Chapter 8-Segment and Interim Reporting

Revenue test

Segment revenues, both external and intersegment, are 10 percent or more of the combined revenue, internal and external, of all reported operating segments.

In determining whether business activities and environments are similar, management must consider these aggregation 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.

Interim period accounting for inventory and cost of goods sold requires several modifications to procedures used on an annual basis. The modifications relate to

(1) a LIFO liquidation, (2) application of the lower-of-cost-or-net realizable value rule, and (3) standard costing.

General information about the operating segment

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

The FASB established three tests for identifying operating segments for which separate disclosure is required

1. A revenue test. 2. A profit or loss test. 3. An asset test.

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 aggregation criteria listed earlier.

The objective of segment reporting

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

For interim reporting purposes, U.S. GAAP requires time intervals of

less than one year to be treated as an integral part of the annual period.

U.S. GAAP follows a ______________ for determining segments.

management approach

A reporting entity must indicate its reliance

on any major external customer.

The management approach is based

on the way that management disaggregates the enterprise for making operating decisions.

Unlike U.S. GAAP, the IASB's IAS 34, "Interim Financial Reporting," requires

requires the presentation of condensed financial statements in an interim report. Also, each interim period should be treated as a discrete period rather than as an integral part of an annual period in determining amounts to be recognized. The exception to this rule is the accrual of income tax expense to determine net income for each interim period.

FASB ASC 270 requires companies to

treat interim periods as integral parts of an annual period rather than as discrete accounting periods in their own right

IAS 34 requires the following minimum components in an interim report

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

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 it as an integral portion of a longer period.

For those companies with international activities, two items of information—revenues fromexternal customers and long-lived assets—must be reported

(1) for the domestic country (2) for all foreign countries in total in which the enterprise derives revenues or holds assets.

The major differences between IFRS 8 and U.S. GAAP are

1. IFRS 8 requires disclosure of total assets and total liabilities by operating segment, but only if such information is provided to the chief operating decision maker. U.S. GAAP requires disclosure of segment assets in general and is silent with respect to the disclosure of liabilities, even if this information is provided to the chief operating decision maker. 2. IFRS 8 indicates that intangible assets are to be included in providing disclosure of longlived assets attributable to geographic segments. In contrast, U.S. GAAP does not define what is intended to be included in long-lived assets. 3. When a company has a matrix form of organization, IFRS 8 indicates operating segments are to be determined based on the core principle of the standard. As a result, operating segments can be based on either products and services or geographic areas. U.S. GAAP stipulates that in a matrix form of organization, segments must be based on products and services, not geographic areas.

An operating segment is considered to be significant if it meets any one of the following tests:

Revenue test Profit or loss test Asset test

Asset test

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

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.

Any operating segment that has been reportable in the past and is judged by management to be of continuing significance should be

disclosed separately in the current financial statements regardless of the outcome of the testing process. This ensures the ongoing usefulness of segment information, especially for comparison purposes.

FASB ASC 280, "Segment Reporting," requires

enterprises to follow a management approach in providing disaggregated information by operating segment.

The major differences between IFRS and U.S. GAAP are that IFRS 8

(a) requires the disclosure of liabilities by operating segment if this information is reported to the chief operating decision maker, (b) requires the inclusion of intangible assets in the disclosure of long-lived assets by geographic area, and (c) allows companies with matrix organizations to define operating segments on the basis of either products and services or geographic areas.

U.S. GAAP requires that the following information be included in interim reports for each 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.

An operating segment is a component of an enterprise if

-It engages in business activities from which it recognizes revenues and incurs expenses. -The chief operating decision maker regularly reviews its operating results to assess performance and make resource allocation decisions. -Its discrete financial information is available

FASB ASC 270-10-50 requires companies to provide the following minimum information in their interim reports

-Sales or gross revenues, provision for income taxes, net income, and comprehensive income. -Basic and diluted earnings per share. -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.-