Segments; Interim Reports; Reporting for the SEC Chapter 13 Segments; Interim Reports; Reporting for the SEC © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved

Business Segment APB defined business segment as “ a component of an entity whose activities represent a separate major line of business or class of customer” FASB Statement No. 14 defined industry segment as “a component of an enterprise engaged in providing a product or service or a group of related products and services primarily to unaffiliated customers.”

Background of Segment Reporting Consolidate financial statement do not supply enough information for meaningful comparative statistics regarding operation of the diversified enterprises in specific industries. FASB Statement No. 14, now superseded, established accounting standards for disclosures relating to industry segments, otherwise known as lines of business, of a business enterprise.

Proposal to improve Segment Reporting In FASB Statement No. 131, “Reporting Disaggregated Information . . . ,” the FASB required the management approach to segment reporting, which necessitates identifying operating segments based on the way a business enterprise is managed. FASB replaced the term industry segment with the term operating segment. Considerable flexibility is available to enterprise management in identifying the segments.

Allocation of Nontraceable Expenses to Operating Segments Managements of business enterprises must devise an appropriate method of apportioning nontraceable expenses to operating segments. Methods used for such apportionments have included ratios based on segment revenues, payroll totals, average plant assets and inventories, or a combination thereof.

SEC Requirements for Segment Information The requirements of the SEC for reporting segment information are in Regulation S-K. In addition to the requirement of FASB, SEC disclosure requirements for operating segments are: Class of product or service Name of Major customer with its relationship to the reporting enterprise. Foreign operations or export sales.

Disclosures Required: Disclosures required by FASB Statement No. 14 included an enterprise's operations in different industries, its foreign operations and export sales, and its major customers.

DISCLOSURES: The FASB mandated numerous disclosures regarding operating segments in both interim and annual reports of business enterprises. Chief among the disclosures are segment profit or loss and components thereof segment assets and liabilities and reconciliation of segment totals to pre-tax income from continuing operations and to consolidated total assets and total liabilities.

Reporting the Disposal of a Business Segment The gain or loss from disposal of a business segment is reported, net of income taxes, in a business enterprise's income statement following income from continuing operations but before extraordinary items. Several items of information regarding the discontinued business segment are disclosed in a note to financial statements of the period of disposal.

Reporting the Disposal of a Business Segment Following income from continuing operations is the income or loss, net of income taxes, of the disposed-of segment between the beginning of the period and the measurement date on which management decided upon the disposal, and between the measurement date and the disposal date. Comparable presentation of the income or loss from operations of a discontinued business segment is included in restated financial statements for accounting periods prior to the period of disposal.

Interim Financial Reports In APB Opinion No. 28, the Accounting Principles Board adopted the integral theory for interim reports of a fiscal year. Under this, each interim period is considered an integral part of the annual reporting period rather than a discrete accounting period.

APB Opinion No. 28 The APB established guidelines for following components of interim financial reports. Revenue Costs Associated Revenue All Other Costs and Expenses Income Taxes Expense

Revenue Revenue from products sold or services rendered should be recognized for an interim period on the same basis as followed for the full year.

Cost Associated with Revenue Cost and expenses directly associated with or allocated to produces sold or services rendered required the same accounting in interim financial reports as in a fiscal-year financial statements. Exceptions Enterprise that use Gross Margin Method to estimate cost should disclose this fact in interim financial report. Material adjustments reconciling inventories with annual physical inventories should be disclosed. Enterprise that use Last in First Out inventory method should include the estimated cost of replacing the depleted lifo base layer. Lower of cost or market write downs of inventories should be provided for interim periods as for complete period unless decline in inventory on interim date is considered temporary. Enterprise using Standard Cost should report Standard Cost Variances for interim report.

All Other Cost and Expenses All other costs and expenses are allocated to interim periods as incurred or on the basis of time expired, benefit received, or activity associated with the periods.

Income Taxes Expense To estimate income taxes expense for interim periods, a business enterprise must estimate an effective income tax rate for the full fiscal year at the end of each interim period and apply the estimated rate to year-to-date pre-tax income. The result is reduced by income taxes expense provided for prior interim periods to obtain income taxes expense for the current interim period.

Disclosure of Interim Financial Data Among the minimum disclosure requirements for interim reports are sales or gross revenue, income taxes expense, net income, and basic and diluted earnings per share data

SEC Enforcement Actions Dealing with Wrongful Application SEC enforced numerous actions for overstatements of quarterly earnings reported in Form 10-Q. Techniques used in such overstatements are Premature recognition (“front-ending”) of revenues Creation of fictitious inventories Use of improper Gross Margin percentages Improper deferral of cost that should have be recognized as expense Overstatement of percentage of completion on construction-type contracts.

Reporting for SEC The SEC is a federal agency that administers several federal statutes, most important of which to accountants are The Securities Act of 1933 and The Securities Exchange Act of 1934. Most publicly owned companies are subject to both Acts and must file registration statements with the SEC for issuances of securities, and annual and interim reports to the SEC for securities traded on national exchanges and, with few exceptions, over the counter.

Organization of the SEC The SEC is administered by five commissioners appointed for five year terms by the President and confirmed by Senate of the United State. No more than three commissioners may be members of the same political party. Headquarter in Washington D.C. and has nine regional offices and six branch offices.

Segments of the SEC The chief accountant of the SEC issues pronouncements reflecting the SEC's position on matters affecting accounting and auditing. The SEC's Division of Corporate Finance reviews the forms and periodic reports filed with the SEC by companies subject to its jurisdiction. The Division of Enforcement monitors compliance with the federal statutes administered by the SEC.

Functions of the SEC The SEC's position is that it issues pronouncements (Financial Reporting Releases) on disclosures in financial statements; it leaves to the FASB the establishment of accounting standards. Regulation S-X and Regulation S-K issued by the SEC deal, respectively, with the form and content of financial statements and the form and content of nonfinancial statement disclosures in forms and reports filed with the SEC. In addition, Staff Accounting Bulletins are issued by the SEC to disseminate the administrative interpretations and practices of the SEC's staff in their review of financial statements.

Integration Project and other Activities of the SEC Recently, the SEC completed the bulk of an integration project designed to streamline reports filed with the SEC and eliminate duplications. An incorporation by reference enables the satisfaction of reporting requirements of the Securities Act of 1933 by reference to already-filed information required by the Securities Exchange Act of 1934.