Segment Reporting

comparative reporting

an operating segment that was deemed to be reportable in the immediately preceding period but that does not meet the criteria for reportability in the current period may continue to be reported separately if management judges the segment to have continuing significance

reportable segment disclosures

identifying factors---used to identify the enterprise's reportable segments, including the basis of organization(products and services, geographic areas, regulatroy environments) should be disclosed---also disclose whether any operation segments have been aggregated

income and expense allocation - segment profit (or loss) defined

income and expenses are not allocated to a segment unless they are included in the determination of segment profit or loss reported to the "Chief Operating Decision Maker"

use same accounting principles as main FS

the required FS information is essentially a disaggregation of the entity's regular FS. -the accounting principles used in preparing the FS should be used for the segment information -segment information presented must be reconciled to the related aggregate amounts in the financial statements

US GAAP VS IFRS

IFRS requires the disclosure of segment liabilities if such a measure is regularly provided to the chief operating decision maker US GAAP does not require the disclosure of segment liabilities

Quantitative thresholds for reportable segments - test 2***

75% "Reporting Sufficiency" Test -if the total of external (consolidated) revenue reported by operating segments constitutes less than 75% of external (consolidated) revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three tests, until at least 75% of external (consolidated) revenue is included in reportable segments. The practical limit to the number of segments is 10, which is not a precise limit -add all earlier determined reportable segments that meet the 10% test and then add the next biggest segment!

what items are not used or included in determining segment profit?

Rule: Equity in NI of another company, general corporate expenses, interest, income tax expense, and gains or losses on discontinued operations are all not included in segment profit unless they are included in the determination of segment profit reported to the "chief operating decision maker"

scope - who does segment reporting apply to and not apply to?

(public companies only) - segment reporting applies to public companies only -it does not apply to not-for-profit organizations, nonpublic companies, or separate financial statements and the consolidated or combined financial statements of members of a consolidated group if both the separate company statements and the consolidated or combined financial statements are included in the same financial report

items normally excluded from segment profit (or loss) - segment profit (or loss) defined*

-general corporate revenues -general corporate expenses -interest expense(except for financial institutions) -income taxes -equity in earnings and losses of an unconsolidated subsidiary(under the equity method) -gains or losses from discontinued operations -extraordinary items -minority interest -all of these things are not operating!!

enterprise wide disclosures - 4 of them

-products and services -geographic areas---revenues, long-lived assets -major customers -operating segments

other reportable segment disclosures??

-products and services -profit or loss -assets -liabilities -measurement criteria -reconciliations

Quantitative thresholds for reportable segments - test 1****

1. 10% "size" test (must only meet one) ------------------------------------------------------------------------- a. REVENUE ---a segment meets the size test if its reported revenue, including both sales*** to external customers and intersegment sales*** or transfers(but excluding interest income on advances and loans to other segments), is 10% or more of the combined revenue, internal and external, of all operating segments ------------------------------------------------------------------------- b. REPORTED PROFIT OR LOSS ---a segment meets the size test if the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of ***(1) the combined reported profit of all operating segments that did not report a loss (2) the combined reported loss of all operating segments that did report a loss*** ------------------------------------------------------------------------- c. ASSETS ---a segment meets the size test if its assets are 10% or more of the combined assets of all operating segments -the assets of a segment are those assets included in the measure of the segment's assets that are reviewed by the chief operating decision maker

segment profit (or loss) defined - formula*

1. formula revenues less: directly traceable costs less: reasonably allocated costs(by CFO) = operating profit(or loss)

operating segment

an operating segment is a component of an enterprise: 1. that 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 enterprise) 2. whose operating results are regularly reviewed by the enterprise's "Chief Operating Decision Maker" to make decisions about resources to be allocated to the segment and assess its performance 3. for which discrete financial information is available (traceable cash flow)..."this cash flow is from Product A" -the definition of a segment depends on how management uses information, which is called the management approach method. For example, management may report results both by product and service lines and by geographical lines

for each reportable segment of an enterprise disclose what?

both profit or loss and total assets should be disclosed under US GAAP

required disclosures for all public enterprises

financial statements for public business enterprises US GAAP and IFRS must report information about a company's: 1. operating segments (annual and interim) 2. products and services 3. geographic areas 4. major customers

"all other segments" category***

information about other business activities and operating segments that are not reportable based on the above criteria should be combined and disclosed in an "all other segments" category

intercompany transactions not eliminated for reporting

it is important to remember that transactions between the segments of an enterprise are not eliminated as in consolidation between the parent company and subsidiaries

reportable segment

reportable segments are operating segments of an enterprise that meet the criteria for separate reporting -those operating segments that exhibit similar long-term financial performance may be aggregated into a single operating segment if (i) aggregation is consistent with the objective and principles of segment reporting (ii) the segments have similar economic characteristics and (iii) the segments are similar in: 1. the nature of the products and services 2. the nature of the production processes 3. the type or class of customer for their products and services 4. the methods used to distribute their products or provide their services 5. if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities

general

the objective of segment reporting is to provide information on the business activities and the economic environment of a company to help users of the financial statements: 1. better understand the enterprise's performance 2. better assess its prospects for future net cash flows 3. make more informed judgments about the enterprise as a whole -in general, an enterprise is required to disclose segment profit or loss, segment assets, and certain related items, but it is not required to report segment cash flow

not every enterprise is an operating segment - What aren't operating segments?

1. corporate HQ not an operating segment -a corporate HQ or certain functional departments may not earn revenues or may earn revenues that are only incidental to the activities to the activities of the enterprise and would, therefore, not be operating segmenets 2. pension plan not an operating segment -an enterprise's pension and other post-retirement benefit plans are not considered to be operating segments