REPORTING SEGMENT AND RELATED INFORMATION

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CHAPTER 14

• REPORTING SEGMENT AND RELATED INFORMATION

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FOCUS OF CHAPTER 14

• Objectives and Applicability of FAS 31
• Reporting Operating Segment Information
• Reporting Enterprise-wide Information
• Products services
• Geographic areas
• Major customers

3
Segment and Related Information Reporting
Objectives

• To provide information about a reporting entitys
  different types of
• Business activities.
• Economic environments.

4
Segment and Related Information Reporting
Objectives

• This information should help financial statement
  users
• Better understand past performance.
• Better assess prospects for future net cash
  flows.
• Make more informed judgments about the entity as
  a whole.

5
Segment and Related Information Reporting
Overview Applicability

• Segment and related information reporting under
  FAS 131 consists of disclosing the following 4
  informational items
  Operating segments.
  Products services.
  Foreign operations/sales.
  Major customers.

1
2
FAS 131
3
4
2, 3, 4 are entity-wide disclosures.
They apply to ALL entities--even those having
only l segment.
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Segment and Related Information Reporting
Overview Applicability

• Segment and related information reporting is
• Needed because of the limitations of consolidated
  financial statements.
• Done in notes to the financial statements.
• Applicable to
• Both ANNUAL INTERIM statements.
• PUBLIC BUSINESS ENTERPRISES ONLY (excludes
  not-for-profit entities).

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Segment and Related Information Reporting
Overview Applicability

• Public business enterprises are entities that
• Have issued debt or equity securitiesthat are
  traded in a public market,
• Are required to file financial statements with
  the SEC, or
• Provide financial statements for the purpose of
  issuing any class of securities in the public
  market.

Wall Street
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Segment and Related Information Reporting
Overview Applicability

• Segment and related information reporting even
  applies to the following entities if they issue
  separate company statements that are NOT in
  the same FINANCIAL REPORT as a set of
  consolidated statements
• Parent enterprises.
• Subsidiaries.
• Joint ventures.
• Investees--if the equity method is used.

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Segment ReportingBasis of Segmentation

• Disaggregated financial information could be
  presented in several ways, for example
• By products services (rejected).
• By geographic area (rejected).
• By legal entity (rejected).
• By type of customer (rejected).
• By organization of the segments for reporting to
  management for decision-making (the management
  approach).

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Segment ReportingBasis of Segmentation

• FAS 131 requires
• A SINGLE basis of segmentation.
• The MANAGEMENT approach basis of segmentation.

In contrast, FAS 14 (which was superseded by FAS
131) required TWO bases of segmentation-- by
industry and by geographic areas.
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Segment ReportingBasis of Segmentation

• Merits of the Management Approach
• Facilitates consistent descriptions in (1) annual
  reports and (2) various other published
  information.
• Entities need not develop a separate measure of
  profitability solely for segment reporting
  purposes. Thus
• A non-GAAP method used internally is also used
  for segment reporting.

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Segment ReportingBasis of Segmentation

• The components that management establishes for
  reporting decision-making are called OPERATING
  SEGMENTS. Such components
• Engage in activities from which they may earn
  revenues and incur expenses.
• Such activities include revenues and expenses
  resulting from transactionswith other segments
  (calledintersegment transactions).

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Segment ReportingBasis of Segmentation

• Such components (continued)
• Have their operating results regularly reviewed
  by a chief operating decision maker.

2
Have discrete financial information available.
3
14
Segment ReportingBasis of Segmentation

• What Could Be an Operating Segment
• A start-up operation that has yet to report any
  revenues.
• A component of a vertically integrated
  operation--providing these operations are managed
  that way.

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Segment ReportingBasis of Segmentation

• What Could Not Be an Operating Segment
• A corporate headquarters.
• Functional departments that earn either no
  revenues or only incidental revenues.
• What Is Definitely Not an Operating Segment
• An entitys pension plan.
• An entitys postretirement benefit plan.

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Segment ReportingDisclosures Required

• An entity must disclose 4 types of information
  about its REPORTABLE OPERATING SEGMENTS
• General information.
• Specified amounts.
• Reconciliations of specified amounts to
  consolidated amounts.
• Certain interim period information.

TYPE
1
2
3
4
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Segment Reporting Disclosures Required--General
Information

• TYPE 1--General Information Disclosures
• Factors used to identify the entitys reportable
  segments, including the basisof organization,
  such as based on
• Products and services.
• Geographic areas.
• Regulatory environments.
• A combination of factors.
• Types of products services from which each
  reportable segment derives its revenues.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• TYPE 2--Specified Amounts Disclosures
• For each reportable segment, a measure of
• Profit or loss.
• Total assets (but not liabilities).
• Certain account amounts (listed on next slide) if
  they are included in the measure of segment
  profit or loss.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• Certain Account Amounts That May Have to Be
  Disclosed
• Revenues from external customers.
• Intersegment revenues.
• Interest revenue and interest expense.
• Depreciation amortization expense and
  significant other NONCASH items.
• Unusual items extraordinary items.
• Equity method income on investees.
• Income tax expense or benefit.

20
Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 1--LACK OF UNIFORMITY FAS 131 does
  NOT define segment operating profit or loss (as
  did FAS 14, its predecessor).
• Thus any measure of performance may be
  displayed--AS LONG AS THAT MEASURE OF PERFORMANCE
  IS REVIEWED BY THE CHIEF OPERATING DECISION
  MAKER.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 2--Terminology In dealing with
  segment reporting, the term intercompany is NOT
  RELEVANT. The RELEVANT terms are
• Intersegment (sales between segments).
• Intrasegment (sales between components of a
  vertically integrated operation deemed to be a
  single operating segment).

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Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 3--Terminology In presenting
  operating segment information
• Intersegment sales must be disclosed separately
  ONLY IF they are included in the measure of
  profitability.
• Intrasegment sales need NOT be disclosed.

23
Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 4--Transfer Pricing
• FAS 131 did not establish a basisfor setting
  prices for sales or transfers either between or
  within segments.
• Transfer pricing is more likely to bean issue
  within vertically integrated operations than
  between nonvertically integrated segments.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 5--Allocations A segments expenses
  (used in its measure of operations) may include
  BOTH
• Directly traceable costs and
• Allocated common costs (costs thatbenefit two or
  more segments).
• Costs that are allocated must be allocated on a
  reasonable basis.

1
2
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Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 6--Nonallocations
• Common costs need not be allocatedto or between
  segments.
• Costs accounted for on a consolidated basis need
  not be allocated to segments (e.g. pension costs).

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Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 7--Asymmetrical Allocations
  Permitted in determining a segments
• Measure of profitability
• Total assets.
• Thus depreciation expense could be allocated to a
  segment but the related fixed assets could not.

27
Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 8--RD Costs Disclosure of segment
  research development costs is NOT required
  because
• Doing so could result in competitive harm by
  providing competitors with early insight into
  strategic plans.
• R D costs are often (1) incurred centrally and
  (2) NOT allocated to segments.

28
Segment Reporting Disclosures
Required--Specified Amounts Information

• Key Point 9--Liabilities Disclosure of segment
  liabilities is NOT required
• The value of information about segment
  liabilities in assessing segment performance was
  deemed limited, partly because in many cases
  liabilities are
• Incurred centrally and NOT allocated to segments.

29
Segment Reporting Disclosures
Required--Specified Amounts Information

• Additional Asset-Related Disclosures for
  Reportable Segments--if the items are included in
  the determination of segment assets
• The amount of investment in equity method
  investees.
• Total expenditures for additions tolong-lived
  assets.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• MEASUREMENT--BASIC RULE Each segment item
  amount reported must be the measure reported to
  the chief operating decision maker for assessing
  performance allocating resources to the
  segment.
• Eliminations Adjustments Made in Consolidation
  Allocate to a segment ONLY IF they are included
  in the measure of profit and loss used by the
  chief operating decision maker.

31
Segment Reporting Disclosures
Required--Specified Amounts Information

• MEASUREMENT--MULTIPLE MEASURES If more than one
  measure of a segments profit or loss and assets
  is used by the chief operating decision maker,
  the measure selected for segment reporting must
  be the measure most consistent with
• Those used in measuring those items in the
  entitys consolidated financial statements.

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Segment Reporting Disclosures
Required--Specified Amounts Information

• MEASUREMENT--DISCLOSURES
• For reportable segments profit or loss and
  assets, disclose as a minimum
• The basis of accounting for intersegment
  transactions.
• The nature of differences reported on the
  specified reconciliations (for P/L and for
  assets), if not apparent thereon.

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2
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Segment Reporting Disclosures
Required--Specified Amounts Information

• MEASUREMENT--DISCLOSURES (cont.)
• The nature and effect of any changes from prior
  periods in the measurement methods used to
  determine a reported segment P/L .
• The nature and effect of any asymmetrical
  allocations to segments.

3
4
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Segment Reporting Disclosures
Required--Reconciliations

• TYPE 3--Reconciliations of SPECIFIED Amounts to
  CONSOLIDATED Amounts
• Reconcile the total of the reportable segments
• Revenues.
• Measure of profit or loss.
• Assets.
• Other significant items of information disclosed
  for reportable segments(e.g. liabilities, RD
  expense).

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Segment Reporting Disclosures Required--Interim
Period Information

• TYPE 4--Certain Interim Period Information
• For each reportable segment, disclose
• Revenues from external customers.
• Intersegment revenues.
• A measure of profit or loss.
• Total assets, if a material change from amount
  disclosed in last annual report.
• Changes in the segmentation basis or in basis of
  measurement of segment P/L.
• Reconciliations to consolidated amounts.

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Segment Reporting Disclosures Required--Cash
Flow Information

• Reporting segment cash flows is NOT required.
• An indication of both an operating segments
  cash-generating ability and its cash requirements
  may be gathered from the required profitability
  and asset related disclosures.

37
Segment ReportingAggregation of Similar Segments

• Operating segments that have similar economic
  characteristics often have similar long-term
  financial performance.
• Thus two or more operating segments may be
  combined into a single operating segment if 3
  criteria (on thenext two slides) are met.

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Segment ReportingAggregation Criteria

• The Three Aggregation Criteria
• Aggregation must be consistent with the
  objectives principles of FAS 131.
• The segments must have similar economic
  characteristics.
• The segments are similar in each of the following
  5 areas
• The nature of the products services.

1
2
3
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Segment ReportingAggregation Criteria

• Segments similar in 5 areas (Contd)
• The nature of the production processes.
• The type or class of customer for their products
  services.
• The methods used to distribute their products or
  provide services.
• If applicable, the nature of the regulatory
  environment (e.g. banking, insurance, or public
  utilities).

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Segment ReportingQuantitative Thresholds--Overvie
w

• Not all operating segments are REPORTABLE
  operating segments.Three 10 tests are performed
  todetermine if an operating segmentis a
  reportable operating segment.
• ONLY ONE of the three 10 testsneed be passed.
  The tests involve
• REVENUES, PROFITABILITY,and ASSETS.

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Segment Reporting Quantitative Thresholds--The
10 Tests

• REVENUES Are the segments reported revenues
  includes both sales to external customers and
  intersegment sales or transfers 10 or more of
  the combined revenue, internal and external, of
  ALL reported operating segments?

1
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Segment Reporting Quantitative Thresholds--The
10 Tests

• PROFITABILITY Is the absolute amount of the
  segments reported profit or loss 10 or more of
  the greater, in absolute amount, of the combined
  reported
• PROFIT of all operating profitsthat DID NOT
  report a loss or
• LOSS of all operating segmentsthat DID report a
  loss?

2
Winners
Losers
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Segment ReportingQuantitative Thresholds--The
10 Tests

• ASSETS Are the segments assets 10or more of
  the combined assets of ALL operating segments?
• Operating segments that do NOT meet any of the
  three 10 tests may be COMBINED with
• Other such operating segments to produce a
  reportable segment--ONLY IF they share a majority
  of the specified aggregation criteria (listed on
  slides 38 39).

3
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Segment ReportingNonreportable Operating
Segments

• Nonreportable operating segments and other
  business activities are
• Combined and
• Disclosed in an ALL OTHER category.
• The Judgment Factor A reportable segment in the
  preceding period that does NOT qualify as a
  reportable segment in the current period may be
  presented if management deems it to be of
  continuing significance.

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Segment ReportingThe 75 Test

• Determining Reportable Operating Segments
• Enough operating segments must be selected so
  that at least 75 of the total consolidated
  revenues (sales to external customers) is
  included in reportable operating segments.
• Describing Reportable Operating Segments
• The product or service of each industry segment
  must be identified.

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Enterprise-Wide Disclosures The Three
Categories of Information

• Three types of enterprise-wide disclosures are
  called for. Information about
• Products and Services.
• Geographic Areas.
• Major Customers.

1
2
3
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Enterprise-Wide Disclosures Products and
Services

• An entity must report REVENUES FROM EXTERNAL
  CUSTOMERS--unless it is impractical to do
  so--for
• Each product and service, or
• Each group of similar products and services.
• If it is impractical to disclose this product and
  service information, disclose that fact.

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Enterprise-Wide Disclosures Geographic
Areas--General

• An entity must report geographic
  information--unless it is impracticalto do
  so--for
• REVENUES
• LONG-LIVED ASSETS
• If it is impractical to disclose this
  geographicinformation, disclose that fact.

1
2
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Enterprise-Wide Disclosures Geographic
Areas--Revenues

• REVENUES--Disclose
• Revenues from external customers located
• In the United States.
• Outside the United States,in total.
• Revenues attributed to an individual foreign
  country, if material.

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Enterprise-Wide Disclosures Geographic
Areas--Long-Lived Assets

• LONG-LIVED ASSETS--Disclose
• Long-lived assets located
• In the United States.
• Outside the United States,in total.
• In an individual foreign country,if material.

51
Enterprise-Wide Disclosures Geographic
Areas--Long-Lived Assets

• Long-lived assets exclude
• Financial instruments.
• Long-term customer relationships of a financial
  institution.
• Mortgage or other servicing rights.
• Deferred policy acquisition costs.
• Deferred tax assets.

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Enterprise-Wide Disclosures Major Customers

• When an entity has revenues from any single
  customer in excess of 10 of total revenues,
  disclose
• The fact of such revenues.
• The amount of revenues from each customer but
  not the identity of each.
• The industry segment(s) making the salesto each
  such customer.

1
2
3
53
Enterprise-Wide DisclosuresMajor Customers

• Each is considered a SINGLE customer
• A group of entities known to beunder common
  control.
• The federal government.
• A state government.
• A local government.
• A foreign government.

54
Review Question 1

• Revtexs 5 operating segments have total revenues
  of 1--100,000, 2--200,000, 3--300,000
  (includes intrasegment revenues of 30,000),
  4--400,000, and 5--500,000 (includes
  intrasegment revenues of 50,000). The revenues
  test is based on revenues ofA. 1,420,000 B.
  1,450,000 C. 1,470,000 D. 1,500,000

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Review Question 1--With Answer

• Revtexs 5 operating segments have total revenues
  of 1--100,000, 2--200,000, 3--300,000
  (includes intrasegment revenues of 30,000),
  4--400,000, and 5--500,000 (includes
  intrasegment revenues of 50,000). The revenues
  test is based on revenues ofA. 1,420,000 B.
  1,450,000 (1,500,000 - 50,000)C.
  1,470,000 D. 1,500,000

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Review Question 2

• Optexs 5 operating segments have operating
  profits and losses of 1--100,000,
  2--(200,000), 3--300,000, 4--400,000, and
  5--500,000. The operating profit or loss test
  is based on 10 ofA. 200,000 B.
  1,100,000 C. 1,300,000 D. 1,500,000

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Review Question 2--With Answer

• Optexs 5 operating segments have operating
  profits and losses of 1--100,000,
  2--(200,000), 3--300,000, 4--400,000, and
  5--500,000. The operating profit or loss test
  is based on 10 ofA. 200,000 B.
  1,100,000 C. 1,300,000 D. 1,500,000

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End of Chapter 14

• Time to Clear Things Up--Any Questions?