1. Slide 14-1 14 CHAPTER 14 REPORTING SEGMENT AND RELATED INFORMATION

2. Slide 14-2 14 FOCUS OF CHAPTER 14 l Objectives and Applicability of FAS 31 l Reporting Operating Segment Information l Reporting Enterprise-wide Information n Products & services n Geographic areas n Major customers

3. Slide 14-3 14 Segment and Related Information Reporting: Objectives lTo provide information about a reporting entity’s different types of: n Business activities. n Economic environments.

4. Slide 14-4 14 Segment and Related Information Reporting: Objectives lThis information should help financial statement users: n Better understand past performance. n Better assess prospects for future net cash flows. n Make more informed judgments about the entity as a whole.

5. Slide 14-5 14 Segment and Related Information Reporting: Overview & Applicability l 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 #3 #2 #4 #2, #3, & #4 are “ entity-wide disclosures.” They apply to ALL entities--even those having only l segment. FAS 131

6. Slide 14-6 14 Segment and Related Information Reporting: Overview & Applicability l Segment and related information reporting is: n Needed because of the limitations of consolidated financial statements. n Done in notes to the financial statements. n Applicable to: s Both ANNUAL & INTERIM statements. s PUBLIC BUSINESS ENTERPRISES ONLY ( excludes not-for-profit entities).

7. Slide 14-7 14 Segment and Related Information Reporting: Overview & Applicability l Public business enterprises are entities that: n Have issued debt or equity securities that are traded in a public market, n Are required to file financial statements with the SEC, or n Provide financial statements for the purpose of issuing any class of securities in the public market. Wall Street

8. Slide 14-8 14 Segment and Related Information Reporting: Overview & Applicability l 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: n Parent enterprises. n Subsidiaries. n Joint ventures. n Investees--if the equity method is used.

9. Slide 14-9 14 Segment Reporting: Basis of Segmentation l Disaggregated financial information could be presented in several ways, for example: n By products & services (rejected). n By geographic area (rejected). n By legal entity (rejected). n By type of customer (rejected). n By organization of the segments for reporting to management for decision- making ( the “management” approach ).

10. Slide 14-10 14 Segment Reporting: Basis of Segmentation l FAS 131 requires : n A SINGLE basis of segmentation. n 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.

11. Slide 14-11 14 Segment Reporting: Basis of Segmentation l Merits of the “Management” Approach: n Facilitates consistent descriptions in (1) annual reports and (2) various other published information. n Entities need not develop a separate measure of profitability solely for segment reporting purposes. Thus: s A non-GAAP method used internally is also used for segment reporting.

12. Slide 14-12 14 Segment Reporting: Basis of Segmentation lThe components that management establishes for reporting & decision-making are called OPERATING SEGMENTS. Such components: n Engage in activities from which they may earn revenues and incur expenses. s Such activities include revenues and expenses resulting from transactions with other segments ( called inter segment transactions). #1

13. Slide 14-13 14 Segment Reporting: Basis of Segmentation lSuch components (continued): n Have their operating results regularly reviewed by a chief operating decision maker. #2 #3 Have discrete financial information available.

14. Slide 14-14 14 Segment Reporting: Basis of Segmentation l What Could Be an Operating Segment: n A start-up operation that has yet to report any revenues. n A component of a vertically integrated operation-- providing these operations are managed that way.

15. Slide 14-15 14 Segment Reporting: Basis of Segmentation l What Could Not Be an Operating Segment: n A corporate headquarters. n Functional departments that earn either no revenues or only incidental revenues. l What Is Definitely Not an Operating Segment: n An entity’s pension plan. n An entity’s postretirement benefit plan.

16. Slide 14-16 14 Segment Reporting: Disclosures Required lAn entity must disclose 4 types of information about its REPORTABLE OPERATING SEGMENTS: n General information. n Specified amounts. n Reconciliations of specified amounts to consolidated amounts. n Certain interim period information. 1 2 3 4 TYPE

17. Slide 14-17 14 Segment Reporting: Disclosures Required--General Information l TYPE 1--General Information Disclosures: n Factors used to identify the entity’s reportable segments, including the basis of organization, such as based on: s Products and services. s Geographic areas. s Regulatory environments. s A combination of factors. n Types of products & services from which each reportable segment derives its revenues.

18. Slide 14-18 14 Segment Reporting: Disclosures Required--Specified Amounts Information l TYPE 2--Specified Amounts Disclosures: n For each reportable segment, a measure of: s Profit or loss. s Total assets (but not liabilities). n Certain account amounts (listed on next slide) if they are included in the measure of segment profit or loss.

19. Slide 14-19 14 Segment Reporting: Disclosures Required--Specified Amounts Information n Certain Account Amounts That May Have to Be Disclosed: s Revenues from external customers. s Intersegment revenues. s Interest revenue and interest expense. s Depreciation & amortization expense and significant other NONCASH items. s Unusual items & extraordinary items. s Equity method income on investees. s Income tax expense or benefit.

20. Slide 14-20 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #1--LACK OF UNIFORMITY: FAS 131 does NOT define segment operating profit or loss (as did FAS 14, its predecessor). n Thus any measure of performance may be displayed -- AS LONG AS THAT MEASURE OF PERFORMANCE IS REVIEWED BY THE CHIEF OPERATING DECISION MAKER.

21. Slide 14-21 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #2--Terminology: In dealing with segment reporting, the term “intercompany” is NOT RELEVANT. The RELEVANT terms are: n Intersegment (sales between segments ). n Intrasegment (sales between components of a vertically integrated operation deemed to be a single operating segment ).

22. Slide 14-22 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #3--Terminology: In presenting operating segment information: n Intersegment sales must be disclosed separately ONLY IF they are included in the measure of profitability. n Intrasegment sales need NOT be disclosed.

23. Slide 14-23 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #4--Transfer Pricing: n FAS 131 did not establish a basis for setting prices for sales or transfers either between or within segments. n Transfer pricing is more likely to be an issue within vertically integrated operations than between non vertically integrated segments.

24. Slide 14-24 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #5--Allocations: A segment’s expenses (used in its measure of operations) may include BOTH : n Directly traceable costs and n Allocated common costs (costs that benefit two or more segments). s Costs that are allocated must be allocated on a reasonable basis. #1 #2

25. Slide 14-25 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #6--Nonallocations: n Common costs need not be allocated to or between segments. n Costs accounted for on a consolidated basis need not be allocated to segments (e.g. pension costs).

26. Slide 14-26 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #7--Asymmetrical Allocations: Permitted in determining a segment’s: n Measure of profitability n Total assets. s Thus depreciation expense could be allocated to a segment but the related fixed assets could not.

27. Slide 14-27 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #8--R&D Costs: Disclosure of segment research & development costs is NOT required because: n Doing so could result in competitive harm by providing competitors with early insight into strategic plans. n R& D costs are often (1) incurred centrally and (2) NOT allocated to segments.

28. Slide 14-28 14 Segment Reporting: Disclosures Required--Specified Amounts Information l Key Point #9--Liabilities: Disclosure of segment liabilities is NOT required: n The value of information about segment liabilities in assessing segment performance was deemed limited, partly because in many cases liabilities are: n Incurred centrally and NOT allocated to segments.

29. Slide 14-29 14 Segment Reporting: Disclosures Required--Specified Amounts Information n Additional Asset-Related Disclosures for Reportable Segments-- if the items are included in the determination of segment assets : s The amount of investment in equity method investees. s Total expenditures for additions to long-lived assets.

30. Slide 14-30 14 Segment Reporting: Disclosures Required--Specified Amounts Information l 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. n 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. Slide 14-31 14 Segment Reporting: Disclosures Required--Specified Amounts Information l MEASUREMENT--MULTIPLE MEASURES: If more than one measure of a segment’s 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 : n Those used in measuring those items in the entity’s consolidated financial statements.

32. Slide 14-32 14 Segment Reporting: Disclosures Required--Specified Amounts Information l MEASUREMENT--DISCLOSURES: For reportable segment’s profit or loss and assets, disclose as a minimum: n The basis of accounting for inter segment transactions. n The nature of differences reported on the specified reconciliations (for P/L and for assets), if not apparent thereon. #1 #2

33. Slide 14-33 14 Segment Reporting: Disclosures Required--Specified Amounts Information l MEASUREMENT--DISCLOSURES ( cont.): n The nature and effect of any changes from prior periods in the measurement methods used to determine a reported segment P/L. n The nature and effect of any asymmetrical allocations to segments. #3 #4

34. Slide 14-34 14 Segment Reporting: Disclosures Required--Reconciliations n TYPE 3--Reconciliations of SPECIFIED Amounts to CONSOLIDATED Amounts: s Reconcile the total of the reportable segments’: l Revenues. l Measure of profit or loss. l Assets. l Other significant items of information disclosed for reportable segments (e.g. liabilities, R&D expense).

35. Slide 14-35 14 Segment Reporting: Disclosures Required--Interim Period Information l TYPE 4--Certain Interim Period Information: n For each reportable segment, disclose: s Revenues from external customers. s Intersegment revenues. s A measure of profit or loss. s Total assets, if a material change from amount disclosed in last annual report. s Changes in the segmentation basis or in basis of measurement of segment P/L. s Reconciliations to consolidated amounts.

36. Slide 14-36 14 Segment Reporting: Disclosures Required--Cash Flow Information l Reporting segment cash flows is NOT required. n An indication of both an operating segment’s cash-generating ability and its cash requirements may be gathered from the required profitability and asset related disclosures.

37. Slide 14-37 14 Segment Reporting: Aggregation of Similar Segments lOperating segments that have similar economic characteristics often have similar long-term financial performance. n Thus two or more operating segments may be combined into a single operating segment if 3 criteria (on the next two slides) are met.

38. Slide 14-38 14 Segment Reporting: Aggregation Criteria l The Three Aggregation Criteria: n Aggregation must be consistent with the objectives & principles of FAS 131. n The segments must have similar economic characteristics. n The segments are similar in each of the following 5 areas: s The nature of the products & services. #1 #2 #3

39. Slide 14-39 14 Segment Reporting: Aggregation Criteria n Segments similar in 5 areas (Cont’d): s The nature of the production processes. s The type or class of customer for their products & services. s The methods used to distribute their products or provide services. s If applicable, the nature of the regulatory environment (e.g. banking, insurance, or public utilities).

40. Slide 14-40 14 Segment Reporting Quantitative Thresholds--Overview l Not all operating segments are REPORTABLE operating segments. Three 10% tests are performed to determine if an operating segment is a reportable operating segment. l ONLY ONE of the three 10% tests need be passed. The tests involve: n REVENUES, PROFITABILITY, and ASSETS.

41. Slide 14-41 14 Segment Reporting: Quantitative Thresholds--The 10% Tests n REVENUES: Are the segment’s 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

42. Slide 14-42 14 Segment Reporting: Quantitative Thresholds--The 10% Tests n PROFITABILITY: Is the absolute amount of the segment’s reported profit or loss 10% or more of the greater, in absolute amount, of the combined reported: s PROFIT of all operating profits that DID NOT report a loss or s LOSS of all operating segments that DID report a loss ? #2 Winners Losers

43. Slide 14-43 14 Segment Reporting: Quantitative Thresholds--The 10% Tests n ASSETS: Are the segment’s assets 10% or more of the combined assets of ALL operating segments? lOperating segments that do NOT meet any of the three 10% tests may be COMBINED with n 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

44. Slide 14-44 14 Segment Reporting: Nonreportable Operating Segments l Nonreportable operating segments and other business activities are: n Combined and n Disclosed in an “ALL OTHER” category. l 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.

45. Slide 14-45 14 Segment Reporting: The 75% Test l Determining Reportable Operating Segments: n 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. l Describing Reportable Operating Segments: n The product or service of each industry segment must be identified.

46. Slide 14-46 14 Enterprise-Wide Disclosures: The Three Categories of Information lThree types of enterprise-wide disclosures are called for. Information about: n Products and Services. n Geographic Areas. n Major Customers. #1 #2 #3

47. Slide 14-47 14 Enterprise-Wide Disclosures: Products and Services lAn entity must report REVENUES FROM EXTERNAL CUSTOMERS --unless it is impractical to do so-- for: n Each product and service, or n Each group of similar products and services. lIf it is impractical to disclose this product and service information, disclose that fact.

48. Slide 14-48 14 Enterprise-Wide Disclosures: Geographic Areas--General lAn entity must report geographic information --unless it is impractical to do so-- for : n REVENUES n LONG-LIVED ASSETS lIf it is impractical to disclose this geographic information, disclose that fact. #1 #2

49. Slide 14-49 14 Enterprise-Wide Disclosures: Geographic Areas--Revenues l REVENUES-- Disclose: n Revenues from external customers located: s In the United States. s Outside the United States, in total. n Revenues attributed to an individual foreign country, if material.

50. Slide 14-50 14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets l LONG-LIVED ASSETS--Disclose: n Long-lived assets located: s In the United States. s Outside the United States, in total. s In an individual foreign country, if material.

51. Slide 14-51 14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets lLong-lived assets exclude : n Financial instruments. n Long-term customer relationships of a financial institution. n Mortgage or other servicing rights. n Deferred policy acquisition costs. n Deferred tax assets.

52. Slide 14-52 14 Enterprise-Wide Disclosures: Major Customers lWhen an entity has revenues from any single customer in excess of 10% of total revenues, disclose: n The fact of such revenues. n The amount of revenues from each customer [but not the identity of each]. n The industry segment(s) making the sales to each such customer. #1 #2 #3

53. Slide 14-53 14 Enterprise-Wide Disclosures: Major Customers lEach is considered a SINGLE customer : n A group of entities known to be under common control. n The federal government. n A state government. n A local government. n A foreign government.

54. Slide 14-54 14 Review Question #1 l Revtex’s 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 of: A. $1,420,000 B. $1,450,000 C. $1,470,000 D. $1,500,000

55. Slide 14-55 14 Review Question #1--With Answer l Revtex’s 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 of: A. $1,420,000 B. $1,450,000 ($1,500,000 - $50,000) C. $1,470,000 D. $1,500,000

56. Slide 14-56 14 Review Question #2 l Optex’s 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% of: A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000

57. Slide 14-57 14 Review Question #2--With Answer l Optex’s 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% of: A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000

58. Slide 14-58 14 End of Chapter 14 l Time to Clear Things Up-- Any Questions?