ACCT 508-- Exam 3- Chp. 8

General info about each operating segment

(FP) - Factors used to identify reportable operating segments - Types of products and services from which each operating segment reported derives its revenues

Explanation of Measurement

- Companies also must explain the measurement of segment profit or loss and segment assets, including a description of any differences in measuring: - Segment profit or loss and consolidated income before tax - Segment assets and consolidated assets - Segment profit or loss and segment assets *- The basis of accounting for intersegment transactions also must be described*

Compared to US GAAP

- Condensed versions of everything - Selected explanatory notes

LIFO liquidation

- Will be removed in the second quarter when new goods are purchased

Interim reporting- Other items

- Income taxes for each interim pd should be computed based on an *estimated annual effective tax rate* - Effective tax rate reflects anticipated tax credits, foreign tax rates, and tax planning activities for the year - Discont. operations should be *reported in net income* on a net of tax basis in the interim pd in which a business component is discont or classified as held for sale *(difference between income tax on income including discontinued operations and income tax on income excluding discontinued operations.)* - Current guidelines require the *retrospective application of a new acct principle to prior pds FS* (Retro: Comparative FS will be restated as if the new acct principle had always been used)

IFRS- Interim reports cont.

- Requires each interim pd to be treated as a discrete pd in determining the amts to be recognized (US does all of the pds) - Expenses that are incurred in one quarter are recognized in full in that quarter- even though the expenditure benefits the entire year (diff than GAAP- spread out) - No accrual of expenses in earlier quarters for exp 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 pd

Aggregation criteria

- Determining segments- mgt must consider these aggregation criteria to determine whether to combine operating segments (PPCDR) - 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

IFRS- Interim reports

- Min components in an interim report: 1. Condensed stmt of fin position (BS) 2. Condensed stmt of comprehensive income (a condensed single stmt of net income and comprehensive income OR a separate condensed stmt of net income and comprehensive income) 4. Condensed stmt of changes in equity 5. Condensed stmt of CF 6. Selected explanatory notes

*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: (RTIntInct DIntInct EN) - 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

Interim reporting- Revenues

- Revenues should be recognized in interim pds the same way revenues are recognized on an annual basis - EX: Revenues from long-term contracts should be recognized using the same methodology as used on an annual basis - A company should recognize projected losses on LT contracts to their full extent in the interim pd in which it becomes apparent that a loss will arise

*Interim reporting*

- The SEC requires publicly traded companies in the US to provide unaudited FS on a quarterly basis (2nd question in connect) - FASB, "interim reporting", provides guidance on how to prepare interim stmts - There are two possible approaches: 1. Discrete: the acct pd stands on its own *2. Integral: treat the acct pd as a portion of a longer pd* - FASB requires companies to use the INTEGRAL approach

Other guidelines

- The combined sales revenues of the disclosed segments must be at least 75% of total company sales, excluding intra-entity sales - Segments must be added until the 75% test is met (even if the add segments do not meet the reportable segment criteria) - Max number is not prescribed, but FASB suggests that 10 separately reported segments might be the practical limit

Profit or loss test

Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit

Revenue tests

Its revenues are 10% or more of the combined revenue of all reported operating segments

Asset test

Its assets are 10% or more of the combined assets of all operating segments

*Interim reporting- change in acct priniciples*

FASB requires: 1. The cumulative effect of the change on prior pds be reflected in the carrying amts of assets and liabilities as of the beg of the first pd presented 2. Any offsetting adj is made to the opening balance of RE 3. FS for each prior pd are adj to reflect the pd specific effects

Required segment disclosures- General information-- significant company info is required to be disclosed for each operating segment:

(GPA) 1. General info about each operating segment 2. Segment profit or loss 3. Total segment assets

Information about geographic area- for companies with *international activities*, two items must be reported:

(RA) - Revenues from external customers AND - Long-lived assets for: (DFM) 1. The domestic country 2. All foreign countries in total in which the enterprise derives revenues or holds assets 3. Each foreign country in which material amount of revenue is derived or assets are held - Even if the company has only one operating segment and therefore does not otherwise provide segment info, it must report geo area info

Management approach- an operating segment is a component of an enterprise:

(RRA) - 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

Segment info in interim reports-- US GAAP

(EIPA) - GAAP requires the following interim disclosure for each reportable operating segment: 1. Revenues from external customers 2. Intersegment revenues 3. Segment profit or loss 4. 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 - There are no requirements for interim disclosures about MAJOR CUSTOMERS OR GEO AREAS

Total segment assets

(IE EA) - Investment in equity method affiliates - Expenditures for additions to long-lived assets

Interim reporting- Inventory and COGS

(LLS) - Interim pd acct for inv and COGS requires several modifications to procedures used on an annual basis: 1. LIFO liquidation (HW problem) *2. Application of the lower of cost or net realizable value rule 3. Std costing*

Not meeting a test

- Disaggregated info describing their INDIVIDUAL operation is not required - HOWEVER, the fin data accumulated from these two nonsignificant segments still have to be presented - The amounts of these two segments can be combined and disclosed as aggregate amounts in an "All Other" category with appropriate disclosure of the source of revenues

IFRS 8- Operating segments-- IFRS and US 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 - US 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 (it's products and services)

Lower of cost or net realizable value

- If at the end of the interim pd, the net realizable VALUE of inv is less than its cost- the company normally should *write down inv* and recognize a loss - However, if the company expects the net realizable value to recover above the inv original cost by year-end, it should not write down inv and recognize a loss at the interim balance sheet data - Instead cont. to carry inv at cost

According to FASB "Accounting Standards Codification" Topic 280, "Segment Reporting", segment reporting provides info to help users of FS to:

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

*Reconciliations to consolidates totals*

- (Revenues-- Consolidated Revenues) The total of reportable segments' revenues must be reconciled to *consolidated revenues* - (Profit or loss-- Income before tax) The total of reportable segments profit or loss must be reconciled to *consolidated income before tax* - (Assets-- Consolidated Total Assets) The total of the reportable segments' assets must be reconciled to *consolidated total assets*

*Standard costing*

- A company should not reflect in interim FS planned price, volume, or capacity variances arising from the use of a std cost system that are expected to be absorbed by the end of the annual pd. - However, it should report *unplanned variances* at the end of the interim pd in the same fashion as it would in the annual FS - Variances = Changes ??

Major customers- FASB requires one final but important disclosure:

- A reporting entity must indicate its reliance on any major external customer: - Whenever 10% or more of a company's consolidated revenues is derived from a single external customer - 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

Quantitative thresholds

- A segment is considered reportable if it satisfies only one of these tests 1. Revenue tests 2. Profit or loss test 3. Asset test

Minimum disclosures in interim reports

- Authoritative acct lit requires companies to provide min info in their interim reports for (many companies provide summary FS and notes in their interim reports that contain less info than is included in the annual FS): (RESTDCPP) 1. Sales or gross revenues 2. Earnings per share (basic and diluted) 3. Seasonal revenues and expenses 4. Significant changes in estimates or provisions for income taxes 5. Disposal of a component of the business and unusual or infrequently occurring items *6. Contingent items* 7. Changes in acct principles or estimates 8. Significant changes in financial position - Companies are encouraged but not required to publish BS and CF info in interim reports