—if the equity method is used.
Segment Reporting:
Basis of Segmentation
• Disaggregated financial information
could be presented in several ways, for
example:
–
–
–
–
–
By products & services (rejected).
By geographic area (rejected).
By legal entity (rejected).
By type of customer (rejected).
By organization of the segments for
reporting to management for decisionmaking (the “management” approach).
Segment Reporting:
Basis of Segmentation
• FAS 131 requires :
– A SINGLE basis of segmentation.
– The MANAGEMENT approach basis of
segmentation.
In contrast, FAS 14 (which was superseded by
FAS 131) required TWO bases of segmentation—
by industry and by geographic areas.
Segment Reporting:
Basis of Segmentation
• Merits of the “Management” Approach:
– Facilitates consistent descriptions in
(1) annual reports and (2) various other
published information.
– Entities need not develop a separate
measure of profitability solely for
segment reporting purposes. Thus:
• A non-GAAP method used internally is
also used for segment reporting.
Segment Reporting:
Basis of Segmentation
• The components that management
establishes for reporting & decision-making
are called OPERATING SEGMENTS. Such
components:
#1 – Engage in activities from which they may
earn revenues and incur expenses.
• Such activities include revenues and
expenses resulting from transactions
with other segments (called
intersegment transactions).
Segment Reporting:
Basis of Segmentation
• Such components (continued):
#2 Have their operating results regularly
reviewed by a chief operating decision
maker.
#3 Have discrete financial information
available.
Segment Reporting:
Basis of Segmentation
• What Could Be an Operating Segment:
– A start-up operation that has yet to report
any revenues.
– A component of a vertically integrated
operation—providing these operations
are managed that way.
Segment Reporting:
Basis of Segmentation
• What Could Not Be an Operating Segment:
– A corporate headquarters.
– Functional departments that earn either
no revenues or only incidental revenues.
• What Is Definitely Not an Operating
Segment:
– An entity’s pension plan.
– An entity’s postretirement benefit plan.
Segment Reporting:
Disclosures Required
• An entity must disclose 4 types of information
about its REPORTABLE OPERATING
SEGMENTS:
TYPE
1– General information.
2– Specified amounts.
3– Reconciliations of specified amounts
to consolidated amounts.
4
– Certain interim period information.
Segment Reporting: Disclosures
Required—General Information
• TYPE 1—General Information Disclosures:
– Factors used to identify the entity’s
reportable segments, including the basis
of organization, such as based on:
• Products and services.
• Geographic areas.
• Regulatory environments.
• A combination of factors.
– Types of products & services from which
each reportable segment derives its
revenues.
Segment Reporting: Disclosures Required—
Specified Amounts Information
• TYPE 2—Specified Amounts
Disclosures:
– For each reportable segment, a
measure of:
• Profit or loss.
• Total assets (but not liabilities).
– Certain account amounts (listed on next
slide) if they are included in the
measure of segment profit or loss.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
–
Certain Account Amounts That May Have
to Be Disclosed:
• Revenues from external customers.
• Intersegment revenues.
• Interest revenue and interest expense.
• Depreciation & amortization expense
and significant other NONCASH items.
• Unusual items & extraordinary items.
• Equity method income on investees.
• Income tax expense or benefit.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #1—LACK OF UNIFORMITY:
FAS 131 does NOT define segment
operating profit or loss (as did FAS 14, its
predecessor).
– Thus any measure of performance may
be displayed—AS LONG AS THAT
MEASURE OF PERFORMANCE IS
REVIEWED BY THE CHIEF
OPERATING DECISION MAKER.
Segment Reporting: Disclosures
Required—Specified Amounts Information
• Key Point #2—Terminology: In dealing with
segment reporting, the term “intercompany”
is NOT RELEVANT. The RELEVANT terms
are:
– Intersegment (sales between segments).
– Intrasegment (sales between
components of a vertically integrated
operation deemed to be a single
operating segment).
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #3—Terminology: In
presenting operating segment information:
– Intersegment sales must be disclosed
separately ONLY IF they are included
in the measure of profitability.
– Intrasegment sales need NOT be
disclosed.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #4—Transfer Pricing:
– FAS 131 did not establish a basis
for setting prices for sales or transfers
either between or within segments.
– Transfer pricing is more likely to be
an issue within vertically integrated
operations than between
nonvertically integrated segments.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #5—Allocations: A
segment’s expenses (used in its
measure of operations) may include
BOTH:
#1 – Directly traceable costs and
#2 – Allocated common costs (costs that
benefit two or more segments).
• Costs that are allocated must be allocated
on a reasonable basis.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #6—Nonallocations:
– Common costs need not be allocated
to or between segments.
– Costs accounted for on a consolidated
basis need not be allocated to
segments (e.g. pension costs).
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #7—Asymmetrical
Allocations: Permitted in determining a
segment’s:
– Measure of profitability and
– Total assets.
• Thus depreciation expense could
be allocated to a segment but the
related fixed assets could not.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #8—R&D Costs: Disclosure of
segment research & development costs is
NOT required because:
– Doing so could result in competitive harm
by providing competitors with early insight
into strategic plans.
– R& D costs are often (1) incurred centrally
and (2) NOT allocated to segments.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• Key Point #9—Liabilities: Disclosure of
segment liabilities is NOT required:
– The value of information about
segment liabilities in assessing
segment performance was deemed
limited, partly because in many cases
liabilities are:
– Incurred centrally and NOT
allocated to segments.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
–
Additional Asset-Related Disclosures
for Reportable Segments—if the items
are included in the determination of
segment assets:
• The amount of investment in equity
method investees.
• Total expenditures for additions to
long-lived assets.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• MEASUREMENT—BASIC RULE: Each
segment item amount reported must be the
measure reported to the chief operating
decision maker for assessing performance &
allocating resources to the segment.
– Eliminations & Adjustments Made in
Consolidation: Allocate to a segment ONLY
IF they are included in the measure of profit
and loss used by the chief operating decision
maker.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• MEASUREMENT—MULTIPLE
MEASURES: If more than one measure
of a segment’s profit or loss and assets is
used by the chief operating decision maker,
the measure selected for segment
reporting must be the measure most
consistent with:
– Those used in measuring those items in
the entity’s consolidated financial
statements.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• MEASUREMENT—DISCLOSURES:
For reportable segment’s profit or loss
and assets, disclose as a minimum:
– The basis of accounting for
#1
intersegment transactions.
– The nature of differences reported on
#2
the specified reconciliations (for P/L and
for assets), if not apparent thereon.
Segment Reporting: Disclosures
Required—Specified Amounts
Information
• MEASUREMENT—DISCLOSURES
(cont.):
#3 – The nature and effect of any changes from
prior periods in the measurement
methods used to determine a reported
segment P/L .
#4 – The nature and effect of any asymmetrical
allocations to segments.
Segment Reporting: Disclosures
Required—Reconciliations
–
TYPE 3—Reconciliations of SPECIFIED
Amounts to CONSOLIDATED Amounts:
• Reconcile the total of the reportable
segments’:
– Revenues.
– Measure of profit or loss.
– Assets.
– Other significant items of
information disclosed for reportable
segments (e.g. liabilities, R&D
expense).
Segment Reporting:
Disclosures Required—Interim
Period Information
• TYPE 4—Certain Interim Period Information:
– For each reportable segment, disclose:
• Revenues from external customers.
• Intersegment revenues.
• A measure of profit or loss.
• Total assets, if a material change from
amount disclosed in last annual report.
• Changes in the segmentation basis or in
basis of measurement of segment P/L.
• Reconciliations to consolidated amounts.
Segment Reporting: Disclosures
Required—Cash Flow Information
• Reporting segment cash flows is NOT
required.
– An indication of both an operating
segment’s cash-generating ability and
its cash requirements may be gathered
from the required profitability and asset
related disclosures.
Segment Reporting:
Aggregation of Similar Segments
• Operating segments that have similar
economic characteristics often have similar
long-term financial performance.
– Thus two or more operating segments
may be combined into a single
operating segment if 3 criteria (on the
next two slides) are met.
Segment Reporting:
Aggregation Criteria
• The Three Aggregation Criteria:
#1 – Aggregation must be consistent with the
objectives & principles of FAS 131.
#2 – The segments must have similar economic
characteristics.
#3 – The segments are similar in each of the
following 5 areas:
• The nature of the products & services.
Segment Reporting:
Aggregation Criteria
–
Segments similar in 5 areas (Cont’d):
• The nature of the production processes.
• The type or class of customer for their
products & services.
• The methods used to distribute their
products or provide services.
• If applicable, the nature of the regulatory
environment (e.g. banking, insurance, or
public utilities).
Segment Reporting
Quantitative Thresholds—
Overview
• Not all operating segments are
REPORTABLE operating segments.
Three 10% tests are performed to determine if
an operating segment is a reportable
operating segment.
• ONLY ONE of the three 10% tests need be
passed. The tests involve:
– REVENUES, PROFITABILITY, and
ASSETS.
Segment Reporting:
Quantitative Thresholds—The 10%
Tests
#1 – REVENUES: Are the segment’s reported
revenues [includes both sales to external
customers and intersegment sales or
transfers] 10% or more of the combined
revenue, internal and external, of ALL
reported operating segments?
Segment Reporting:
Quantitative Thresholds—The
10% Tests
#2
–
PROFITABILITY: Is the absolute
amount of the segment’s reported profit
or loss 10% or more of the greater, in
absolute amount, of the combined
reported:
Winners
• PROFIT of all operating profits
that DID NOT report a loss or
• LOSS of all operating segments Losers
that DID report a loss?
Segment Reporting:
Quantitative Thresholds—The
10%Tests
#3 – ASSETS: Are the segment’s assets 10%
or more of the combined assets of ALL
operating segments?
• Operating segments that do NOT meet any of
the three 10% tests may be COMBINED with
– Other such operating segments to produce
a reportable segment—ONLY IF they
share a majority of the specified
aggregation criteria (listed on slides #38
& #39).
Segment Reporting:
Nonreportable Operating
Segments
• Nonreportable operating segments and
other business activities are:
– Combined and
– Disclosed in an “ALL OTHER” category.
• The Judgment Factor: A reportable
segment in the preceding period that does
NOT qualify as a reportable segment in the
current period may be presented if
management deems it to be of continuing
significance.
Segment Reporting:
The 75% Test
• Determining Reportable Operating Segments:
– Enough operating segments must be selected
so that at least 75% of the total consolidated
revenues (sales to external customers) is
included in reportable operating segments.
• Describing Reportable Operating Segments:
– The product or service of each industry
segment must be identified.
Enterprise-Wide Disclosures:
The Three Categories of
Information
• Three types of enterprise-wide
disclosures are called for. Information
about:
#1 – Products and Services.
#2 – Geographic Areas.
#3 – Major Customers.
Enterprise-Wide Disclosures:
Products and Services
• An entity must report REVENUES FROM
EXTERNAL CUSTOMERS—unless it is
impractical to do so—for:
– Each product and service, or
– Each group of similar products
and services.
• If it is impractical to disclose this product
and service information, disclose that
fact.
Enterprise-Wide Disclosures:
Geographic Areas—General
• An entity must report geographic information—
unless it is impractical to do so—for :
#1 – REVENUES
#2 – LONG-LIVED ASSETS
• If it is impractical to disclose this geographic
information, disclose that fact.
Enterprise-Wide Disclosures:
Geographic Areas—Revenues
• REVENUES—Disclose:
– Revenues from external customers
located:
• In the United States.
• Outside the United States, in total.
–
Revenues attributed to an individual
foreign country, if material.
Enterprise-Wide Disclosures:
Geographic Areas—Long-Lived Assets
• LONG-LIVED ASSETS—Disclose:
– Long-lived assets located:
• In the United States.
• Outside the United States, in total.
• In an individual foreign country, if
material.
Enterprise-Wide Disclosures:
Geographic Areas—Long-Lived
Assets
• Long-lived assets exclude:
– Financial instruments.
– Long-term customer relationships
of a financial institution.
– Mortgage or other servicing rights.
– Deferred policy acquisition costs.
– Deferred tax assets.
Enterprise-Wide Disclosures:
Major Customers
• When an entity has revenues from any
single customer in excess of 10% of total
revenues, disclose:
#1 – The fact of such revenues.
#2 – The amount of revenues from each
customer [but not the identity of each].
#3 – The industry segment(s) making the
sales
to each such customer.
Enterprise-Wide Disclosures:
Major Customers
• Each is considered a SINGLE customer:
– A group of entities known to be
under common control.
– The federal government.
– A state government.
– A local government.
– A foreign government.
Review Question #1
• Revtex’s 5 operating segments have total
revenues of: #1—$100,000, #2--$200,000, #3—
$300,000 (includes intrasegment revenues of
$30,000), #4—$400,000, and #5—$500,000
(includes intrasegment revenues of $50,000). The
revenues test is based on revenues of:
A. $1,420,000
B. $1,450,000
C. $1,470,000
D. $1,500,000
Review Question #1
With Answer
• Revtex’s 5 operating segments have total
revenues of: #1—$100,000, #2--$200,000, #3—
$300,000 (includes intrasegment revenues of
$30,000), #4—$400,000, and #5—$500,000
(includes intrasegment revenues of $50,000). The
revenues test is based on revenues of:
A. $1,420,000
B. $1,450,000 ($1,500,000 - $50,000)
C. $1,470,000
D. $1,500,000
Review Question #2
• Optex’s 5 operating segments have operating
profits and losses of: #1—$100,000, #2—
$(200,000), #3—$300,000, #4—$400,000, and
#5—$500,000. The operating profit or loss test
is based on 10% of:
A.
B.
C.
D.
$200,000
$1,100,000
$1,300,000
$1,500,000
Review Question #2
With Answer
• Optex’s 5 operating segments have operating
profits and losses of: #1—$100,000, #2—
$(200,000), #3—$300,000, #4—$400,000, and
#5—$500,000. The operating profit or loss test
is based on 10% of:
A.
B.
C.
D.
$200,000
$1,100,000
$1,300,000
$1,500,000
End of Chapter 12
• Time to Clear Things Up—
Any Questions?