Chapter 8 segment and interim reporting PDF

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Chapter 8 lecture notes, contains bulleted list of all important topics in the chapter....

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ACCT 403 Chapter 8: Segment and Interim Reporting  All publicly traded companies in the US are required to prepare interim reports on a quarterly basis  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: better understand the enterprises performance, better assess its prospects for future net cash flows, make more informed judgments  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  Usually segments are reported separately (obviously)  If two or more operating segments have essentially the same business activities in essentially the same economic environments, information for those individual segments may be combined (but it is not required)  Three tests for IDing operating segments for which separate disclosure is required: 1) revenue test (segment revenues, both external and intersegment, are 10% or more of the combined revenue of all reported operating segments). 2) profit or loss test (segment profit or loss is 10% or more of the larger of the combined reported profit/loss of all the segments). 3) asset test (segment assets are 10% or more of all combined assets).  A segment is considered to be significant if it meets ANY of the *above* tests  The revenue test – to apply, figure out the combined revenue of all segments, then multiply that number by 10% to figure out the threshold  The profit or loss test – subtract segment expenses from total segment revenues to determine the profit or loss of each segment, (common costs are not required to be allocated if this isn’t normally done), add up all the total PROFITS, multiply that by the 10% to figure out the threshold  Asset test – add up all the total assets for each reporting segment, multiply that by 10% to determine the threshold of significance  A sufficient number of segments is presumed to be included only if the combined segment sales to unaffiliated customers are at least 75% of total company consolidated sales made to outsiders. If this isn’t achieved, additional segments must be disclosed separately despite their failure to satisfy any of the thresholds.  FASB suggests that around 10 separate segments might be the practical limit to report  Information required to be disclosed for each segment::: 1) general information (types of products, factors used to ID). 2) segment profit or loss (may include: revenues, interest revenue/expense, depreciation, unusual items, equity in net income, income tax).

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3) total segment assets (investment in equity method affiliates, expenditures for additions to long-lived assets). Segment information is to be provided as the company’s internal reporting system prepares it, even if not based on GAAP Preparing segment info in accordance with GAAP used at the consolidated level is difficult in some cases because some GAAP is not intended to apply at the segment level Allocation of::: inventory on a LIFO basis when inventory pools include items in more than one segment, companywide pension plans, and litigation obligations to individual operating segments are NOT required Companies also must explain the measurement of segment profit/loss and segment assets, including a description of any differences in measuring: 1) segment profit or loss and consolidated income before tax. 2) segment assets and consolidated assets. 3) segment profit or loss and segment assets Some companies are organized around product/service lines while some others are organized geographically and define operating segments as regions of the world Some other enterprises may have only one operating segment yet provide a range of different products and services To provide comparability between enterprises, FASB 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 or services An enterprise with only one operating segment also must disclose revenues from external customers on the basis of product or service (providing this info is not required if impracticable) For companies with international activities, two items of info- revenues from external customers and long-lived assets- must be reported BOTH FOR the domestic country AND for all foreign countries in total If revenues from external customers attributed to an individual foreign country are material, the specific country and amount of revenues must be disclosed separately as must a material amount of long-lived assets located in an individual foreign country 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 IFRS and GAAP are largely converged on this topic except for: 1) IFRS requires disclosure of total assets/liabilities by operating segment only if such info is provided to the chief operating decision maker. 2) IFRS indicates that intangible assets are to be included in providing disclosure of long-lived assets attributable to geographic segments. 3) IFRS indicates operating segments are to be determined based on the core principle of the standard (when a company is a matrix form)

 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  Rules about interim reporting:  Revenues – companies should recognize revenues in interim period in the same way they recognize revenues on an annual basis  Inventory and COGS: several modifications relate to: LIFO liquidation, application of lower of cost or net realizable value rule, and standard costing  LIFO liquidation – a company experiences a LIFO liquidation at the end of an interim period when the number of units of inventory sold exceeds the number of units added to inventory during the period (*see page 383 for more info*).  Lower of cost or net realizable value – if at the end of an interim period, the net realizable value of inventory is less than its cost, the company normally should write down inventory and recognize a loss  Standard costing – a company should NOT reflect in interim financial statements planned price, volume, or capacity variances arising from the use of a standard cost system that are expected to be absorbed by the end of the annual period.  Other costs and expenses – a company should charge costs and expenses not directly matched with revenues to income in the interim period in which they occur unless they can be IDed with activities or benefits of other interim periods  Income taxes – companies should compute income tax related to ordinary income at an estimate annual effective tax rate. At the end of each interim period, a company makes its best estimate of the effective tax rate for the entire year.  Change in accounting principle – when the accounting change takes place in other than the first interim period, current guidelines require information for the interim periods prior to the change to be reported by retrospectively applying the new accounting principle to those prechange interim periods  If retrospective application is impracticable, the accounting change is not allowed to be made in an interim period but may be made at the beginning of the next fiscal year  Seasonal items – companies must disclose the seasonal nature of their business operations  FASB requires the following minimum disclosures in interim reports::: sales or gross revenues etc, basic/diluted EPS, seasonal revenues/expenses, significant changes in estimates/provisions, disposal of a component of the business, contingent items, changes in accounting principles/estimates, significant changes in financial position  GAAP requires the following info to be included in interim reports for each operating segment::: revenues from external customers, intersegment revenues, segment profit/loss, total assets (if there has been a material change from the last annual report).  Unlike GAAP, IFRS requires each interim period to be treated as a discrete period in determining the amounts to be recognized...