Chapter 13 - MGMT 503

10% revenue test

Applied to each operating segment's total revenue as a percentage of the combined revenue of all segments IF an operating segment's total revenue is 10 percent or more of the combined revenue of all segments, then the segment is separately reportable and supplementary disclosures must be provided for it in the annual report

Enterprise-wide disclosure

- to provide users more information about the specific risks of the company - Typically made in a footnote to the financial statements - required: products and services, geographic information, and major customers

Operating segments

- 10 percent quantitative thresholds to identify reportable operating segments - that are used internally for evaluating the company's financial performance and condition (ASC 280-10-50-12) - Separate disclosure required if at least one: 1) 10% revenue test 2) 10% profit/loss test 3) 10% asset test

Comprehensive disclosure test

- 75 percent CONSOLIDATED revenue test - Applied after determining which segments are reportable under any of the 10 percent tests - The total revenue from 3RD parties by all separately reportable operating segments must equal at least 75 percent of the total consolidated revenue

Which of the following is NOT true about enterprise-wide disclosures? a. The auditor determines the materiality threshold for these disclosures. b. A company is required to report revenues for each major product and service or each group of similar products and services. c. Company's must report revenues attributed to the company's home country and the revenue from external customers attributed to all foreign countries. d. There is no materiality threshold for geographic segments

A

Information about products and services (disclosures)

A company is required to report the revenues from external customers for each major product and service, or each group of similar products and services, unless it is impracticable for it to do so The reason for this requirement is that the company may have organized its operating segments on a basis different from its product lines (otherwise no further action required)

Which of the following is NOT one of the 10% thresholds for defining an operating segment? a. 10% of revenues. b. 10% of cost of goods sold. c. 10% of profit (or loss). d. 10% of assets.

B

Which of the following is NOT one of the characteristics of an operating segment? a. The component unit's business activities generate revenue and incur expenses. b. The component unit's operating results are regularly reviewed by the entity's chief operating decision maker. c. The component unit can be identified with a standard industry code assigned by the federal government. d. Separate financial information is available for the component unit

C

10% profit/loss test

Determine whether a segment's profit or loss is equal to or greater than 10 percent of the absolute value of either the combined operating profits or the combined operating losses of the segments, whichever is greater

COGS and inventory

General rule: Interim cost of goods sold should be computed with the direct and allocated cost elements on the same basis as used to compute the annual cost of goods sold

Disposal of component or unusual, infrequently occurring, and contingent items

Measurement and reporting on the same bases as used to prepare the annual report Discontinued operations, and unusual and infrequently occurring items should be reported in the interim period in which they occur

Limitations of Consolidated F/S

Results of individual companies are not disclosed and as such may hide good and bad performers Financial ratios are based on aggregated data and may not be representative for single entities Similar accounts of different companies may not be entirely comparable Data aggregation in general results in information loss

Elements of 10Q

See slide 29

Disposal of a component

The materiality test for discontinued operations should be based on the operating income of the interim period in which the discontinued operations are first reported Contingencies that could affect the company also must be disclosed on the same basis as that used in the annual report

reporting standards for revenue

The measurement basis used in an interim period should be the same as that used for the full fiscal year Revenue from seasonal businesses cannot be manipulated to eliminate seasonal trends

accounting pronouncements on interim reporting

- ASC 270 (APB 28) - Standardized the preparation and reporting of interim income statements - ASC 250 (FASB 154) - Specifies that a change in an accounting principle made in an interim period is reported using the retrospective application to the prechange interim periods for the direct effects of the change - ASC 740 (FIN 18) - Tackles the problems of measuring the tax provision for interim reports when the actual tax expense is based on annual income - IAS 34 - International Financial Reporting Standards for interim reporting; similar to those of U.S. GAAP

Exercising judgement in determining segments

- Companies should still separately report segments that have been reported in prior years but fail the current period's significance tests because of abnormal occurrences - Companies need not separately report a segment that has met a 10 % test on a one-time basis only - If a segment becomes reportable in the current period but has not been reported separately in earlier periods, the prior years' comparative segment disclosures, which are included in the current year's annual report, should be restated

10% asset test

- Determine if the segment's assets are 10 percent or more of the total assets of all operating segments - Items composing each segment's assets are defined by management, as used for internal decision-making purposes (could include intangibles, A/R or even I/C items if relevant)

Other costs and expenses

- General principle: Costs and expenses should be charged to interim income in the interim period in which they are incurred - allocated among the interim periods based on: time used, benefit received, and activity level of interim period

Information about geographic areas (disclosures)

- MUST report, unless impractical to do so: a. 3rd party REVENUES attributed to the company's home country of domicile and b. 3rd party REVENUE attributed to all foreign countries in which the enterprise generates revenues - if 3rd party revenues are material the revenues for that country shall also be separately disclosed - Long-lived productive assets located in the entity's home country of domicile and the total assets located in all foreign countries in which the entity holds assets (if assets in foreign country are material then the amount of assets held in that specific country shall also be disclosed separately) - Long-lived productive assets do not include (ASC 280): financial instruments, LT customer relationship of financial institution, mortgage, deferred tax assets etc.

Segment Reporting - Accounting Issues

- Many companies offer multiple products through various divisions in different geographical regions. - These segments or components of a large company may have different profit rates, different risks, different growth opportunities - So, there is a need for disaggregated information which allow investors to better understand a company's operations as well as its risks and opportunities.

Integral view

- The integral theory of interim reporting views an interim period as an installment of an annual period - Recognition and adjustment of certain income or expense items may be affected by judgments

Interim reporting - 10Q

- This must be filed within 40 days after the end of each of the first three quarters for publicly owned companies classified as "accelerated filers" - quarterly report - doesn't have to be audited but reviewed by independent auditors - Selected quarterly financial data must be reported in a footnote in the annual financial report

Issues when defining segments

- corporate HQ, pensions and post-retirement plans are not a separate operating segment hence not included The company may choose to aggregate several individual operating segments that have very similar economic characteristics and if Management belief that informs investors and users of financial statements more adequately Allocation of costs to specific segments: costs clearly identifiable to a segment and used by the chief operating's decision makers should be included only.

Information to be disclosed for a segment separately reportable

- general information - amounts for each separately reportable segment - measures of segment profit or loss - segment assets - reconciliation to consolidated totals

Information about major customers (disclosures)

- individual customers could be Any single customer or group of customers/companies under common control, the federal government, a state government, a local government, or a foreign government - materiality = 10% - disclosure requirement: amount of revenue and identity of segments, name of customer does not need to be disclosed

Segment Reporting

- operating segment has 3 characteristics and uses a "management approach" 1) unit generates revenue and incurs expenses 2) unit's operating results are regularly reviewed and used by the entity's chief operating decision maker 3) separate financial information is available for the component unit - external segment reporting is aligned with company's internal reporting and its organization structure

Interim financial reporting

-reports cover a time period of less than one year - Publicly held companies are required to publish quarterly reports - The quarterly report is, in many ways, a smaller version of the annual report

Format of the Quarterly Financial Report

1) income statement for the most recent quarter of the fiscal period 2) income statements for the cumulative year-to-date 3) condensed B/S at the end of the current quarter and condensed B/S 4) statement of cash flows as of the end of the cumulative year-to-date period 5) footnotes that update those in the last annual report 6) statement of comprehensive income for most recent fiscal quarter 7) reconciliation of changes in stockholder's equity 8) report by management