Chapter Eight

Segment and
Interim
Reporting

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 Learning Objective 8-1

Understand how an enterprise determines

its operating segments and the factors that
influence this determination.

8-2
 Rationale for
Segment Reporting
Segment reporting provides information to help
users of financial statements to:
Better understand the entitys performance.
Better assess the entitys prospects for future
net cash flow.
Make more informed judgments about the
enterprise as a whole.

8-3
 The 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.

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 Learning Objective 8-2

Apply the three tests that are used to

determine which operating segments
are of significant size to warrant
separate disclosure.

8-5
 Determining Segments

Management must consider these aggregation criteria

to determine whether to combine operating segments:
nature of the products or services provided by each
operating segment.
nature of the production process.
type or class of customer.
distribution methods.
nature of the regulatory environment.
8-6
 Quantitative Thresholds

A Segment is considered reportable if it satisfies one of these

tests:
Revenue test - Its revenues are 10% or more of the
combined revenue of all segments.
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.
Asset test - Its assets are 10% or more of the combined
assets of all operating segments.

8-7
 Reportable Segments - Example

Revenue Test:
Atkinson Company is a business with the following
six segments.

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 Reportable Segments - Example
Based on the test for revenue, three of the following
segments will be reportable (they exceed 10% of $97.8
million):

8-9
Reportable Segments - Example

Profit or Loss Test:

Atkinsons six segments had the following
financial results:

8-10
Reportable Segments - Example
The individual profits and losses are compared to
10% of the LARGER of the profit and loss totals,
and four are determined to be reportable because
they are greater than $1.65 million = ($16.5 X .10).

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 Reportable Segments - Example
The Asset Test:
Atkinsons segments have the following total assets in each
segment. Any segment with assets that are 10% or more
of the combined assets total is reportable.

8-12
 Reportable Segments - Example

Three of Atkinsons segments have at least 10% of the

total assets ($4.43 million):

8-13
Reportable Segments - Example

Because four of Atkinsons operating segments meet at

least one of the quantitative tests, they are considered
reportable.

8-14
Operating Segment Tests -
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 additional segments do not
meet the reportable segment criteria).
Although a maximum number is not
prescribed, authoritative literature suggests
that 10 separately reported segments might be
the practical limit.
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 Learning Objective 8-3

List the basic disclosure requirements

for operating segments.

8-16
 Required Segment Disclosures

A company is required to disclose general information

about each operating segment.
Segment profit or loss
Revenues
Interest revenue and expense
Depreciation, depletion and amortization expense
Significant noncash and unusual items
Income Tax expense or benefit
Investment in equity method affiliates
Total assets
Capital expenditures

8-17
 Other Enterprise Disclosures
The company must also disclose
additional information regarding . . .

Products &
Services Geographic
Areas

Major
Customers
8-18
 Products & Services

GAAP 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
and services.

8-19
 Learning Objective 8-4

Determine when and what types of

information must be disclosed for
geographic areas.

8-20
 Geographic Areas

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.

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 Learning Objective 8-5

Apply the criterion for determining when

disclosure of a major customer is required.

8-22
 Major Customers

When 10% or more of a companys revenue is

derived from one or more customer, the
company MUST disclose all of the companies
as major customers.

The IDENTITY of the major customer need

not be disclosed.

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 Learning Objective 8-6

Recognize differences between U.S. GAAP

and IFRS in segment reporting.

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 IFRS and Segment Reporting

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.
IFRS specifically includes intangible assets as 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.

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 Learning Objective 8-7

Understand and apply procedures used in

interim reports to treat an interim period
as an integral part of the annual period.

8-26
 Interim Reporting

To provide more timely information, the SEC

requires quarterly financial statements from
publicly-traded companies in the U.S.

But how do the statements fairly reflect

expenses that do not occur evenly
throughout the year?

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 Interim Reporting

There are two possible approaches:

Discrete the accounting period stands
on its own.
Integral treat the accounting period
as a portion of a longer period.
FASB ASC 270 requires companies to use
the Integral Approach.

8-28
 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.
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.
8-29
 Interim Reporting - Inventory
and Cost of Goods Sold
LIFO Liquidations
Interim period gross profit should
not reflect gains resulting from
Standard Costing
temporary LIFO liquidations.
Variances that are
expected to be
absorbed by year-
end should not be
Lower -of-Cost-or-Market
recognized in the
Inventory write-downs should be
interim period.
reflected in interim period numbers
if the market value is not expected
to recover by year-end.
8-30
 Interim Reporting - Expenses

To provides for less volatility of information:

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.
Costs not directly matched to revenues should be
allocated among interim periods on a reasonable
basis through the use of accruals and deferrals.

8-31
 Interim Reporting Other Items
Extraordinary Items
should be reported
separately and in full in A change in accounting
the interim period in principles should be
which they occur. reported as if it
occurred in the first
Income Taxes for each interim period shown.
interim period (This may require
should be computed restatement.)
based on an estimated
annual effective tax rate.
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 Learning Objective 8-8

List the minimum disclosure requirements

for interim financial reports.

8-33
 Interim Reporting
Minimum Disclosures
Sales or Gross Provision for Income
Revenues Taxes (and significant
changes in estimates)
Seasonal
EPS Revenues & Net
Expenses Income
Unusual or
Contingent
Extraordinary
items
Items
Other Disposal of
significant a Business
changes Segment
8-34
 Interim Reporting
Segment Disclosures

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)

There are no interim disclosure about major

customers or geographic areas.
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 Learning Objective 8-9

Recognize differences between U.S.

GAAP and IFRS in interim reporting.

8-36
 IFRS -- Interim Reporting
IAS 34 requires the following minimum components in an
interim report:
Condensed statement of financial position (balance sheet).
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.
Condensed statement of changes in equity.
Condensed statement of cash flows.
Selected explanatory notes.
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 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 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.

8-38