ACC 4100 Chapter 8 - Segment & Interim Reporting
An operating segment is a component of an enterprise if...
(1) It engages in business activities from which it recognizes revenues and incurs expenses. (2) The chief operating decision maker regularly reviews its operating results to assess performance and make resource allocation decisions. (3) Its discrete financial information is available.
The reporting requirement was changed from *geographic regions* to *individual countries* because reporting information about individual countries has *two* benefits...
(1) It reduces the burden on financial statement preparers because most companies likely have material operations in only a few countries, perhaps only their country of domicile (2) More importantly, country-specific information is easier to interpret and therefore more useful.
Combined Revenue
Includes: Sales to Outsiders Intersegment Transfers Interest Revenue - Outsiders Interest Revenue - Intersegment Loans
FASB ASC 250-10-45-5
(a) The cumulative effect of the change to the new accounting principle on periods prior to those presented is reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. (b) An offset adjustment, if any, is made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. (c) Financial statements for each individual prior period are adjusted to reflect the period-specific effects of applying the new accounting principle.
Interim Reporting: Inventory & COGS
Several modifications related to (1) LIFO liquidation, (2) application of lower-of-cost-or-NRV rule, and (3) standard costing.
A sufficient number of segments is presumed to be included only if the *combined segment sales to unaffiliated customers* are at least...
75% of total company *consolidated sales made to outsiders*.
"Integral Part of an Annual Period" Approach (Integral Approach)
A company accrues a portion of the bonus to be paid in December as an expense in each of the first three quarters of the year.
JE to Record COGS with Historical Cost and Excess of Replacement Cost Over Historical Cost for LIFO Liquidation
Debit to COGS [for COGS under the higher Replacement Cost] Credit to Inventory [for COGS under the lower Historical Cost] Credit to Excess of Replacement Cost over Historical Cost of LIFO Liquidation [difference]
Application of the integral approach requires estimating the annual bonus early in the year and developing a method for...
allocating the bonus to the four quarters of the year.
"Discrete Period" Approach
The company reports the entire bonus expense in December, reducing fourth-quarter income only.
Segment Reporting
The objective is to provide information about the different business activities in which an enterprise engages and the different economic environments in which it operates to help users of financial statements.
In determining materiality, management should apply the concept that...
an item is material if its omission could change a user's decision about the enterprise as a whole.
Calculation of Income Tax Expense on an Interim Period Discontinued Operation
Calculated at the margin as the difference between income tax on income *including* discontinued operations and income tax on income *excluding* discontinued operations.
Interim Reporting: Income Taxes
Companies should compute income tax related to ordinary income at an estimated annual effective tax rate. At the end of each interim period, a company makes its best estimate of the effective tax rate for the entire year. The effective tax rate reflects anticipated tax credits, foreign tax rates, and tax planning activities for the year.
Interim Reporting: Change in Accounting Principle
Current accounting guidelines require retrospective application [comparative financial statements will be restated as if the new accounting principle has always been used] of a new principle to prior period's statements
Discontinued Operations under Interim Reporting
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.
If the lower limit for the sufficient number of segments is not achieved...
additional segments must be disclosed separately despite their failure to satisfy even one of the three quantitative thresholds.
Operating segments that are not individually significant and cannot be aggregated with other segments are...
combined and disclosed in an "All Other" category
FASB ASC 270 requires companies to treat interim periods as...
integral parts of an annual period rather than as discrete accounting period in their own right
If an operating segment newly qualifies for disclosure in the current year...
prior period segment data presented for comparative purposes must be restated to reflect the newly responsible segment as a segment segment.
If more than one set of organizational units exist but segment managers are held responsible for only one set...
that set constitutes the operating segments.
An enterprise with *only one* operating segment also must disclose revenues from external customers on the basis of product or service but is not required if...
the information is not available and the cost to develop it would be excessive.
If segment managers exist for two or more overlapping sets of organizational units (as in a matrix form of organization)...
the nature of the business activities must be considered, and the organizational units based on products and service constitute the operating segments.
Operating segments that do not meet any of the quantitative thresholds may be combined to produce a reportable segment if...
they share a majority of the (5) aggregation criteria listed earlier
Though a __________ was considered for determining when a country is material...
ultimately the FASB decided to leave this to management's judgement.
Interim Reporting: Revenues
Companies should recognize revenues in interim periods the same way they recognize revenues on an annual basis.
Standard Costing under Interim Reporting
A company should not reflect in interim financial statements planned price, volume, or capacity variances arising from the use of a standard cost system that are expected to be absorbed by the end of the annual period; it should report unplanned variances at the end of the interim period in the same fashion as it would in the annual financial statements.
FASB ASC 280-10-50-42
A reporting entity must indicate its reliance on any major external customer. Presentation of this information is required whenever *10% or more* of a company's *consolidated revenues* is derived from a single external customer.
Combined Profit & Combined Loss
Combined Profit (Combined Loss) = Combined Revenue - Combined Expense Revenue > Expense → Profit Revenue < Expense → Loss Combined Profit > Combined Loss → 10% of Combined Profit is the minimum amount that qualifies a segment for separate reporting Combined Profit < Combined Loss → 10% of Combined Loss is the minimum amount that qualifies a segment for separate reporting
Calculation of Income Tax Expense per Period under Interim Reporting
Company applies their best estimate of the effective tax rate to the pretax ordinary income earned to date during the year, resulting in the cumulative income tax expense to recognize to date. The difference between the cumulative income tax recognized to date and the income tax expense recognized in the current interim period.
Asset Test
An operating segment is considered to be significant if" its *segment assets* are *10% or more* of the combined assets of all operating segments.
Profit or Loss Test
An operating segment is considered to be significant if: its *segment profit or loss* is *10% or more* of the *larger* (in absolute terms) of the combined reported profit of all profitable segments OR the combined reported loss of all segments incurring a loss.
FASB ASC 280-10-50-40
Requires disclosure of revenues derived from transactions with external customers from each product or service if operating segments have not been determined based on differences in products or services.
Generally, information must be separately reported for each operating segment that meets one or more of the following quantitative thresholds:
Revenue Test Profit or Loss Test Asset Test
FASB ASC 280-10-50-18
Suggests that 10 separately reported segments might be the practical limit to the number of operating segments that should be reported separately.
Interim Reporting
Two approaches can be followed in preparing interim reports: (1) Treat the interim period as a discrete accounting period, standing on its own, or (2) treat is as an integral portion of a longer period.
If two of more operating segments have essentially the same business activities in essentially the same economic environments, information for those individual segments may be combined, if they are similar in ALL of the following criteria:
(1) The nature of the products and services provided by each operating segment. (2) The nature of the production process. (3) The type or class of customer. (4) The distribution methods (5) If applicable, the nature of the regulatory environment.
Other Costs & Expenses under Interim Reporting
A company should charge costs and expenses not directly matched with revenues to income *in the interim period in which they occur unless they can be identified with activities or benefits of other interim periods; the cost should be allocated among interim periods on a reasonable basis through the use of accruals and deferrals.
Revenue Test
An operating segment is considered to be significant if: its *segment revenues*, both external and intersegment, are *10% or more* of the combined revenue, internal and external, of all reported operating segments.
Lower of Cost or NRV under Interim Reporting
If at the end of an interim period, NRV > Cost →Inventory Write-Down & Recognize Loss *If company expects NRV to recover above Cost by year-end*, continue to carry inventory at COST.
Combined Expense
Includes: Operating Expenses - Outsiders Operating Expenses - Intersegment Transfers Depreciation & Amortization Interest Expense Income Taxes
Management Approach
Is based on the way that management disaggregates the enterprise into operating segments for making operating decisions