OPERATING SEGMENTS AND INTERIM
FINANACIAL REPORTING
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Need for Disaggregated Financial Data
Different industries or geographic areas
may have different
rates of profitability
growth opportunities
types of risks
Difficult to analyze a firm engaging in
several industries or geographic areas
based on aggregated information
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Segmental Disclosures
Advantage
unveiling
of information that has been merged in
the consolidated data
Disadvantages
may be misleading due to classification and
allocation problems, lack of user knowledge, etc.
disclosure to competing firms and labor unions
information overload for users
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Common Cost Allocation - Which?
Common costs should be
allocated to a segment for
external reporting purposes
only if they are included in
the segment’s internal
profit or loss calculations
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Common Cost Allocation - How?
Steps
Joint costs are accumulated into logical
and relatively homogeneous expense
pools
The pools are allocated to segments on
the basis of beneficial or casual
relationships as measured by activity or
output of the segments
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Common Cost Allocation - How?
Joint
costs
Centralized
Expense Data processing warehouse
pools expenses expenses
Segments
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Operating Segment
Definition:
It is a component of the firm that engages in
business activities that earns revenues and
incur expenses
The entity’s chief operating decision maker
regularly reviews the component’s operating
results
Discrete financial information is available
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Determining Operating Segments
Modified management approach
focus on the way in which management
organizes segments internally to make
operating decisions and to assess
performance
aggregation criteria
quantitative thresholds
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Aggregation Criteria
An entity is permitted to aggregate operating
segments which are similar in all the following
areas:
nature of their products or services
nature of the production process
types or classes of customers
methods used to distribute products or provide
services
nature of regulatory environment
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Quantitative Thresholds
A segment is significant enough to be a
reportable segment if :
its combined external and internal revenue > 10%
of the combined external and internal revenue of
all reportable segments;
itsreported profit or loss > 10% of the total gross
profit (loss) of all operating segments reporting a
profit (loss); or
its assets > 10% of combined assets of all
operating segments
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75% Combined Revenue Test
Combined sales to
unaffiliated customers of
all reportable segments Must be
> 75%
Combined sales to
unaffiliated customers of
all operating segments
If the 75% test is not met, additional segments must be identified
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Segmental Disclosure Requirements
general information
segment operating profit or loss
segment assets
bases for measurement
reconciliation
of segment amounts
and consolidated amounts for
revenue
profit or loss
assets
other significant items
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Segmental Disclosure Requirements
interim disclosures
enterprisewide disclosures
product or service
geographic area
major customers - each customer representing
10% or more of total enterprise revenues
methods of presentation
financial statements
footnotes to the financial statements
separate schedule
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Geographic Area
operations in foreign countries should
be grouped on the basis of
proximity
economic affinity
similarities of business environments
nature, scale, and degree of
interrelationship of the operations in the
various countries
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Major Customers
Purpose: To provide information about
dependency on one or more major customers
Disclosure requirement
each customer representing 10% or more of
total enterprise revenues
customers who are federal, state, local, or
foreign government
amount of sales
segment making the sales
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Interim Financial Reporting
Purpose: to provide timely financial
information for investment decision
making
SEC disclosure requirement: Form 10-Q
comparative income statements for the
quarter and year-to-date for the current and
preceding year
comparative statements of financial position at
the end of the most recent quarter for the
current and preceding year
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Interim Reporting - Inventory Costing
COGS can be estimated using gross profit rate
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
Price and volume variances under standard
costing should be deferred if expected to be
absorbed by year end
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Interim Reporting - Income Taxes
Steps
(1) estimate effective tax rate for the full year
income of estimated
(2) year-to-date = x
tax year-to-date tax rate
provision
(3) = year-to-date _ tax
current tax provision provision
quarter’s tax up to
provision preceding
quarter
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Interim Reporting - Income Taxes
First Quarter JE
Income tax expense 42,300
Income tax payable 42,300
To record income tax provision for the first quarter as:
(actual first quarter income) x (estimated tax rate for the year)
= $15,000 x 28.2%
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Interim Reporting - Income Taxes
Second Quarter JE
Income tax expense 48,900
Income tax payable 48,900
First quarter Second quarter
Year to date Year to date
tax provision tax provision
= $42,300 = $91,200
Difference = $48,900
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Interim Reporting - Accounting
Changes
Changes in estimate
accountedfor in the interim period when
the change is made
no restatement of previous interim reports
effect on earnings disclosed
for current and subsequent
interim periods
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Interim Reporting - Accounting
Changes
Changes in principle
ifthe change occurs in the first quarter:
the cumulative effect should be included in the first
quarter income.
ifthe change occurs in other than the first quarter:
the cumulative effect should be shown as if it had
occurred in the first quarter. All other quarters
should be restated using the new method.
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Interim Reporting - Minimum Disclosure
Gross revenues, income tax provisions, extraordinary
items, cumulative effect of a change in accounting
principles, net income
basic and diluted EPS
seasonal revenue, or expenses
segment disposal; extraordinary, unusual or
infrequent items
contingent items
changes in accounting principles or estimates
significant changes in financial position
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