1. Slide 14-1

2. Slide 14-2 Reporting for Segments and for Interim Financial Periods Advanced Accounting, Fourth Edition 1414

3. Slide 14-3 1. 1.Understand the need for disaggregated financial data. 2. 2.Describe the basic requirements of public companies in reporting segmental data. 3. 3.Determine an operating segment. 4. 4.Define a reportable segment. 5. 5.Describe how common costs are handled in segmental reporting. 6. 6.Identify the information to be presented for each reportable segment. Learning Objectives

4. Slide 14-4 7. 7.Explain when and what types of geographic data must be reported. 8. 8.Explain when information about major customers must be reported. 9. 9.Compare the international accounting standards for segmental reporting with the U.S. requirements. 10. 10.Describe current requirements for companies to report interim information. 11. 11.Indicate some problems with interim reporting and the authoritative position on the issue. Learning Objectives

5. Slide 14-5 Users need information to determine conditions, trends, and ratios that assist in predicting cash flows of firms. Different industries or geographic areas have different rates of profitability, opportunities for growth, and types of risk. Need for Disaggregated Financial Data Disaggregated information is useful to assist in analyzing uncertainties surrounding expected cash flows. LO 1 The need for disaggregated financial data.

6. Slide 14-6 SFAS No. 131 [ASC 280-10-05-03], “Disclosures about Segments of an Enterprise and Related Information.” Primary benefit - unveiling information. Arguments against segmental disclosures include: May be misleading due to accounting problems, lack of user knowledge, different measurement techniques. Disclosures to competing firms, labor unions, etc. Adds to already excessive amount of disclosures. Standards of Financial Accounting and Reporting LO 1 The need for disaggregated financial data.

7. Slide 14-7 Basic Disclosure Requirements (Management Approach): Objective is to facilitate consistency between internal and external reporting. Standards of Financial Accounting and Reporting LO 2 Basic disclosure requirements. Segmented by  Product or service,  Geographic area,  Customer type, or  Legal entity. Reporting Requirement  Segmental profit or loss,  Certain items of revenue and expense,  Segmental assets, and  Other items.

8. Slide 14-8 A component of an enterprise that may earn revenues and incur expenses, and about which management evaluates separate financial information in deciding how to allocate resources and assess performance is a(n) a.identifiable segment. b.operating segment. c.reportable segment. d.industry segment. Question Standards of Financial Accounting and Reporting

9. Slide 14-9 Operating Segment - Component of an enterprise that  May earn revenues and incur expenses.  Chief operating decision maker regularly reviews the component’s operating results.  Discrete financial information is available. Standards of Financial Accounting and Reporting LO 3 Operating segment. LO 4 Reportable segment. Reportable Segment  Significant to an enterprise’s operations.  Has passed one of three 10% tests or  Determined to be reportable by other criteria.

10. Slide 14-10 Common Cost Allocation Standards of Financial Accounting and Reporting LO 5 Handling common costs. Common costs should be allocated to a segment (external reporting purposes only) if they are included in the segment’s profit or loss calculations that are used internally by the chief operating decision maker.

11. Slide 14-11 Determining Operating Segments Standards of Financial Accounting and Reporting Modified Management Approach Aggregation Criteria Quantitative Thresholds

12. Slide 14-12 An entity is permitted to aggregate operating segments if the segments are similar regarding the a.nature of the production processes. b.types or class of customers. c.methods used to distribute products or provide services. d.all of these. Question Standards of Financial Accounting and Reporting

13. Slide 14-13 Determining Operating Segments Standards of Financial Accounting and Reporting Aggregation Criteria - entity is permitted to aggregate operating segments that have similar economic characteristics and are similar in ALL the following:  Nature of their products or services.  Nature of the production processes.  Types or class of customers.  Methods used to distribute products or provide services.  Nature of the regulatory environment.

14. Slide 14-14 Standards of Financial Accounting and Reporting Quantitative Thresholds - Segment is reportable if it meets one or more of the following:  Combined (external and internal) revenue is 10% or more of combined revenue of all reportable segments.  Profit or loss is 10% or more of the greater absolute amount of:  Combined profit of all segments not reporting a loss.  Combined loss of all segments that reported a loss.  Assets are 10% or more of the combined assets of all segments. Determining Operating Segments

15. Slide 14-15 Standards of Financial Accounting and Reporting Problem 14-1: Significance Tests—Segmental Reporting Bacon Industries operates in seven different segments. Information concerning the operations of these segments for the most recent fiscal period follows:

16. Slide 14-16 Standards of Financial Accounting and Reporting Problem 14-1: Determine which of the segments must be treated as reportable segments. Revenue Test

17. Slide 14-17 Standards of Financial Accounting and Reporting Problem 14-1: Determine which of the segments must be treated as reportable segments. Operating Profit Test

18. Slide 14-18 Standards of Financial Accounting and Reporting Problem 14-1: Determine which of the segments must be treated as reportable segments. Identifiable Assets Test Summary: Segments 3, 4, 5, 6, and 7 are reportable segments.

19. Slide 14-19 Seventy-Five Percent Combined Revenue Test Standards of Financial Accounting and Reporting The combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least 75% of the combined revenue from sales to unaffiliated customers of all operating segments.

20. Slide 14-20 To determine whether a substantial portion of a firm's operations are explained by its segment information, the combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least a.10% of the combined revenue of all operating segments. b.75% of the combined revenue of all operating segments. c.10% of the combined revenue from sales to unaffiliated customers of all operating segments. d.75% of the combined revenue from sales to unaffiliated customers of all operating segments. Review Question Standards of Financial Accounting and Reporting

21. Slide 14-21 Standards of Financial Accounting and Reporting Problem 14-1 Data: 75% Test Nonaffiliated revenue (reportable segments) $176,100 Total nonaffiliated revenue$184,300 Nonaffiliated Revenue from reportable segments $176,100 = 95.6%

22. Slide 14-22 For each reportable segments and in the aggregate for the segments not separately reported. General information. Operating profit or loss. Assets. Bases for measurement. Interim disclosures. Reconciliation of segment amounts and consolidated amounts for revenue, profit or loss, assets, and other significant items. Enterprise wide disclosures.  Product or service.  Geographic area.  Major customer (10%). LO 6 Reportable segment information to be presented. Standards of Financial Accounting and Reporting Information to be Presented

23. Slide 14-23 Standards of Financial Accounting and Reporting Where operations in foreign countries are grouped into geographic areas, the groupings should consider 1.proximity, 2.economic affinity, 3.similarities of business environments, and 4.the nature, scale, and degree of interrelationship of the operations in the various countries. Geographic Areas LO 7 Reporting on geographical areas.

24. Slide 14-24 Standards of Financial Accounting and Reporting If 10% or more of the revenue of a firm is derived from sales to any single customer, or If 10% or more of the revenue is derived from sales to the federal government, a state government, a local government, or a foreign government, that fact and the amount of revenue must be disclosed. Information about Major Customers LO 8 Reporting on major customers.

25. Slide 14-25 Which of the following is not a consideration in segment reporting for diversified companies? a.Consolidation policy. b.Defining the segments. c.Transfer pricing. d.Allocation of joint costs. Review Question Standards of Financial Accounting and Reporting

26. Slide 14-26 Interim financial statements are presented to provide information concerning financial status and progress for time periods of less than one year. Normal time period is a quarter of a year. Prepared for most recent interim period, as well as on a cumulative or year-to-date basis. May consists of statements of financial position, income, and cash flows. SEC requires public companies to file Form 10-Q. LO 10 Current interim reporting requirements. Interim Financial Reporting

27. Slide 14-27 Seasonal nature of operations in many industries can cause wide fluctuations in revenues and expenses. Short time period to determine interim results. Some accountants hold that each interim period should stand alone as a basic accounting period. Some accountants view each interim period as essentially an integral part of the annual period. LO 11 Problems in interim reporting. Interim Financial Reporting Problems in Interim Reporting In response to SEC complaints and general pressure, the APB issued APB Opinion No. 28 in May 1973.

28. Slide 14-28 “Each interim period should be viewed as an integral part of an annual period.” Each interim period should be based on accounting practices used for annual statements. Revenue should be recognized on same basis as used for the full year. Costs Associated with Revenue should be similarly treated for interim purposes. Interim Financial Reporting APB Opinion No. 28 [ASC 270-10-05-1] in May 1973

29. Slide 14-29 Acceptable alternatives for inventory costing: COGS can be estimated using gross profit rates. Liquidated LIFO base should be charged at replacement cost if expected to be replaced by year end. Inventory loss from market declines expected to recover before year end need not be recognized. Standard cost for determining inventory and product cost should be based on the procedures used for the fiscal year. Interim Financial Reporting

30. Slide 14-30 Which of the following methods of inventory valuation is allowable at interim dates but not at year-end? a.Estimated gross profit rates. b.Retail method. c.Specific identification. d.Weighted average. Review Question Interim Financial Reporting

31. Slide 14-31 All Other Costs and Expenses (other than product costs) Charged to income as incurred or allocated based on  an estimate of time expired,  benefit received or  activity associated with the periods. If not readily identified with activities or benefits should be charged when incurred. Arbitrary assignment of costs should not be made. Gains and losses that would not be deferred at year-end should not be deferred at interim periods. Interim Financial Reporting

32. Slide 14-32 In considering interim financial reporting, how did the Accounting Principles Board conclude that such reporting should be viewed? a.As useful only if activity is evenly spread throughout the year so that estimates are unnecessary. b.As a “special” type of reporting that need not follow generally accepted accounting principles. c.As reporting of an integral part of an annual period. d.As reporting of a basic accounting period. Review Question Interim Financial Reporting

33. Slide 14-33 APB Opinion Nos. 28, 23, and 24, and in SFAS No. 109 [ASC 740-270] At the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. Interim Financial Reporting Provision for Income Taxes

34. Slide 14-34 Interim Financial Reporting – Income Taxes Exercise 14-8: Spur Company’s actual earnings for the first two quarters of 2008 and its estimate during each quarter of its annual earnings are: Actual first-quarter earnings $ 400,000 Actual second-quarter earnings 510,000 First-quarter estimate of annual earnings 1,350,000 Second-quarter estimate of annual earnings 1,420,000 Spur Company estimated its permanent differences between accounting income and taxable income for 2008 as: Environmental violation penalties $ 25,000 Dividend income exclusion 180,000 The combined state and federal tax rate for 2008 is 42%.

35. Slide 14-35 Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008. * ($1,195,000 x 42%) ** ($501,900 / $1,350,000) First Quarter x

36. Slide 14-36 Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008. First Quarter Journal Entry Income Tax Expense148,800 Income Tax Payable 148,800

37. Slide 14-37 Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008. * ($1,265,000 x 42%) ** ($531,300 / $1,420,000) Second Quarter x

38. Slide 14-38 Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008. Second Quarter Journal Entry Income Tax Expense191,540 Income Tax Payable 191,540 1 st Quarter tax provision = $148,800 Year-to-Date tax provision = $340,340 2 nd Quarter tax provision = $191,540 * * $340,340 - $148,800 1 st 2 nd 3 rd 4 th

39. Slide 14-39 Changes in Estimate Accounted for in interim period when change is made. No restatement of previous interim reports. Effect on earnings disclosed for current and subsequent interim periods. Accounting Changes and Error Corrections - SFAS No. 154 [ASC 250] requires retrospective application to financial statements of prior periods where practical. Interim Financial Reporting Accounting Changes in Interim Periods

40. Slide 14-40 a.Gross revenues, provision for income taxes, extraordinary items (including related income tax effects), and net income. b.Basic and diluted earnings-per-share data. c.Seasonal revenue, costs, or expenses. d.Significant changes in estimates or provisions for income taxes. e.Disposal of a segment of a business and extraordinary, unusual, or infrequently occurring items. f.Contingent items. g.Changes in accounting principles or estimates. h.Significant changes in financial position. Interim Financial Reporting Minimum Disclosures in Interim Reports

41. Slide 14-41 IAS 34, “Interim Financial Reporting”, does not state which entities should prepare and publish interim financial statements. The standard determines the minimum content of the interim reports if the entity elects or is required to prepare interim financial statements. IAS 34 generally requires that the interim period be a discrete reporting period. IAS 34 applies when an entity publishes an interim financial report in accordance with International Financial Reporting Standards (IFRS). International Issues in Interim Reporting

42. Slide 14-42 Differences between IFRS and US GAAP The view of an interim period is conceptually quite different under U.S. GAAP and under IFRS.  Under IFRS, the interim period is defined as a discrete reporting period, with certain exceptions.  Under U.S. GAAP, an interim period is an integral part of the full year (again, with certain exceptions).

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