Chapter 8: Segment and Interim Reporting

T/F: There are requirements for interim disclosures about major customers or geographic areas.

False

•Current guidelines require the retrospective application...

of a new accounting principle to prior periods' financial statements.

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. GAAP requires disclosure of total assets and is silent on liabilities. •IFRS includes intangible assets as long-lived assets. U.S. GAAP does not define what to include in 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. GAAP does not permit geographic area.

3. Total segment assets and the following related items (2):

•Investment in equity method affiliates. •Expenditures for additions to long-lived assets.

For companies with international activities, two items must be reported:

•Revenues from external customers. •Long-lived assets for 1)The domestic country. 2)All foreign countries in total in which the enterprise derives revenues or holds assets.

•No accrual of expenses in earlier quarters for expenses...

is 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.

Asset Test

its assets are 10 percent or more of the combined assets of all operating segments.

Profit or loss test

its profit or loss is 10 percent or more of the combined profit (or combined loss if larger) of all segments reporting a profit.

Revenue Test

its revenues are 10 percent or more of the combined revenue of all reported operating segments.

The existence of all major customers must be disclosed along with the...

related amount of revenues and the identity of the operating segment generating the revenues.

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

•Better understand the enterprise's performance. •Better assess the entity's prospects for future net cash flows. •Make more informed judgments about the enterprise as a whole.

IAS 34 required minimum components in an interim report:

•Condensed statement of financial position (balance sheet). •Condensed statement of comprehensive income: a. A condensed single statement of net income and comprehensive income, or b. Separate condensed statements of net income and comprehensive income. •Condensed statement of changes in equity. •Condensed statement of cash flows. •Selected explanatory notes.

"Interim Reporting," provides guidance on how to prepare interim statements. There are two possible approaches (2):

•Discrete—the accounting period stands on its own. •Integral—treat the accounting period as a portion of a longer period.

1. General information about each operating segment (2):

•Factors used to identify reportable operating segments. •Types of products and services from which each operating segment reported derives its revenues.

Interim period accounting for inventory and CGS requires several modifications to procedures used on an annual basis, related to...

•L I F O liquidation. •application of the lower-of-cost-or-net realizable value rule. •standard costing.

2. Segment profit or loss must be disclosed if it is regularly provided to or included in the measure of segment profit or loss reviewed by the chief operating decision maker (7):

•Revenues from external customers. •Transaction revenues from other operating segments. •Interest revenue and expense (reported separately). •Depreciation, depletion, and amortization expense. •Equity in the net income of investees (equity method). •Significant noncash and unusual items. •Income tax expense or benefit.

Authoritative accounting literature requires companies to provide minimum information in their interim reports for (8):

•Sales or gross revenues. •Earnings per share (basic and diluted). •Seasonal revenues and expenses. •Significant changes in estimates or provisions for income taxes. •Disposal of a component of the business and unusual or infrequently occurring items. •Contingent items. •Changes in accounting principles or estimates. •Significant changes in financial position.

An operating segment is a component of an enterprise (3):

•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.

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

•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. If the company has only one operating segment and does not provide segment information, it must report geographic area information.

Management must consider these aggregation criteria to determine whether to combine operating segments (5):

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

Revenues should be recognized in interim periods... Revenues from long-term contracts should be recognized... A company should recognize projected losses on long-term contracts...

•the same way revenues are recognized on an annual basis. •using the same methodology as used on an annual basis. •to their full extent in the interim period in which it becomes apparent that a loss will arise.

A reporting entity must indicate its reliance on any major external customer:

Whenever 10 percent or more of a company's consolidated revenues is derived from a single external customer.

-The total of reportable segments' revenues must be reconciled to... -The total of reportable segments' profit or loss must be reconciled to... -The total of the reportable segments' assets must be reconciled to...

-consolidated revenues. -consolidated income before tax. -consolidated total assets.

1.The cumulative effect of the change on prior periods be reflected... 2.Any offsetting adjustment is made to the... 3.Financial statements for each prior period are adjusted to reflect...

-in the carrying amounts of assets and liabilities as of the beginning of the first period presented. -opening balance of retained earnings (or other appropriate accounts). -the period-specific effects.

Companies also must explain the measurement of segment profit or loss and segment assets, including a description of any differences in measuring (3):

1)Segment profit or loss and consolidated income before tax. 2)Segment assets and consolidated assets. 3)Segment profit or loss and segment assets. The basis of accounting for intersegment transactions also must be described.

A segment is considered reportable if it satisfies only one of these tests:

1. Revenue test 2. Profit or Loss test 3. Asset test

Significant company information is required to be disclosed for each operating segment:

1.General information about each operating segment: 2.Segment profit or loss must be disclosed if it is regularly provided to or included in the measure of segment profit or loss reviewed by the chief operating decision maker: 3.Total segment assets and the following related items:

__ separately reported segments might be the practical limit.

10

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

75

The combined sales revenues of the disclosed segments must be at least __ percent of total company sales, excluding intra-entity sales.

75

•Discontinued operations should be reported in net income on a net of tax basis in the interim period in which...

a business component is discontinued or classified as held-for-sale.

•IAS 34 requires each interim period to be treated as _ ____ ____ in determining the amounts to be recognized.

a discrete period

•G A A P requires the following interim disclosure for each reportable operating segment:

a) Revenues from external customers. b) Intersegment revenues. c) Segment profit or loss. d) Total assets (if there has been a material change from the last annual report). •An enterprise must reconcile total segments' profit or loss to the company's total income before taxes.

•Income taxes for each interim period should be computed based on...

an estimated annual effective tax rate.

Companies are encouraged, but not required, to publish...

balance sheet and cash flow information in interim reports.

•Expenses that are incurred in one quarter are recognized...

in full in that quarter