14

14
Reporting for Segments
and for Interim
Financial Periods

Advanced Accounting, Fifth Edition

Slide
14-1
 Learning
Learning Objectives
Objectives

1. Understand the need for disaggregated financial data.

2. Describe the basic requirements of public companies in
reporting segmental data.
3. Determine an operating segment.
4. Define a reportable segment.
5. Identify the information to be presented for each
reportable segment.

Slide
14-2
 Learning
Learning Objectives
Objectives

6. Explain when and what types of geographic data must be

reported.
7. Explain when information about major customers must be
reported.
8. Compare the international accounting standards for
segmental reporting with the U.S. requirements.
9. Describe current requirements for companies to report
interim information.
10. Indicate some problems with interim reporting and the
authoritative position on the issue.

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14-3
 Need
Need for
for Disaggregated
Disaggregated Financial
Financial Data
Data

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.

Disaggregated information is useful to assist in analyzing

uncertainties surrounding expected cash flows.

Slide
14-4
LO 1 The need for disaggregated financial data.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

FASB ASC topic 280 (Segment Reporting): Segmental

disclosures have limitations as well as strengths.

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.

Slide LO for
LO 1 The need 2 Basic disclosurefinancial
disaggregated requirements.
data.
14-5
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Basic Disclosure Requirements (Management Approach):

Objective is to facilitate consistency between

internal and external reporting.

Segmented by Reporting Requirement

 Product or service,  Segmental profit or loss,
 Geographic area,  Certain items of revenue
and expense,
 Customer type, or
 Segmental assets, and
 Legal entity.
 Other items.

Slide LO 2 Basic disclosure requirements.

14-6
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Common Cost Allocation

 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.
 Two of the most difficult tasks in applying the
segment disclosure requirements are those of
determining
An appropriate basis for the allocation of common costs and

Appropriate operating segments

Slide LO 2 Basic disclosure requirements.
14-7
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Question
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.

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14-8
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

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.

Reportable Segment
 Significant to an enterprise’s operations.
 Has passed one of three 10% tests or
 Determined to be reportable by other criteria.

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14-9
LO 3 Operating segment. LO 4 Reportable segment.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Determining Operating Segments

Modified Management Approach

Aggregation Criteria

Quantitative Thresholds

Slide
14-10 LO 3 Determine an operating segment.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Question
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.

Slide
14-11 LO 3 Determine an operating segment.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Determining Operating Segments

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.

Slide
14-12 LO 3 Determine an operating segment.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Determining Operating Segments

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.
Slide LO 3 Determine an operating segment.
14-13
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
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:

Operating Revenue Operating Identifiable

Segment Total Intersegment Profit (Loss) Assets
1 $ 4,200 $ 800 $ (600) $ 7,000
2 6,000 1,200 2,000 8,800
3 51,000 7,000 2,100 35,400
4 48,000 - 8,800 37,600
5 13,000 - 3,200 14,000
6 64,500 3,400 4,000 52,000
7 12,000 2,000 (3,000) 16,400
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14-14
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.
Revenue Test

Operating % of Total Reportable

Segment Revenue Revenue Segment
1 $ 4,200 2.1% No
2 6,000 3.0% No
3 51,000 25.7% Yes
4 48,000 24.2% Yes
5 13,000 6.5% No
6 64,500 32.5% Yes
7 12,000 6.0% No
$ 198,700 100.0%
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14-15
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.

Operating Profit Test

% of Largest
Operating Operating Operating of Op. Profit Reportable
Segment Profit Loss or Op. Loss Segment
1 $ (600) 3.0% No
2 $ 2,000 9.9% No
3 2,100 10.4% Yes
4 8,800 43.8% Yes
5 3,200 15.9% Yes
6 4,000 19.9% Yes
7 (3,000) 14.9% Yes
$ 20,100 $ (3,600)
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14-16
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.

Identifiable Assets Test

Operating Identifiable Reportable

Segment Assets % of Total Segment
1 $ 7,000 4.1% No
2 8,800 5.1% No
3 35,400 20.7% Yes
4 37,600 22.0% Yes
5 14,000 8.2% No
6 52,000 30.4% Yes
7 16,400 9.6% No
$ 171,200
Summary: Segments 3, 4, 5, 6,
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14-17
and 7 are reportable segments.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Seventy-Five Percent Combined Revenue Test

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.

Slide LO34 Determine

LO Determinean
a operating
operating segment.
segment.
14-18
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Review Question
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.
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14-19
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Problem 14-1 Data: 75% Test

Operating Revenue Revenue from

Segment Total Intersegment Nonaffiliates
1 $ 4,200 $ 800 3,400
2 6,000 1,200 4,800 Nonaffiliated
3 51,000 7,000 44,000 Revenue from
4 48,000 - 48,000
reportable
segments
5 13,000 - 13,000
6 64,500 3,400 61,100 $176,100
7 12,000 2,000 10,000
$ 198,700 $ 14,400 $ 184,300

Nonaffiliated revenue (reportable segments) $176,100

= 95.6%
Total nonaffiliated revenue $184,300
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14-20
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Information to be Presented
For each reportable segments and in the aggregate for the
segments not separately reported.

 General information.  Enterprise wide disclosures.

 Operating profit or loss.  Product or service.
 Assets.  Geographic area.
 Bases for measurement.  Major customer (10%).
 Interim disclosures.
 Reconciliation of segment amounts and consolidated amounts
for revenue, profit or loss, assets, and other significant items.
Slide
14-21
LO 5 Reportable segment information to be presented.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Geographic Areas
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.

Slide
14-22
LO 6 Reporting on geographical areas.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Information about Major Customers

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.

Slide
14-23
LO 7 Reporting on major customers.
 Standards
Standards of
of Financial
Financial Accounting
Accounting and
and Reporting
Reporting

Review Question
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.

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14-24
 Interim
Interim Financial
Financial Reporting
Reporting

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.

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14-25
LO 9 Current interim reporting requirements.
 Interim
Interim Financial
Financial Reporting
Reporting

Problems in Interim Reporting

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 (discrete view) as a basic accounting period.
Other accountants view each interim period as
essentially an integral part of the annual period.

In response to SEC complaints and general pressure, the

APB issued APB Opinion No. 28 in May 1973 (now included in
FASB ASC topic 270, Interim Reporting).
Slide LO 10 Problems in interim reporting.
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 Interim
Interim Financial
Financial Reporting
Reporting

The Board concluded that “each interim period should be

viewed as an integral part of an annual period”.
Financial statements for 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.

Slide LO 10 Problems in interim reporting.

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 Interim
Interim Financial
Financial Reporting
Reporting

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.

Slide LO 10 Problems in interim reporting.

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 Interim
Interim Financial
Financial Reporting
Reporting

Review Question
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.

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14-29
 Interim
Interim Financial
Financial Reporting
Reporting

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.

Slide LO 10 Problems in interim reporting.

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 Interim
Interim Financial
Financial Reporting
Reporting

Review Question
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.
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 Interim
Interim Financial
Financial Reporting
Reporting

Provision for Income Taxes

The basic technique for computing income tax provisions for
interim financial statements is described in FASB ASC
subtopic 740-270 (Income Taxes – Interim Reporting).

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.

The effective rate should reflect anticipated tax

credits, foreign tax rates, percentage depletion,
and other available tax planning alternatives.

Slide LO 10 Problems in interim reporting.

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 Interim
Interim Financial
Financial Reporting
Reporting –– Income
Income Taxes
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%.
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 Interim
Interim Financial
Financial Reporting
Reporting –– Income
Income Taxes
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
Estimated Annual Earnings $ 1,350,000
Add: Environmental Violation Penalties 25,000
Deduct: Dividend Income Exclusion (180,000)
Estimated Taxable Income $ 1,195,000
Estimated Annual Income Tax Payable * $ 501,900
Estimated Effective Combined Annual Tax Rate ** 37.2%
Actual First Quarter Earnings x 400,000
First Quarter Income Tax Provision (Expense) $ 148,800

* ($1,195,000 x 42%) ** ($501,900 / $1,350,000)

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14-34
 Interim
Interim Financial
Financial Reporting
Reporting –– Income
Income Taxes
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 Expense 148,800

Income Tax Payable 148,800

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14-35
 Interim
Interim Financial
Financial Reporting
Reporting –– Income
Income Taxes
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
Estimated Annual Earnings $ 1,420,000
Deduct: Net Permanent Difference ($180,000-$25,000) (155,000)
Estimated Taxable Income $ 1,265,000
Estimated Annual Income Tax Payable * $ 531,300
Estimated Effective Combined Annual Tax Rate ** 37.4%
Cumulative Income to Date ($400,000 + $510,000) x $ 910,000
Cumulative Tax Provision Needed 340,340
Tax Provision in 1st Quarter 148,800
Tax Provision in 2st Quarter $ 191,540

* ($1,265,000 x 42%) ** ($531,300 / $1,420,000)

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14-36
 Interim
Interim Financial
Financial Reporting
Reporting –– Income
Income Taxes
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 Expense 191,540

Income Tax Payable 191,540

1st 2nd 3rd 4th

1st Quarter 2nd Quarter Year-to-Date

tax provision tax provision tax provision
= $148,800 = $191,540 * = $340,340

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* $340,340 - $148,800
 Interim
Interim Financial
Financial Reporting
Reporting

Accounting Changes in Interim Periods

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.

Current GAAP requires retrospective application to financial

statements of prior periods where practical.

Slide LO 10 Problems in interim reporting.

14-38
 Interim
Interim Financial
Financial Reporting
Reporting

Minimum Disclosures in Interim Reports

• Gross revenues, provision for income taxes, extraordinary items
(including related income tax effects), and net income.
• Basic and diluted earnings-per-share data.
• Seasonal revenue, costs, or expenses.
• Significant changes in estimates or provisions for income taxes.
• Disposal of a segment of a business and extraordinary, unusual,
or infrequently occurring items.
• Contingent items.
• Changes in accounting principles or estimates.
• Significant changes in financial position.
Slide LO 10 Problems in interim reporting.
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 International
International Issues
Issues in
in Interim
Interim Reporting
Reporting

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).
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14-40
 Differences
Differences between
between IFRS
IFRS and
and US
US GAAP
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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 Copyright
Copyright

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