Advanced Accounting Final
reconciliations of the segment totals to the consolidated financial statements
The total of the reportable segments' revenues to the public entity's consolidated revenues The total of the reportable segments' measures of profit or loss to the public entity's consolidated income before income taxes, extraordinary items, and discontinued operations The total of the reportable segments' assets to the public entity's consolidated assets The total of the reportable segments' amounts for every other significant item of information disclosed to the corresponding consolidated amount
Revenue rule of total operating segments
Total external revenue reported by operating segments must constitute at least 75% of total consolidated revenue.
Geographic Disclosures
A concentration of revenues and assets Revenues from external customers attributed to the public entity's country of domicile and attributed to all foreign countries in total from which the public entity derives revenues. Long-Lived Assets (other than financial instruments), long-term customer relationships of a financial institution, mortgage and other servicing rights, deferred policy acquisition costs, and deferred tax assets located in the public entity's country of domicile and located in all foreign countries in total in which the public entity holds assets.
Reporting Standards for Business Combinations
ASC Topics: 805, 350, 810
Why is it necessary to identify the acquiring company?
Acquired company's assets and liabilities are revalued to fair value at date of acquisition Acquiring company's assets and liabilities remain at book value
Acquisition Method
Acquired net assets are recorded on the BS at fair value. Any difference between the fair value of those net assets and the purchase price is recorded as Goodwill. Goodwill is an intangible asset that is only recorded in transactions that qualify as business combinations. Transaction costs related to acquiring a business are not capitalized in asset values; when a business is acquired, all transaction costs are expensed in the period they are incurred.
Prospective Approach
Adjust the Equity Investment account to its fair value on the date that significant influence is obtained and Increase the Equity Investment account for the cost of the incremental additional investment that caused the investment to move from being a passive investment to a significant-influence investment.
Two essential elements of integrated set of activities and assets
At least one input AND at least one substantive process
What does segment reporting help financial statement users do?
Better understand the public entity's performance, Better assess its prospects for future net cash flows, and Make more informed judgments about the public entity as a whole.
ASU 2016-07
Changing FV Method to Equity Method using the prospective approach
ASC Topic 810
Consolidation criteria, procedures, and consolidated financial statement format
Indicators of Absence of Influence
Investee challenges investor's ability to exercise significant influence (litigation or complaint to gov. regulatory authorities) Agreement signed by both parties in which investor surrenders significant shareholder rights Majority ownership of investee concentrated among small group of shareholders who operate investee without regard to views of investor Investor needs or wants more financial information to apply equity method than is available to investee's other shareholders (e.g., quarterly f/s), tries to obtain such information and fails Investor tries and fails to obtain representation on investee's Board of Directors
Times when Equity Investment Account might be reduced to zero
Investee company losses Payment of dividends by investee to investor in excess of amount of cumulative Equity Income reported by investor Write-down of Equity Investment by investor as result of determination that market value of investment has permanently declined
Indicators of Significant Influence
Investor representation on BOD of investee Investor participation in policy-making process of investee Extent of ownership of investee voting shares by investor in relation to concentration of other shareholdings Material intercompany transactions b/w investor and investee Interchange of managerial personnel b/w investor and investee Technological dependency of investee on the investor
Degree of Influences and Their Accounting Methods
Insignificant/Passive/0-20%: Fair Value Method Significant/20-50%: Equity Method Controlling/Over 50%: Consolidation
What to do if acquired group of net assets constitute a business
a specialized set of accounting principles, called the Acquisition Method, applies
ASC Topic 350
Valuation and subsequent reporting for intangible assets acquired, including goodwill
ASC Topic 805
Valuation of assets acquired and liabilities assumed Valuation of consideration paid Definition of a Business
Goodwill (PP>BV Assets)
not amortized; It is tested for impairment and written down if necessary
What happens if an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds
prior-period segment data presented for comparative purposes shall be restated to reflect the newly reportable segment unless it is impracticable to do so.
Revenue Test (Operating Segment)
reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments
Output
result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues the result of processes applied to inputs and is the factor that generates revenues from the acquired group of net assets
Process
system, standard, protocol, convention, or rule that when applied to input or inputs, creates or has ability to contribute to creation of outputs
ASC 323
the Equity Method should be used when the investor has the ability to exercise "significant influence" over the operating and financial policies of the investee
When happens when reported amount of the Equity Investment is reduced to zero
the investor ceases to use the equity method to account for its Equity Investment and instead, the investment is carried on the investor's BS at zero until the investee earns sufficient profits such that the loss is eliminated
Changing from the Equity Method (company stock has readily determinable FV)
the investor company will apply the fair value approach
What is consolidation?
the replacement of the Equity Investment account with the assets and liabilities of the investee company to which that account relates.
When does a business combination occur
when one company obtains CONTROL over another company
Key Focus of Outputs
whether a group of net assets is ". . . CAPABLE of being conducted and managed for the purpose of providing a return
What must an investor do when they obtain control over the investee?
consolidate the financial statements of both companies when reporting to external parties (e.g. shareholders, SEC)
T-Account for Equity Method Accounting
Debit: Purchase Price, % of Net Income Credit: % of Net Loss, % Dividends
Characteristics of a component of a public company (must have all)
Engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity). Operating results are regularly reviewed by the public entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Discrete financial information is available
Potential characteristics of Acquiring Company
Entity that issues equity interests Entity whose owners have larger voting interest in combined company Entity selects majority of governing body Entity dominates senior management Entity pays a premium over the pre-combination fair value of the equity interests of the other entity
Summary of Equity Method of Accounting
Equity investment initially recorded at purchase price Dividends received are treated as a recovery of the investment and reduce the Equity Investment Account Investor reports income equal to it's percentage share of the investee's reported income Equity Investment account on the investor's balance sheet increases and decreases to reflect corresponding increases and decreases in the investee's Stockholders Equity Changes in FV of the Equity Investment are not reflected as adjustments to the reported amount of the Equity Investment and thus, are not recognized in income until sold
What disclosures does the SEC focus on is Segment Reporting?
External revenues from similar products or services Geographic information
Definitions of a Business
FASB ASC 805-10-55-3A: [a] business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. FASB ASC 805-10-55-4: [a] business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.
Discrete financial information
Financial information able to be separated
What to do when Purchase Price> BV of Assets Acquired
Nature of additional assets must be determined. Investor must account for these assets just like any other assets that it purchases.
Similarity characteristics for aggregation of segments
Nature of the products and services Nature of the production processes Type or class of customer for products and services Methods used to distribute products or provide services Nature of the regulatory environment, if applicable (e.g., banking, insurance, public utilities)
Determination of Significant Influence
Over 20% ownership is a rebuttable threshold requires examination of the facts and circumstances of the relationship between the investor and the investee.
Why are they rules against aggregating specific segments?
Prevents lumping everything together, aggregating things that should not be aggregated
Objective of requiring disclosures about segments of a public entity and related information is to..?
Provide information about different types of business activities in which a public entity engages and the different environments in which they operate
Two ways (according to U.S GAAP) control can be achieved
Quantitative majority of the voting equity interest Qualitatively determined power to direct an entity's activities and a majority of the entity's economic risks and rewards regardless of the level of equity ownership
Quantitative Thresholds of Operating Segments
Reported Revenues, Absolute Amount of Reported Profit or Loss, Assets
Disclosures companies must provide (segment reporting)
Revenues from external customers Long-lived assets Information about the extent of their reliance on a single external customer with revenues of 10% or more of the company's total revenues
Tangible Assets or Definite-lived intangible assets (PP>BV of Assets)
must be depreciated/amortized based on remaining useful lives
Typical disclosures of segment financial data
Sales Income (net income, income before extraordinary items, or operating income) Depreciation and amortization expense Total assets Capital expenditures Geographical Concentration of Revenues and Assets
If the group of net asset has NOT produced outputs
Substantive process would include an organized workforce of employees with knowledge and experience to perform or apply acquired process that is critical to ability to develop or convert an input into outputs
If the group of net assets has ALREADY produced outputs
Substantive process would include organized workforce that can continue to produce output or process that significantly contributes to producing outputs, but that cannot be replaced without significant cost
Profit/Loss Test (Operating Segment)
The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of either: •The combined reported profit of all operating segments that did not report a loss or •The combined reported loss of all operating segments that did report a loss
What happens when the purchase price is greater than the book value of the assets acquired
The investor has two groups of assets: net assets reported on the BS of the investee company, and additional previously unrecorded assets
When can two or more segments be aggregated?
The segments have similar operating characteristics and They are similar in other characteristics
Asset Test (Operating Segment)
assets are 10% or more of the combined assets of all operating segments
Input
economic resource that creates, or has ability to contribute to creation of, outputs when one or more processes are applied to it
Management Approach of Segment Reporting
focuses on financial information that a public entity's decision makers use to make decisions about the public entity's operating matters
What happens if a segment is identified as a reportable segment in the immediately preceding period to be of continuing significance
information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria for reportibility
Changing from the Equity Method (company stock does not have readily determinable FV)
investor company will use the cost-based approach. (According to FASB ASC 321-10-35-2, "cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.")
What happens once an operating segment is identified?
it must be disclosed in the footnotes if it meets any one of three quantitative thresholds
