Chapter Eight

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Chapter Eight
Segment and Interim Reporting
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FASB Statement No. 131
SFAS No. 14 provided that a company could avoid
industry segment disclosures if . . .
. . . Any single segment made up 90 of a
companys revenues, profit or loss, and
identifiable assets.
In 1996, McDonalds reported having a dominant
industry segment and avoided industry segment
disclosure.
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FASB Statement No. 131
The special AICPA Committee on Financial
Reporting acknowledged that companies reporting a
dominant segment were common . . .
In 1997, the Committees work resulted in the
issuance of SFAS No. 131 to address the
shortcomings of SFAS no. 14
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FASB Statement No. 131
Disclosures about Segments of an Enterprise
and Related Information
Changes to required segment disclosures.
Changes how segments are determined.
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FASB Statement No. 131
Disclosures about Segments of an Enterprise
and Related Information

• Uses the Management Approach to determine
  segments.
• Reportable segments must be operating segments of
  the company.
• Look at the internal reporting system for
  guidance.

• Segment information must be reported for each
  operating segment that meets one of three tests.
• Similar operating segments may be combined.

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FASB Statement No. 131
What is an operating segment?

• How Management disaggregates the enterprise for
  decision-making purposes will determine which
  operating segments exists
• However, a segment is a component of a company
• That engages in business activities from which it
  earns revenues and incurs expenses
• Whose operating results are regularly reviewed by
  management to assess performance and allocate
  resources
• From which discrete financial information is
  available.
• Additionally (applicable in mixed structures)
• an operating segment has a segment manager
• If a matrix reporting structure exists e.g. by
  product and by geographical region, then the
  product segment is used

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FASB Statement No. 131
Disclosures about Segments of an Enterprise
and Related Information

• Five similarities must exist before combining
  segments
• Nature of the products/services provided by each
  operating segment.
• Nature of the production process.
• Type or class of customer.
• Distribution methods.
• Nature of the regulatory environment. (if
  applicable)

See Comprehensive example for application of this
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Operating Segment Tests

• There are three tests for identifying a
  Reportable Industry Segment.
• Revenue Test
• Operating Profit/Loss Test
• Identifiable Assets Test
• Only one test has to be satisfied for a segment
  to be reportable.

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Operating Segment TestsRevenue Test

• Does a segments total revenue equal or exceed
  10 of the combined revenue of all the industry
  segments of the company?
• Note Total revenue includes inter-segment sales.

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Operating Segment TestsProfit or Loss Test

• Does the absolute amount of operating profit or
  loss for each segment equal or exceed 10 of the
  larger of . . .
• . . . the absolute value of the combined
  operating profit of all industry segments that
  did not incur an operating loss
• OR
• . . . the absolute value of the combined
  operating loss of all industry segments that
  incurred an operating loss?

Note - If common costs (expenses) are not
normally allocated among segments for internal
reporting then they can be excluded when
determining the segment profit/loss applicable
for this test
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Operating Segment TestsIdentifiable Assets Test

• Does a subunits identifiable assets equal or
  exceed 10 of the combined identifiable assets of
  all operating segments of the company?

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Operating Segment TestsOther Guidelines

• The combined external sales revenues of the
  disclosed segments must equal or exceed 75 of
  the total company external sales.
• (i.e. Inter-segment sales are excluded from this
  test)
• Segments must be added until the 75 test is met,
  even if the additional segments do not meet the
  reportable segment criteria.
• Do not disclose more than 10 segments.

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Operating Segment Tests

• Reportable Segment information is reported in the
  Notes to the Financial Statements.
• Required information includes
• Segment Revenue
• Segment Operating Income (or Loss)
• Identifiable Segment Assets
• Other related disclosures

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Operating SegmentsExample

• Examine the information for Rapid Send, Inc.
• Test each product line to determine whether it
  must be disclosed as a reportable segment.

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Operating SegmentsExample
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Operating SegmentsExample
Enter the revenue for each segment.
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Operating SegmentsExample
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Operating SegmentsExample
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Operating SegmentsExample
Enter the absolute value of the profit or loss
for each segment.
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Operating SegmentsExample
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Operating SegmentsExample
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Operating SegmentsExample
Enter total assets for each segment.
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Operating SegmentsExample
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Operating SegmentsExample
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Operating SegmentsExample
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Operating SegmentsExample
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Operating SegmentsExample
The Parts segment did not meet any of the three
tests and so it is not reportable.
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Operating SegmentsExample
In addition, the 75 test must be met. Total
revenues, excluding inter-segment revenues, are
1,265,000. 75 of 1,265,000 is
948,750. Combined sales, excluding inter-segment
sales, for the Clothing, Home, Car, and Food
segments is 1,195,000. 1,195,000 gt
948,750 Therefore, no other segments must be
reported.
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Reconciliation of Segment Information

• The company must prepare a reconciliation
  between the reportable segments
• Revenues and consolidated revenues
• Profit or loss and the Companys income before
  tax as a whole
• Assets and the Companys total assets
• Adjustments and eliminations must be identified

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Other Enterprise Disclosures
The company must also disclose additional
information regarding . . .
2. Geographic Areas
1. Products Services
3. Major Customers
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Disclosures about . . . 1. Products and Services
SFAS No. 131 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.
In 2001, Lowes made product disclosures even
though they reported one dominant segment.
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Disclosures about . . . 2. Geographic Areas

• (1) Revenues from external customers and
• (2) long-lived assets must be disclosed for
• The domestic country.
• All foreign countries in which the enterprise
  derives revenues or holds assets.
• Each foreign country in which a material amount
  of consolidated (i.e. external) revenues is
  derived or assets are held.

IBM
Profit/ loss is no longer required as was the
case with SFAS14
In 1998, IBM reported that 44 of their revenues
came from the U.S. and 10 came from Japan.
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Disclosures about . . . 3.Major Customers
Whenever 10 or more of a companys consolidated
revenues is derived from a single customer . . .
. . . The company must disclose that it has a
major customer. The IDENTITY of the major
customer does not have to be disclosed.
BRIGGS STRATTON
In 2001, Briggs Stratton reported significant
sales to three major engine customers . . .
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Interim Reporting - APB Opinion 28

• Mandatory for SEC Companies Interim Quarterly
• Requires that interim periods be treated as
  integral parts of the fiscal period.
• Expenses, such as bonuses, must be predicted
  early in the year and allocated to each of the
  interim reporting periods.

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Interim Reporting 1-Revenues
Revenues are recognized in the interim periods in
which they are earned.
Revenue from long-term contracts should be
recognized on the of completion basis.
Losses from long-term contracts should be
recognized fully in the interim period in which
they become apparent.
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Interim Reporting2-Inventory and Cost of Goods
Sold
LIFO Liquidations Interim period gross profit
should not reflect gains resulting from
temporary LIFO liquidations.
Standard Costing Variances that are expected to
be absorbed by year-end should not be recognized
in the interim period.
Lower -of-Cost-or-Market Inventory write-downs
should be reflected in interim period numbers if
the market value is not expected to recover by
year-end.
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Interim Reporting3-Other Issues
To the extent possible, annual costs should be
accrued at interim periods
Hey, pal! You getting this down?
Extraordinary Items If material (when compared to
expected income for the year), disclose
separately.
Income Taxes Interim tax should be computed at an
estimated annual effective tax rate.
Cumulative Effect of an Accounting
Change Accounting changes occurring at any time
during the year should be retroactively reported
in the 1st interim period.
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Interim ReportingOther Items
Expenses not directly matched with revenues
should be charged to income in the interim period
in which they occur.
Extraordinary Items should be reported separately
and in full in the interim period in which they
occur.
Income Taxes for each interim period should be
computed based on an estimated annual effective
tax rate.
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Interim ReportingSFAS No. 3
Cumulative Effect of Accounting Changes
Reported in full in the FIRST interim period of
the fiscal year.
Even if the change occurs in a later interim
period, the FIRST period must be restated to
include the cumulative effect of the accounting
change.
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Interim ReportingMinimum Disclosures
Sales, income taxes, extraordinary items, cum
effect of change in accounting principles and net
income
Disposal of a segment
EPS
Significant changes in estimates
Seasonal Revenues Expenses
Changes in accounting principles
Contingent items
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• The following segment information is required for
  interim reports
• External revenues
• Inter-segment revenues
• Segment profit or loss
• Total assets
• A reconciliation to the company totals (where
  applicable) is still required
• Segment information is not required until the
  second year that a company applies SFAS131

THE END