acct 404 ch 8

Information to be Disclosed by Operating Segment:

(1) General information including factors used to identify segments and segments' products and services. (2) Segment profit or loss, external revenues, intersegment revenues, interest revenue, interest expense, depreciation/depletion/amortization, other significant noncash expenses, unusual and extraordinary items, and income tax expense or benefit. (3) Segment assets, investments in equity method affiliates, and capital expenditures.

Entity-wide Disclosures—Products and Services:

If a company does not report segments by product/service line, then external revenues are required to be disclosed from each product or service. These disclosures are not required if the cost of generating the information is excessive.

interim reporting

There are two possible approaches: Discrete - the accounting period stands on its own. Integral - treat the accounting period as a portion of a longer period. Current GAAP requires companies to use the Integral Approach.

interim reporting

To provide more timely information, the SEC requires quarterly statements from publicly-traded companies in the U.S. But how do the statements fairly reflect expenses that do not occur evenly throughout the year?

major customers

When 10% or more of a company's revenue is derived from a single customer, the company must disclose that it has a major customer. The IDENTITY of the major customer need not be disclosed.

Information about Geographic Areas

External revenues and long-lived assets must be disclosed by domestic vs. foreign. If revenues from external customers from individual countries is material, then revenues and long-lived assets are disclosed for that country. Different companies have wide variations in materiality thresholds, and this has resulted in wide discrepancies in how much geographic information is presented.

determining segments

An operating segment is a component of an enterprise: That engages in business activities from which it earns revenues and incurs expenses Whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions For which discrete financial information is available

Information about Major Customers:

Revenues are disclosed separately for each major customer, defined as a customer providing at least 10% of a company's total revenues. For each customer, the segment and revenue is disclosed but not the customer's identity.

Reconciliations to Consolidated Totals:

All non-reportable segments are combined, and their information is reported as a single "Other" segment. Total segment revenues, profits/losses, and assets must be reconciled to company totals. They are different because segment data is not based on GAAP. Instead, it is based on the way management is organized and evaluated internally. For example, pension costs may not be allocated to any individual segment. Intersegment revenues, expenses, assets, and liabilities are eliminated from external financial statements.

IFRS—Segment Reporting:

IFRS is very similar to U.S. GAAP. The three differences are as follows: IFRS requires disclosure of total liabilities by operating segment. Under IFRS, the "long-lived assets" disclosure must include intangibles, but under GAAP, companies have the option of excluding intangibles. If the company has a matrix organization form, GAAP requires segments be defined by products and services, but IFRS allows segments to be defined by either geography or products and services.

geographic areas

Revenues from external customers and long-lived assets must be disclosed for: The domestic country. All foreign countries where the enterprise derives revenue or holds assets. Each foreign country in which a material amount of revenue is derived or assets are held.

quantitative thresholds

A Segment is considered reportable if it satisfies one of these tests: Revenue test - Its revenues are 10% or more of the combined revenue of all segments. Profit or Loss test - Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit. Asset test - Its assets are 10% or more of the combined assets of all operating segments.

Determination of Reportable Segments:

Different segments can be combined if they have essentially the same business activities and economic environments for ALL of the following: (1) the nature of the product or services, (2) the nature of the production process, (3) the type of customer, (4) the distribution methods, (5) the nature of the regulatory environment.

Testing Procedures—Complete Illustration: 6. Other Guidelines:

Even if a segment does not meet the thresholds for being a reportable segment in the current period, it will be reported if it was previously reported and management believes that it continues to have significance. Comparative information is provided about newly reportable segments. If the combined sales of reportable segments is less than 75% of external sales, additional segments must be reported. Companies are not required to report more than ten segments.

Flowchart (Exhibit 8.2 on p. 351).

Summarizes the steps for determining which segments to report. (a) determine reportable segments, (b) combine segments if all five aggregation criteria are met, (c) test each segment and report if one of the 10% tests is met, (d) for remaining segments only, combine if a majority of the aggregation criteria are met, then run the 10% tests again, (e) if the earlier steps results in the reportable segments having at least 75% of external sales, then combine all remaining segments into an Other category, (f) if the 75% test is not met, separately report additional segments until it is. Companies are not required to report more than ten segments

required segment disclosures

For each reportable segment, a company is required to disclose: General information Segment profit or loss Revenues Interest revenue and expense Depreciation, depletion and amortization expense Significant noncash and unusual items Income Tax expense Investment in equity method affiliates Total assets Capital expenditures

Operating Segments: The Management Approach

disaggregated information is disclosed about each operating segment, an organizational component based on the way management makes decisions and managers are evaluated. To be a segment, it must (a) earn revenues and incur expenses, (b) be regularly reviewed by the chief operating decision maker, and (c) have discrete information available. If some activities are disaggregated in more than one way (e.g., by both product line and geographical location), two additional factors are considered: (1) if managers are only held accountable for only one set of organizational units (e.g., geographical location, but not product line), that set is used. (2) if managers are held accountable for more than one set of organization units, then product line will be used.

Quantitative Thresholds:

Segment information must be disclosed separately if it meets any one of the following tests: revenue, profit/loss, and asset. 1. Revenue Test: Segment revenues, both external and intersegment, are at least 10% of combined revenues of all operating segments. 2. Profit or Loss Test: Segment profit or loss is at least 10% of the higher of the combined reported profit of all profitable segments or the combined reported loss of all segments incurring a loss. Profits are determined by the methods used internally for manager evaluation, not GAAP. 3. Asset Test: Segment assets are at least 10% of combined assets of all operating segments. Operating segments not meeting any of the three tests may be combined with each other (not with segments meeting a quantitative threshold) if they meet at least three of the five aggregation criteria.

rationale for segment reporting

Segment reporting provides information to help users of financial statements to: Better understand the entity's performance. Better assess the entity's prospects for future cash flow. Make more informed judgments about the enterprise as a whole.

summary

Segment reporting provides more detailed information about the components of a business combination for decision makers. Three quantitative tests used to identify reportable segments: revenue, profit or loss, and asset. Companies must report specific information for each reportable operating segment, and parameters determine the number of segments it reports. With interim reporting, GAAP requires an integral approach, but the IASB's requires that each interim period be treated as a discrete period in determining amounts to be recognized

operating segments should be combined based on the:

nature of the products or services provided by each operating segment. nature of the production process. type or class of customer. distribution methods. nature of the regulatory environment.

IFRS-interim reporting

IAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized. Expenses that are incurred in one quarter are recognized in full in that quarter, even though the expenditure benefits the entire year. No accrual of expenses in earlier quarters for expenses expected to be incurred in a later quarter of the year. The only exception to this rule is the accrual of income tax expense at the end of each interim period.

IFRS-interim reporting

IAS 34 requires the following minimum components in an interim report: • A condensed statement of financial position (balance sheet). • A condensed statement of comprehensive income, presented as: A condensed single statement of net income and comprehensive income, or Separate condensed statements of net income and comprehensive income. • A condensed statement of changes in equity. A condensed statement of cash flows. Selected explanatory notes.

IFRS and Segment Reporting

IFRS and GAAP are substantially the same, except... IFRS requires disclosure of total assets AND liabilities if that information is provided to the chief decision maker. IFRS specifically includes intangible assets as long-lived assets. In a company with a matrix form of organization, IFRS permits operating segments to be based on geographic area, as opposed to products/services.

operating segment tests- other guidelines

The combined sales revenues of the disclosed segments must be at least 75% of total company sales, excluding intra-entity sales. Segments must be added until the 75% test is met (even if the additional segments do not meet the reportable segment criteria). Although a maximum number is not prescribed, authoritative literature suggests that 10 separately reported segments might be the practical limit.