ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4519

CPA Review Batch 45  May 2023 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

OPERATING SEGMENTS & INTERIM FINANCIAL REPORTS

An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues
and expenses relating to transactions with other components of the same entity),
(b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance, and
(c) for which discrete financial information is available.
An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-
up operations may be operating segments before earning revenues.
Generally, an operating segment has a segment manager who is directly accountable to and maintains regular
contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans
for the segment. The term ‘segment manager’ identifies a function, not necessarily a manager with a specific
title. The chief operating decision maker also may be the segment manager for some operating segments. A
single manager may be the segment manager for more than one operating segment.

Aggregation criteria
Operating segments often exhibit similar long-term financial performance if they have similar economic
characteristics. For example, similar long-term average gross margins for two operating segments would be
expected if their economic characteristics were similar. Two or more operating segments may be aggregated into
a single operating segment if aggregation is consistent with the core principle of this IFRS, the segments have
similar economic characteristics, and the segments are similar in each of the following respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

Quantitative thresholds
An entity shall report separately information about an operating segment that meets any of the following
quantitative thresholds:

(a) Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10
per cent or more of the combined revenue, internal and external, of all operating segments.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount,
of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined
reported loss of all operating segments that reported a loss.
(c) Its assets are 10 per cent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and
separately disclosed, if management believes that information about the segment would be useful to users of the
financial statements.

An entity may combine information about operating segments that do not meet the quantitative thresholds with
information about other operating segments that do not meet the quantitative thresholds to produce a reportable
segment only if the operating segments have similar economic characteristics and share a majority of the
aggregation criteria.

Interim period is a financial reporting period shorter than a full financial year.

Interim financial report means a financial report containing either a complete set of financial statements (as
described in IAS 1) or a set of condensed financial statements (as described in IAS 34) for an interim period.

An entity publishing complete set of financial statements must follow requirement of IAS 1.

An entity publishing condensed financial statements must follow requirements of IAS 34. Additional line items or
notes shall be included if their omission would make the condensed interim financial statements misleading.

Basic and diluted EPS shall be presented on the face of an income statement, complete or condensed, for an
interim period.

IAS 1 (PAS1) defines a complete set of financial statements as including the following components:
(a) a statement of financial position;
(b) a statement of comprehensive income;
(c) a statement of changes in equity;
(d) a statement of cash flows; and
(e)notes, comprising a summary of significant accounting policies and other explanatory notes.

An interim financial report shall include, at a minimum, the following components:

(a) condensed statement of financial position;
(b) condensed statement of comprehensive income;
(c) condensed statement of changes in equity;
(d) condensed statement of cash flows; and (e) selected explanatory notes

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OPERATING SEGMENTS & INTERIM FINANCIAL REPORTS

The explanatory notes are designed to provide an explanation of significant events and transactions arising since
the last annual financial statements. IAS 34 assumes that readers of an entity’s report shall also have access to
its most recent annual report. IAS 34 requires many disclosures including:
(a) accounting policy change;
(b) seasonality or cyclicality of operations;
(c) unusual items and changes in estimates;
(d) dividends paid and material events after the end of the interim period; (e)changes in the structure of the
entity including business combinations and restructuring;
(f) segment revenue and result;
(g) changes in contingent liabilities or assets since the last annual SFP date; (h) issue, repurchase and repayment
of debt and equity.

If an entity’s interim financial report is in compliance with IAS 34, that fact shall be disclosed. An interim financial
report shall not be described as complying with IFRSs unless it complies with all of the requirements of IFRSs.

In deciding how to recognize, measure, classify, or disclose an item for interim financial reporting purposes,
materiality shall be assessed in relation to the interim period financial data. In making assessments of materiality,
it shall be recognized that interim measurement may rely on estimates to a greater extent than measurements
of annual financial data.

If an estimate of an amount reported in an interim period is changed significantly during the final interim period
of the financial year but a separate financial report is not published for that final interim period, the nature and
amount of that change in estimate shall be disclosed in a note to the annual financial statements for that financial
year.

An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual
financial statements, except for accounting policy change made after the date of most recent annual financial
statements. However, the frequency of entity’s reporting (annual, half yearly or quarterly) shall not affect the
measurement of its annual results. To achieve that objective, measurements for interim reporting purposes shall
be made on a year-to-date basis.

These shall not be anticipated or deferred as of an interim date if anticipation of deferral would not be appropriate
at the end of the entity’s financial year.

Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred for interim
reporting purposes, if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the
financial year.

Income tax expense should be recognized based on the best estimate of the weighted average annual income tax
rate expected for the full financial year.

It is to be recognized that the preparation of interim reports will often require the greater use of estimates.

An entity should use the same accounting policy throughout a single financial year. Where a new accounting
policy is adopted in an interim period, that policy should be applied retrospectively and previously reported interim
data is restated in accordance with IAS 8.

FINANCIAL ACCOUNTING & REPORTING - THEORIES

1. An operating segment is a component of an entity:
a. that engages in business activities from which it may earn revenues and incur expenses.
b. whose operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance.
c. for which discrete financial information is available.
d. All of the above.
2. An entity shall report separately information about an operating segment that meets which of the following
quantitative thresholds?
a. its reported revenue, excluding sales to external customers and intersegment sales or transfers, is
10 per cent or more of the combined revenue, internal and external, of all operating segments.
b. the amount of its reported profit or loss is 10 per cent or more of the greater of (i) the combined
reported profit of all operating segments that did not report a loss and (ii) the combined reported
profit of all operating segments that reported a loss
c. Its assets are 10 per cent or more of the combined assets of all operating segments.
d. All of them.
3. If the total external revenue reported by operating segments constitutes less than _____ of the entity’s
revenue, additional operating segments shall be identified as reportable segments until at least _______ of
the entity’s revenue is included in reportable segments. What is the % threshold according to PFRS 8?
a. 50% c. 75%
b. 60% d. 80%
4. There may be a practical limit to the number of reportable segments that an entity separately discloses
beyond which segment information may become too detailed. Although no precise limit has been determined,
as the number of segments that are reportable. What number of reportable segments should the entity should
consider whether a practical limit has been reached?
a. Below five c. Above ten
b. Between five to ten d. Below ten

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OPERATING SEGMENTS & INTERIM FINANCIAL REPORTS

5. A segment of a business is to be reported separately when the revenue of the segment exceeds 10% of the
a. total export and foreign sales.
b. total revenue of all entity’s industry segments.
c. combined net income of all segments reporting profit.
d. total combined revenue of all segments reporting profit
6. There is presumption that anyone reading interim financial reports would
a. have access to the records of the entity.
b. not make decisions based on the report.
c. have access to the most recent annual report.
d. understand all Philippine Financial Reporting Standards.
7. Which of the following describes requirements regarding interim financial statements?
a. Interim financial statements are required.
b. Interim financial statements must be presented with the most recent annual statements.
c. If interim financial statements are presented, four basic financial statements are required.
d. If interim financial statements are presented, at least a statement of financial position and a statement
of comprehensive income are required.
8. Publicly traded entities are encouraged to provide interim financial reports
a. on a quarterly basis.
b. whenever the entity wishes.
c. within a month of the half year-end.
d. at least at the end of half year and within 60 days of the end of interim period.
9. For interim reporting, the income tax expense for the second quarter should be computed by using
a. statutory tax rate for the year.
b. effective tax rate expected to be applicable for the second quarter.
c. effective tax rate expected for the full year as estimated at the end of the first quarter.
d. effective tax rate expected for the full year as estimated at the end of second quarter.
10. Which of the following statements is true regarding interim financial reporting?
a. Interim reports are not required.
b. Interim reports are required on a quarterly basis.
c. The discrete view is required for interim financial statements.
d. Interim reports require the preparation of only a statement of comprehensive income and a statement
of financial position.
11. Under PAS 34, which of the following statements is true?
a. An interim financial report may consist of a complete set of financial statements.
b. An interim financial report may consist of a complete set of financial statements or condensed set of
financial statement with selected notes.
c. A complete set of financial statements is required at interim reporting date.
d. A condensed set of financial statements with selected notes is required at interim date.
12. All of the following statements are true regarding interim financial reporting, except
a. PFRS does not mention the integral and independent view of interim reporting.
b. PFRS requires a complete set of financial statements at the interim reporting date.
c. No accruals or deferrals in anticipation of future events during the year should be reported.
d. PFRS requires entities to expense interim amount like advertising expenditures that could benefit later
interim periods.

FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: Asia Co. and its divisions are engaged solely in manufacturing operations. The industries have no
intercompany transactions during the year. The following data pertain to the industries in which operations were
conducted for the year December 31, 2023:
Segments Total revenue Operating profit Identifiable assets
A 20,000,000 3,600,000 40,000,000
B 16,000,000 2,800,000 36,000,000
C 12,000,000 2,400,000 28,000,000
D 6,000,000 1,200,000 16,000,000
E 9,000,000 1,400,000 14,000,000
F 3,000,000 600,000 6,000,000
How many reportable segments does Asia Co. has?
a. Three b. Four c. Five d. Six

Problem 2: Colide Corp. discloses supplemental industry segment information. The ff. is available for year 2023:
Sales Traceable operating expenses
Persy 4,000,000 P2,000,000
Synur 3,200,000 2,000,000
Kelvin 2,400,000 1,400,000
Additional expenses not included above are as follows:
Indirect operating expenses P1,440,000
General and administrative expenses 960,000
Appropriate common expenses are allocated to segments based on the ratio of segment sales to total sales. How
much is the operating profit reported by segment Persy?
a. 1,000,000 b. 800,000 c. 600,000 d. 400,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4519
OPERATING SEGMENTS & INTERIM FINANCIAL REPORTS

Problem 3:
Tim Ho Wan Company disclosed the following transactions for 2023:
a. Paid a one-year building insurance on March 1, 2023 worth P300,000.
b. Sold equipment having a carrying amount of P200,000 on May 30, 2023. The agreement was to have it settled
in two monthly payments of P130,000 to begin a month after the sale. The payments were received as agreed
on June 30 and July 31, 2023.

1. How much insurance expense should be reported in the second quarter?

a. 75,000 b. 85,000 c. 80,000 d. 0

2. How much of the gain on sale of equipment should be reported in the third quarter?
a. 75,000 b. 85,000 c. 80,000 d. 0

Problem 4:
Melon Company reported its income statement for the year ended December 31, 2023 as follows:
Sales P6,000,000
Cost of sales (2,800,000)
Gross income 3,200,000
Gain on sale of equipment 100,000
Total income 3,300,000
Operating expenses (500,000)
Casualty loss (300,000)
Income before tax 2,500,000
Income tax (35%) (875,000)
Net income P1,625,000

▪ The third quarter sales were 30% of the total sales.

▪ For interim purposes, a gross profit rate of 40% can be justified.
▪ Variable expenses are allocated in the same proportion as sales. Fixed operating expenses are allocated
based on the expiration of time. Of the total operating expenses, P400,000 represents variable expenses.
▪ The equipment was sold on June 1, 2023.
▪ The casualty loss occurred on September 1, 2023.

How much is the net income for interim period ending September 30, 2023?
a. 179,500 b. 178,750 c. 177,750 d. 176,250

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