Chapter 8- Segment and Interim Reporting

Segment reporting provides information to help users of financial statements to (3):

1) Better understand the entity's performance 2) Better assess the entity's prospects for future net cash flows 3) Make more informed judgements about the enterprise as a whole

What are the differences between segment reporting for IFRS and GAAP?

1) IFRS requires disclosure of total assets AND total liabilities 2) IFRS specifically includes intangible assets as long-lived assets 3) In a company with a matrix form, IFRS permits operating segments to be based on geographic area (whereas GAAP requires product/service segmentation if the information is available

What must be disclosed under the geographic area requirements (4)?

1) Total Domestic Sales 2) Total Foreign Sales 3) Total Domestic Assets 4) Total Foreign Assets

When/how are projected losses on long-term contracts be recognized under discrete reporting?

A company should recognize projected losses on long-term contracts to their full extent in the interim period in which it becomes apparent that a loss will arise

Interim Reporting

The SEC requires quarterly financial statements from publicly-traded companies in the US to provide more timely information

What are the two possible approaches to interim reporting?

1) Discrete 2) Integral

What aggregation criteria that management must consider to help determine if operating segments should be combined (5)?

1) Nature of the products or services provided by each operating segment 2) Nature of the production process 3) Type or class of customer 4) Distribution method 5) Nature of the regulatory environment

What interim disclosures for each reportable operating segment are required by GAAP?

1) Revenues from external customers 2) Intersegment revenes 3) Segment profit or loss 4) Total Assets (if there has been a material change from the last annual report) *** There are no interim disclosures about major customers or geographic segments

What general information must be disclosed about each reportable operating segment (9)?

1) Segment Profit or Loss 2) General Revenues 3) Interest Revenue and Expense 4) Depreciation, Depletion and Amortization Expense 5) Significant Non-Cash and Unusual Items 6) Income Tax Expense and Benefit 7) Investment in Equity Method Affiliates 8) Total Capital 9) Capital Expenditures

After applying the three tests, what additional information must be included for operating segments?

1) The combined sales revenues of the disclosed must be at least 75% of total company sales (excluding intra-entity sales) 2) A company must disclose general information about each operating segment 3) Products and Services 4) Geographic Areas 5) Major Customers

Revenues from external customers and long-lived assets must be disclosed for (3):

1) The domestic country 2) All foreign countries where the enterprise derives revenue or holds assets 3) Each foreign country in which a material amount of revenue is derived or assets are held (specific country)

When/how are revenues recognized under discrete reporting?

Revenues are recognized in the interim periods in which they are earned.

When/how are revenues from long-term contracts recognized under discrete reporting?

Revenues from long-term contracts should be recognized using the same methodology as used on an annual basis (% of completion)

Where are segment's included in the financial statements?

Segment's are broken out into the footnotes of the financial statements.

What is a company required to do if 75% of sales are no disclosed through operating segment reporting?

Segments must be added until the 75% test is met (even if the additional segments do not meet the reportable segment criteria)

What aspect of a major company does a firm not need to disclose?

The IDENTITY of the major customer need not be disclosed.

Discrete Interim Reporting

The accounting period stands on its own. All revenues are recognized in the accounting period earned, and all expenses are recognized in the period incurred.

What expenses are required to be accrued under IFRS interim reporting?

The accrual of income tax expenses at the end of each interim period is the only expense accrued.

What is the practical limit of reportable operating segments suggested by authoritative literature?

10 segments

What must management consider in order to determine whether to combine operating segements?

Aggregation Criteria

Management Approach

Allows managers to determine what their segments are based on (depends on how managers value their company)

When/how are expenses recognized under integral reporting?

Expenses that are not incurred evenly throughout the year should be predicted early in the year to each interim reporting period

What method is required by IFRS interim reporting?

IAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized.

Under what circumstance does GAAP require the disclosure of revenues from transactions with external customers from each product or service?

If the operating segments were not determined based on differences in products and services.

Which interim reporting approach is required by FASB ASC 270?

Intergral Interim Reporting

How are intra-entity transactions treated when applying the revenue, profit/loss and asset tests?

Intra-entity transactions are included in the application of all three tests. They should be included as if they were outside sales.

When does a firm need to disclose major customers?

Only when the operating segments that have previously been reported have been not determined based on differences in products/services

Why does the FASB require the integral approach?

To provide less volatility of information

Integral Interim Reporting

Treat the accounting period as a portion of the longer period. Recognized expenses and revenues evenly.

What is a major customer?

When 10% or more of a company's revenue is derived from one or more customer

When is a segment considered reportable?

When it satisfies ONE of these three tests: 1) Revenue Test 2) Profit/Loss Test 3) Asset Test

How are Corporate HQ line items treated when applying the revenue, profit/loss and asset tests?

Line items from Corporate HQ are not included in the three tests.

What is an operating segment?

A component of an enterprise that: 1) Engages in business activities from which it earns revenues and incurs expenses 2) Whose operating results are regularly reviewed by the chief decision maker to assess performance and make resource allocation decisions 3) For which discrete financial information is available

Asset Test

A segment's asses are 10% or more of the combined assets of all operating segments

Profit/Loss Test

A segment's profit or loss is 10% or more of the combined profit (or combined loss, if larger) of all segments reporting a profit

Revenue Test

A segment's revenues are 10% of more of the combined revenue of all segments

How many major customers must a company disclose?

ALL major customers must be disclosed

When/how are costs not directly matched recognized under integral reporting?

Costs not directly matched to revenues should be allocated among interim periods on a reasonable basis through the use of accurals and deferrals