Chapter Eight: Segment and Interim Reporting

IFRS—Interim Reporting

-IAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized. -Expenses that are incurred in one quarter are recognized in full in that quarter, even though the expenditure benefits the entire year. -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.

Interim Reporting—Other Items

-Income taxes for each interim period should be computed based on an estimated annual effective tax rate. -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. -Current guidelines require the retrospective application of a new accounting principle to prior periods' financial statements.

Information about Geographic Area For companies with international activities, two items must be reported:

-Revenues from external customers. -Long-lived assets for

Required Segment Disclosures 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:

-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.

Operating Segment Tests: Other Guidelines

-The combined sales revenues of the disclosed segments must be at least 75 percent of total company sales, excluding intra-entity sales. -Segments must be added until the 75 percent test is met (even if the additional segments do not meet the reportable segment criteria). -Although a maximum number is not prescribed, FASB ASC 280-10-50-18 suggests that 10 separately reported segments might be the practical limit.

Determining Segments Management must consider these aggregation criteria to determine whether to combine operating segments:

-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 IAS 34 required minimum components in an interim report: Condensed statement of comprehensive income:

-A condensed single statement of net income and comprehensive income, or -Separate condensed statements of net income and comprehensive income.

IFRS—Interim Reports IAS 34 required minimum components in an interim report:

-Condensed statement of financial position (balance sheet). -Condensed statement of comprehensive income: -Condensed statement of changes in equity. -Condensed statement of cash flows. -Selected explanatory notes.

Major Customers

-FASB ASC 280-10-50-42 requires one final but important disclosure. -A reporting entity must indicate its reliance on any major 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

Required Segment Disclosures General information about each operating segment:

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

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

-General information about each operating segment: -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:

Segment Information in Interim Reports—U.S. GAAP 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).

Reconciliations to Consolidated Totals

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

Interim Reporting

-The SEC requires publicly traded companies in the United States to provide unaudited financial statements on a quarterly basis. -FASB ASC Topic 270, "Interim Reporting," provides guidance on how to prepare interim statements. -There are two possible approaches: -FASB ASC 270 requires companies to use the integral approach.

Interim Reporting—Revenues

-Revenues should be recognized in interim periods the same way revenues are recognized on an annual basis. -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 long-term contracts to their full extent in the interim period in which it becomes apparent that a loss will arise.

Integral

treat the accounting period as a portion of a longer period.

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.

Segment Reporting According to FASB Accounting Standards Codification® (ASC) Topic 280, "Segment Reporting," segment reporting provides information to help users of financial statements to:

-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.

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: -The basis of accounting for intersegment transactions also must be described.

Interim Reporting There are two possible approaches:

-Discrete -Integral

Segment Information in Interim Reports—U.S. GAAP

-GAAP requires the following interim disclosure for each reportable operating segment: -An enterprise must reconcile total segments' profit or loss to the company's total income before taxes. -There are no interim disclosure about major customers or geographic areas.

International Financial Reporting Standard 8—Operating Segments 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.

Information about Geographic Area For companies with international activities, two items must be reported: Long-lived assets for

-The domestic country. -All foreign countries in total in which the enterprise derives revenues or holds assets.

Management Approach An operating segment is a component of an enterprise:

-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.

Information about Geographic Area Disclosures Revenues from external customers and long-lived assets must be disclosed for:

-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.

Major Customers 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.

Discrete

the accounting period stands on its own.

Interim Reporting—Change in Accounting Principles FASB ASC 250-10-45-5 requires:

-The cumulative effect of the change on prior periods be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. -Any offsetting adjustment is made to the opening balance of retained earnings (or other appropriate accounts). -Financial statements for each prior period are adjusted to reflect the period-specific effects.

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

-Revenue Test -Profit or loss test -Asset test

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.

Minimum Disclosures in Interim Reports Authoritative accounting literature requires companies to provide minimum information in their interim reports for:

-Sales or gross revenues. -Provision for income taxes and net income. -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. Companies are encouraged, but not required, to publish balance sheet and cash flow information in interim reports.