Chapter 14: Segment and Interim
Financial Reporting
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
© Pearson Education, Inc. publishing as Prentice Hall
14-1
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.
© Pearson Education, Inc. publishing as Prentice Hall
14-2
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.
© Pearson Education, Inc. publishing as Prentice Hall
14-3
Segment and Interim Financial Reporting
1: Reportable Operating Segments
© Pearson Education, Inc. publishing as Prentice Hall
14-4
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
© Pearson Education, Inc. publishing as Prentice Hall
14-5
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
© Pearson Education, Inc. publishing as Prentice Hall
14-6
Combining Segments
• Similar economic characteristics
– Products and services
– Production processes
– Classes of customers
– Distribution systems
– Regulatory environment, if applicable
© Pearson Education, Inc. publishing as Prentice Hall
14-7
Tests of Segments
•
Three tests to see if a segment exists:
1. 10% Revenue test
2. 10% Profit or loss test
3. 10% Asset test
•
One test to see if sufficient segments have been
identified
1. 75% External revenue test
© Pearson Education, Inc. publishing as Prentice Hall
14-8
Segment and Interim Financial Reporting
2: Threshold Tests
© Pearson Education, Inc. publishing as Prentice Hall
14-9
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
© Pearson Education, Inc. publishing as Prentice Hall
14-10
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
© Pearson Education, Inc. publishing as Prentice Hall
14-11
Example: 10% Revenue Test
Operating
Total
segment Intersegment segment Reportrevenue
revenue
revenue able?
Transportation
$360
$0
$360
Yes
Oil refining
405
480
885
Yes
Insurance
95
20
115
No
Financing
140
0
140
No
Total
$1,000
$500
$1,500
A segment is reportable if its total revenue ≥ 10% of
combined segment revenue.
Threshold = 10%(1,500) = $150
Transportation ($360) and Oil refining ($885) are
reportable segments.
© Pearson Education, Inc. publishing as Prentice Hall
14-12
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
© Pearson Education, Inc. publishing as Prentice Hall
14-13
Example: 10% Asset Test
Operating segment's
identifiable assets
Reportable?
Transportation
$700
Yes
Oil refining
950
Yes
Insurance
180
No
Financing
1,170
Yes
Total
$3,000
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.
© Pearson Education, Inc. publishing as Prentice Hall
14-14
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
© Pearson Education, Inc. publishing as Prentice Hall
14-15
Example: 10% Profit or Loss Test
Separate profitable and unprofitable segments.
Segment
Segment
operating profit operating loss Reportable?
Transportation
(100)
Yes
Oil refining
200
Yes
Insurance
20
No
Financing
50
Yes
Total
270
(100)
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.
© Pearson Education, Inc. publishing as Prentice Hall
14-16
Segment and Interim Financial Reporting
3: Test for Additional Segments
© Pearson Education, Inc. publishing as Prentice Hall
14-17
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
© Pearson Education, Inc. publishing as Prentice Hall
14-18
Preliminary Segment Test Results
Based on the 10% revenues, 10% assets, 10%
profit and loss tests:
– Three reportable segments
• Transportation
• Oil refining
• Financing
– One non-reportable segment which becomes
"all other"
• Insurance
Now, check to see if the three are enough!
© Pearson Education, Inc. publishing as Prentice Hall
14-19
Example: 75% External Revenue
Operating
Total
segment Intersegment segment Reportrevenue
revenue
revenue able?
Transportation
$360
$0
$360
Yes
Oil refining
405
480
885
Yes
Insurance
95
20
115
No
Financing
140
0
140
No
Total
$1,000
$500
$1,500
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% consolidated revenues.
Threshold = 75%(1,000) = $750
$360 + 405 + 140 > $750 … Yes!
© Pearson Education, Inc. publishing as Prentice Hall
14-20
Segment and Interim Financial Reporting
4: Disclosures
© Pearson Education, Inc. publishing as Prentice Hall
14-21
Disclose for Each Reportable
Segment
Profit or loss
Total assets
Revenues from
• External customers
• Other segments
• Interest
• Income from equity
method investments
Expenses items
• Interest
• Depreciation, depletion
and amortization
Other income statement
items
• Unusual items
• Extraordinary items
Significant noncash items
other than depreciation…
© Pearson Education, Inc. publishing as Prentice Hall
14-22
Segment and Interim Financial Reporting
5: Reconciling Segments to
Consolidated Amounts
© Pearson Education, Inc. publishing as Prentice Hall
14-23
Reconciliations
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
© Pearson Education, Inc. publishing as Prentice Hall
14-24
Reconciliations (cont.)
3. Reportable segment assets to consolidated
assets
• Corporate assets
4. If other significant information is disclosed,
reconcile the segment amounts with
consolidated amounts for each item
© Pearson Education, Inc. publishing as Prentice Hall
14-25
Segment and Interim Financial Reporting
6: Enterprise-wide Disclosures
© Pearson Education, Inc. publishing as Prentice Hall
14-26
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%
© Pearson Education, Inc. publishing as Prentice Hall
14-27
Additional Disclosures (cont.)
3. Major customers
• Customer revenues > 10%
• Revenues
• Segment which has those revenues
• Not required: customer identity
© Pearson Education, Inc. publishing as Prentice Hall
14-28
Segment and Interim Financial Reporting
7: Interim versus Annual Reporting
© Pearson Education, Inc. publishing as Prentice Hall
14-29
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
© Pearson Education, Inc. publishing as Prentice Hall
14-30
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
© Pearson Education, Inc. publishing as Prentice Hall
14-31
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
© Pearson Education, Inc. publishing as Prentice Hall
14-32
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
© Pearson Education, Inc. publishing as Prentice Hall
14-33
Segment and Interim Financial Reporting
8: Interim-Period Income Taxes
© Pearson Education, Inc. publishing as Prentice Hall
14-34
Tax Rates
Interim taxes on operations are based on estimated
effective annual tax rate
If expected annual taxable income = $120,000
Taxes = $22,250 + .39(120,000 – 100,000) = $30,050
Effective tax rate = 30,050 / 120,000 = 25.042%
The 25.042% rate is used for all four quarters.
© Pearson Education, Inc. publishing as Prentice Hall
14-35
Interim Period Disclosures
Sales or gross revenues
Provision for taxes
Extraordinary items,
net of tax
Cumulative effect of
accounting changes
Net income
© Pearson Education, Inc. publishing as Prentice Hall
Additional items:
1. Basic, diluted EPS
2. Seasonal revenues, costs
and expenses
3. Significant change in
estimated taxes
4. Disposals,
extraordinary, unusual,
infrequent items
5. Contingent items
6. Changes in accounting
principles or estimates
7. Significant change in
financial position
14-36
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
© Pearson Education, Inc. publishing as Prentice Hall
14-37
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
© Pearson Education, Inc. publishing as Prentice Hall
14-38