Chapter Eight Segment and Interim Reporting Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Rationale for Segment Reporting Learning Objective 8-1: Understand how an enterprise determines its operating segments and the factors that influence this determination. Segment reporting provides information to help users of financial statements to:  Better understand the entity’s performance.  Better assess the entity’s prospects for future net cash flow.  Make more informed judgments about the enterprise as a whole. 8-2

The Management Approach An operating segment is a component of an enterprise:  That engages in business activities from which it earns revenues and incurs expenses,  Whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions,  For which discrete financial information is available. 8-3

Determining Segments Learning Objective 8-2: Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure. Management must consider these aggregation criteria to determine whether to combine operating segments:  nature of products or services provided by each segment.  nature of the production process.  type or class of customer.  distribution methods.  nature of the regulatory environment. 8-4

Quantitative Thresholds A Segment is considered reportable if it satisfies one of these tests:  Revenue - Its revenues are 10% or more of the combined revenue of all segments.  Profit or Loss - Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit.  Asset - Its assets are 10% or more of the combined assets of all operating segments. 8-5

Operating Segment Tests - Other Guidelines The combined sales revenues of the disclosed segments must be at least 75% of total company sales, excluding intra-entity sales. Segments must be added until the 75% test is met (even if the additional segments do not meet the reportable segment criteria). Although a maximum number is not prescribed, authoritative literature suggests that 10 separately reported segments might be the practical limit. 8-6

Required Segment Disclosures Learning Objective 8-3: List basic disclosure requirements for operating segments. For each reportable segment of a company, it must disclose general information about:  Segment profit or loss  Revenues Interest revenue and expense Depreciation, depletion and amortization expense Significant noncash and unusual items Income Tax expense or benefit  Investment in equity method affiliates  Total assets  Capital expenditures 8-7

Geographic Areas Learning Objective 8-4: Determine when and what types of information must be disclosed for geographic areas. Revenues from external customers and long-lived assets must be disclosed for:  The domestic country.  All foreign countries where the enterprise derives revenue or holds assets.  Each foreign country in which a material amount of revenue is derived or assets are held. 8-8

Major Customers Learning Objective 8-5: Apply the criterion for determining when disclosure of a major customer is required. When 10% or more of a company’s revenue is derived from one or more customer, the company MUST disclose all of the companies as major customers. IDENTITY of a major customer need not be disclosed. 8-9

IFRS and Segment Reporting Learning Objective 8-6: Recognize differences between U.S. GAAP and IFRS in segment reporting. IFRS and GAAP are substantially the same, except…  IFRS requires disclosure of total assets AND liabilities if that information is provided to the chief decision maker.  IFRS specifically includes intangible assets as long-lived assets.  In a company with a matrix form of organization, IFRS permits operating segments to be based on geographic area, as opposed to products/services. 8-10

Interim Reporting Learning Objective 8-7: Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period. To report expenses that do not occur evenly throughout the year, there are two possible approaches:  Discrete – the accounting period stands on its own.  Integral – treat the accounting period as a portion of a longer period. The SEC requires quarterly financial statements from publicly-traded companies in the U.S. FASB ASC 270 requires companies to use the Integral Approach. 8-11

Interim Reporting - Revenues Revenues are recognized in the interim periods in which they are earned. Revenues from long-term contracts should be recognized using the same methodology as used on an annual basis. A company should recognize projected losses on long-term contracts to their full extent in the interim period in which it becomes apparent that a loss will arise. 8-12

Interim Reporting - 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. 8-13

Interim Reporting - Expenses To provides for less volatility of information:  Expenses that are not incurred evenly throughout the year should be predicted early in the year and allocated to each of the interim reporting periods.  Costs not directly matched to revenues should be allocated among interim periods on a reasonable basis through the use of accruals and deferrals. 8-14

Interim Reporting – Minimum Disclosures 8-15 Sales or Gross Revenues Provision for Income Taxes (and significant changes in estimates) Earnings per share Seasonal Revenues & Expenses Disposal of a Business Segment Contingent items Other significant changes Unusual or Extraordinary Items Net Income Learning Objective 8-8: List the minimum disclosure requirements for interim financial reports.

Interim Reporting – Segment Disclosures GAAP requires the following interim disclosure for each reportable operating segment:  Revenues from external customers  Intersegment revenues  Segment profit or loss  Total assets (if there has been a material change from the last annual report) There are no interim disclosure about major customers or geographic areas 8-16

IFRS - Interim Reporting Learning Objective 8-9: Recognize differences between U.S. GAAP and IFRS in interim reporting. IAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized. Expenses that are incurred in one quarter are recognized in full in that quarter, even though the expenditure benefits the entire year. No accrual of expenses in earlier quarters for expenses expected to be incurred in a later quarter of the year. The only exception to this rule is the accrual of income tax expense at the end of each interim period. 8-17

IFRS -- Interim Reporting IAS 34 requires the following minimum components in an interim report: Condensed statement of financial position (balance sheet). Condensed statement of comprehensive income, presented as: a.A condensed single statement of net income and comprehensive income, or b. Separate condensed statements of net income and comprehensive income. Condensed statement of changes in equity. Condensed statement of cash flows. Selected explanatory notes. 8-18