CH 8

Operating segment

A component of an enterprise: 1. that engages in business activities from which it earns revenues and incurs expenses 2. operating results are reviewed by the chief operation decision maker 3. discrete financial info is available

1. Revenue Test

A segments revenues are 10% or more of the combined revenue of all segments

Which one of the following is a test for identifying operating segments for which separate disclosure is required?

Asset test

ASC Topic 280 requires a company to disclose the following information for each reportable industry segment except

identifiable liabilities

Aggregation criteria to determine whether to combine operating segments

nature of products or services provided by each segment, nature of the production process, type or class of customer, distribution methods, and nature of the regulatory environment

All of the following items of information are required to be included in interim reports for each operating segment, except for

revenues from internal customers

Integral

treat the accounting period as a portion of a longer period; requires companies to use this approach

Advantages of segment reporting that aligns with a company's internal structure include all of the following except for

an easy application of GAAP to internal segments would exist, that would not have been possible if the segments were not aggregated

Interim Reporting - Revenues

Revenues are recognized in the interim periods in which they are earned. Revenues from long term contracts should be recognized using the same methodology as used on an annual basis. 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.

ASC Topic 280 requires a company to disclose the following information for each reportable operating segment, except for

gross profit

When must revenues from external customers and long lived assets must be disclosed?

the domestic country, all foreign countries where the enterprise derives revenue or holds assets, and each foreign country in which a material amount of revenue is derived or assets are held.

ASC Topic 280 requires management to consider the following aggregation criteria except for

the total amount of long lived assets for each operation segment

LIFO Liquidations

Interim period gross profit should not reflect gains resulting from "temporary"

Minimum info to provide for interim report

• Sales or gross revenues, provision for income taxes, extraordinary items, and net income. • Earnings per share. • Seasonal revenues and expenses. • Significant changes in estimates or provisions for income taxes. • Disposal of a segment of a business and unusual or infrequently occurring items. • Contingent items. • Changes in accounting principles or estimates. • Significant changes in financial position.

Segment reporting

Helps users of financial statements to: 1. Better understand the entity's performance 2. Better assess the entity's prospects for future net cash flow 3. Make more informed judgments about the enterprise as a whole

Ashley Inc. has a publishing industry operating segment. Which one of the following is included in calculating the segment's operating profit or loss?

Intersegment revenues

Items that are required to be reported in interim financial states for each material operating segment?

Intersegment revenues, revenues from external customers, and segment profit or loss

Lower of Cost or Market

Inventory write downs should be reflected in interim period numbers if the market value is not expected to recover by year end

GAAP requires the following interim disclosure for each reportable operating segment:

-Revenues from external customers -Intersegment revenues -Segment profit or loss -Total assets (if there has been a material change from the last annual report)

Two approaches to report expenses that do not occur evenly throughout the year:

1. Discrete 2. Integral

When is a segment considered reportable if it satisfies one of these tests?

1. Revenue 2. Profit or Loss 3. Asset

3. Asset test

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

2. Profit or Loss test

Segment profit or loss is 10 percent 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.

Required Segment Disclosures

Segment profit or loss, revenues, investment in equity method affiliates, total assets, capital expenditures

Assuming that each of the items below is significant (constitutes more than 10% of the appropriate total), a company would not have to disclose under ASC Topic 280:

The identity of a major customer who accounts for 30% of all sales.

Interim Reporting - Expenses

1. Expenses that are not incurred evenly throughout the year should be predicted early in the year and allocated to each of the interim reporting periods 2. costs not directly matched to revenues should be allocated among interim periods on a reasonable basis through the use of accruals and deferrals

What is makes a "major customer"?

Disclosure of a major customer is required when 10% or more of a company's revenue is derived from one or more customer, the company must disclose all of the companies as major customers. The identity does not need to be disclosed.

True statement concerning US GAAP?

Does not require segment information to be reported in accordance with generally accepted accounting principles

IFRS and GAAP

Substantially the same except.. 1. IFRS requires disclosure of total assets and liabilities if that info is provided to the chief decision maker. 2. IFRS specifically includes intangible assets as long lived assets. 3. In a company with a matrix form of organization, IFRS permits operating segments to be based on geographic area, as opposed to products/services.

Standard Costing

Variances that are expected to be absorbed by year end should not be recognized in the interim period

Discrete

accounting period stands on its own

Under ASC Topic 280, an operating segment would not be required to disclose the following information even it is were material in amount

cash flow information