1. Segment and Interim Financial Reporting
Chapter 15
Segment and Interim Financial Reporting
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2. Segment and Interim Financial Reporting: Objectives
Understand how the management approach is used to identify potentially reportable operating segments.
Apply the threshold tests to identify reportable operating segments: the revenue test, the asset test, and the operating profit test.
Apply the 75% external revenue test to determine whether additional segments must be reported.
Understand the types of information that may be disclosed for segments and the reasons that the levels of disclosure may vary across companies.
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3. Segment and Interim Financial Reporting: Objectives (cont.)
Understand what segment disclosures are reconciled to the consolidated amounts.
Know the types of enterprise-wide disclosures related to products and services, geographic areas of operation, and major customers that are required to be disclosed.
Understand the similarities and differences in the reporting of operations in an interim versus an annual reporting period.
Compute interim-period income tax expense.
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Segment and Interim Financial Reporting
1: reportable operating segments
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Operating Segments
According to GAAP, companies that have publicly traded debt or equity instruments must report on their business segments.
Reporting is based on the structure used by management to make decisions or evaluate performance. For example,
if the company’s internal reporting and evaluation system is geographically based, the segment reporting is geographically based.
if the internal reporting and evaluation system is product-line based, the segment reporting is product-line based.
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6. Operating Segment (def.)
A component of a business enterprise
Engages in business activities
Revenues and expenses tracked
Intercompany amounts included
Operating results are reviewed by chief operating decision maker
Discrete financial information is available
Excludes pension and post-retirement plans, and general corporate headquarters
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Combining Segments
Segments with similar economic characteristics may be combined.
Products and services
Production processes
Classes of customers
Distribution systems
Regulatory environment, if applicable
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Segment and Interim Financial Reporting
2: Threshold tests
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Reportable Segments
Operating segments are reportable and material if any one of the three threshold tests are met
10% Revenue test
10% Asset test
10% Profit or loss test
Segments not meeting any of the three tests are combined into one "all other" category.
One additional test to see if a sufficient number of segments have been identified
75% External revenue test
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10% Revenue Test
Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue of all operating segments.
Combined includes "all other" category
Intersegment revenues are not eliminated so that combined revenue may be > consolidated revenue
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11. Example: 10% Revenue Test
Operating segment revenue
Intersegment revenue
Total segment revenue
Report-able?
Transportation
$360 $0
Yes
Oil refining
405
480
885
Insurance 95 20
115 No
Financing
140
Total
$1,000
$500
$1,500
A segment is reportable if its total revenue ≥ 10% of combined segment revenue.
Threshold = 10%(1,500) = $150
Transportation ($360) and Oil refining ($885) are reportable segments.
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10% Asset Test
Segment assets are 10% or more of combined assets of all operating segments.
Combined includes "all other"
Use the segment's identifiable assets
General corporate assets
May be excluded or included
Consider organization of assets for decision- making purposes
Combined assets of segments may be less than total corporate assets
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13. Transportation, Oil refining, and Financing are reportable segments.
Example: 10% Asset Test
Operating segment's identifiable assets
Reportable?
Transportation
$ 700
Yes
Oil refining
950
Insurance
180 No
Financing
1,170
Total
$3,000
A segment is reportable if its identifiable assets ≥ 10% of combined segment assets.
Threshold = 10%(3,000) = $300
Transportation, Oil refining, and Financing
are reportable segments.
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10% Profit or Loss Test
The absolute value of the segment's reportable profit or loss is 10% or more of the greater of:
The combined reported profit of all segments reporting profits, or
The absolute value of the combined reported losses of all segments reporting losses.
Operating segment profit or loss
Is not defined by GAAP
Is based on the calculation used by management for decision making
May include or exclude common revenues and costs
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15. Example: 10% Profit or Loss Test
Separate profitable and unprofitable segments.
A reportable segment's |profit or loss| ≥ 10% of the greater of |combined profits or combined losses| $270 is greater than $100.
Threshold = 10%(270) = $27.
Transportation, Oil refining, and Finance are reportable segments.
Segment operating profit
Segment operating loss
Reportable?
Transportation
(100)
Yes
Oil refining
200
Insurance 20 No
Financing 50
Total
270
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16. 3: TEST FOR ADDITIONAL SEGMENTS
Segment and Interim Financial Reporting
3: TEST FOR ADDITIONAL SEGMENTS
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17. 75% External Revenue Test
GAAP does not specify the number of segments that must be reported; however, the external revenue of reportable segments must be at least 75% of the total consolidated revenue.
Exclude intersegment revenues
Add other segments until the 75% test is met
Segments are typically aggregated so that there are not more than ten separate segments reported.
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18. Preliminary Segment Test Results: Example (cont.)
Based on the 10% revenues, 10% assets, 10% profit and loss tests:
Three reportable segments
Transportation
Oil refining
Financing
One non-reportable segment which becomes "all other"
Insurance
Now, check to see if the three are enough!
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19. 75% External Revenue: Example
Now we examine the operating segment revenue without intersegment sales data. Have sufficient segments been identified?
Threshold = 75%(1,000) = $750
$ > $750 … Yes!
Operating segment revenue
Intersegment revenue
Total segment revenue
Report-able?
Transportation
$ 360
$ 0 $
Yes
Oil refining
405
480
885
Insurance 95 20
115 No
Financing
140
Total
$1,000
$500
$1,500
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Segment and Interim Financial Reporting
4: segment disclosures
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21. Reportable Segment Disclosures
Profit or loss
Total assets
Revenue from external customers
Revenue from other operating segments
Interest income and expense
Depreciation and amortization expense
Unusual items
Income from equity method investments
Income tax expense or benefit
Extraordinary items
Significant noncash items other than depreciation
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22. Reportable Segment Disclosures (cont.)
Remember: GAAP is depending on the company’s chief operating decision maker to determine the most useful information. Whatever data is required internally will also be used for external disclosures. However, the company allocating expenses among the operating segments should be continued for external segment disclosure purposes.
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23. 5: reconciling segments to consolidated amounts
Segment and Interim Financial Reporting
5: reconciling segments to consolidated amounts
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Reconciliations
Reconciliation schedules should be provided to explain the difference between segment amounts and consolidated totals for:
Reportable segment revenue to consolidated revenue
Intersegment revenues
Reportable segment profit and loss to consolidated income before taxes
Intersegment revenues, expenses, and common or allocated costs
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25. Reconciliations (cont.)
Reportable segment assets to consolidated assets
Corporate assets
If other significant information is disclosed, reconcile the segment amounts with consolidated amounts for each item
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26. 6: Enterprise-wide disclosures
Segment and Interim Financial Reporting
6: Enterprise-wide disclosures
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27. Additional Disclosures
Additional enterprise-wide disclosures are required if not already reported with segment information
Products and services
Revenues by product/product line, service
Geographic information
Revenues and fixed assets
Domestic and foreign
And if >10%, the specific country must be disclosed
Major customers
Customer revenues > 10% Total Revenues
Segment which has those revenues
Not required: customer identity
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28. 7: interim financial reporting
Segment and Interim Financial Reporting
7: interim financial reporting
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29. Accounting for Interim Periods
Are interim reports “stand-alone” periods, or an integral part of the annual period?
GAAP has concluded that an interim period is an integral part of the whole, and should be based on the same accounting principles and practices used in the annual financial statements.
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30. Product Cost Modifications
Companies that determine Cost of Goods Sold via a physical inventory may use the Gross Profit method for interim periods.
LIFO inventory layers that are liquidated in an interim period may be expensed at current cost if the layer will be replaced by year end.
Inventory market declines are not required to be recorded if the decline is temporary.
Variances under a standard cost system that are expected to be absorbed by year end may be deferred at the interim date.
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31. Other Interim Modifications
Annual expenses may be allocated, such as property taxes or major annual repairs.
Advertising expenses may be deferred to later interim periods if the benefits clearly apply.
Income taxes from continuing operations use an estimated effective annual tax rate.
Income taxes on unusual, infrequent, and other items are calculated separately and included in the interim period containing that item.
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32. 8: interim-period income taxes
Segment and Interim Financial Reporting
8: interim-period income taxes
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33. Estimated Annual Effective Tax Rate
If expected annual taxable income = $120,000 Taxes= $22, (120,000 – 100,000)= $30,050 Effective tax rate = 30,050 / 120,000 = % The % rate is used for all four quarters.
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34. Interim Period Disclosures
Sales or gross revenues
Provision for taxes
Extraordinary items, net of tax
Net income and Comprehensive income
Basic and Diluted EPS
Seasonal revenues, costs, or expenses
Significant changes in estimated taxes
Disposals, extraordinary, unusual, or infrequent items
Contingent items
Changes in accounting principles or estimates
Significant change in financial position
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35. Other Interim Disclosures
Segment information disclosures are reduced for interim reporting
Certain information about defined benefit pension plans
Certain information about the use of fair value measurements, derivatives, and other financial instruments
Information about impairments
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36. SEC Interim Financial Disclosures
SEC requires
Q1, Q2, Q3 and annual reports
Quarterly requirements similar to annual
Comparative information
Current quarter vs. prior year quarter
Quarterly and year-to-date for current and prior year
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