Chapter 13

Segment and
Interim Reporting
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 13-1

Understand accounting
issues associated with
segment reporting both in
the United States and
internationally.

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 Segment Reporting Accounting Issues

 ASC 280 - A management approach to the

definition of segments
 Focus on financial information that an
enterprise’s financial decision makers use to
evaluate the entity’s operating segments.

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 Segment Reporting Accounting Issues

 ASC 280 defines an operating segment as

having three characteristics:
1. The component unit’s business activities generate
revenue and incur expenses, including any revenue or
expenses in transactions with other business units of the
company.
2. The component unit’s operating results are regularly
reviewed by the entity’s chief operating decision maker,
who then determines the resources to be assigned to the
segment and evaluates it.
3. Separate financial information is available for the
component unit.
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 Segment Reporting Accounting Issues

 Issues
 Generally, the corporate headquarters is not a
separate operating segment.
 The company may choose to aggregate several
individual operating segments that have very
similar economic characteristics.
 Management belief that aggregation will provide
more meaningful information to users.
 Allocation of costs to specific segments

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 Segment Reporting Accounting Issues

 International Financial Reporting

Standards for operating segments
 IFRS 8 specifies segment reporting.
 This standard requires disclosure of information
about an entity’s reportable operating segments
both in its annual and its interim financial
statements.
 International standards are similar to those of
U.S. GAAP although there are several differences.

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Practice Quiz Question #1
Which of the following is NOT one of the
characteristics of an operating segment?
a. The component unit’s business activities
generate revenue and incur expenses.
b. The component unit’s operating results
are regularly reviewed by the entity’s
chief operating decision maker.
c. The component unit can be identified
with a standard industry code assigned
by the federal government.
d. Separate financial information is
available for the component unit.

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Practice Quiz Question #1 Solution
Which of the following is NOT one of the
characteristics of an operating segment?
a. The component unit’s business activities
generate revenue and incur expenses.
b. The component unit’s operating results
are regularly reviewed by the entity’s
chief operating decision maker.
c. The component unit can be identified
with a standard industry code assigned
by the federal government.
d. Separate financial information is
available for the component unit.

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Learning Objective 13-2

Understand and be able to

calculate threshold tests for
segment reporting.

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 Information about Operating Segments

 10 percent quantitative thresholds:

 Separate disclosures required for
segments meeting at least one of the
following tests:
1. 10 percent revenue test
2. 10 percent profit (loss) test
3. 10 percent assets test

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 Information about Operating Segments

 10 percent revenue test

 Applied to each operating segment’s total
revenue as a percentage of the combined
revenue of all segments before elimination of
intersegment transfers and sales.
 If an operating segment’s total revenue is 10
percent or more of the combined revenue of all
segments, then the segment is separately
reportable and supplementary disclosures must
be provided for it in the annual report.

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 Information about Operating Segments

 10 percent profit (loss) test

 Determine whether a segment’s profit or loss is
equal to or greater than 10 percent of the
absolute value of either the combined operating
profits or the combined operating losses of the
segments, whichever is greater.

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 Information about Operating Segments

 10 percent assets test

 Determine if the segment’s assets are 10 percent
or more of the total assets of all operating
segments.
 Items composing each segment’s assets are
defined by management, as used for internal
decision-making purposes.

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 Information about Operating Segments

 Comprehensive disclosure test

 75 percent consolidated revenue test
 Applied after determining which segments are
reportable under any of the 10 percent tests.
 The total revenue from external sources by all
separately reportable operating segments must
equal at least 75 percent of the total
consolidated revenue.

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 Information about Operating Segments

 Other considerations
 An upper limit of about 10 segments is used.
 Above this, a company should consider
aggregating the closely related segments.

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 Information about Operating Segments

 Other considerations
 Exercising judgment in determining segments
 Companies should separately report segments that
have been reported in prior years but fail the current
period’s significance tests because of abnormal
occurrences.
 Companies need not separately report a segment that
has met a 10 percent test on a one-time basis only.
 If a segment becomes reportable in the current
period but has not been reported separately in earlier
periods, the prior years’ comparative segment
disclosures, which are included in the current year’s
annual report, should be restated.
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 Information about Operating Segments

 Information to be disclosed for a segment

determined to be separately reportable:
 General information
 Amounts for each separately reportable segment
 Measures of segment profit or loss
 Segment assets
 Reconciliations to consolidated totals

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Required Footnote Disclosures

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Practice Quiz Question #2

Which of the following is NOT one of the

10% thresholds for defining an
operating segment?
a. 10% of revenues.
b. 10% of cost of goods sold.
c. 10% of profit (or loss).
d. 10% of assets.

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Practice Quiz Question #2 Solution

Which of the following is NOT one of the

10% thresholds for defining an
operating segment?
a. 10% of revenues.
b. 10% of cost of goods sold.
c. 10% of profit (or loss).
d. 10% of assets.

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Learning Objective 13-3

Understand the
requirements for
enterprise-wide
disclosures.

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 Enterprise-wide Disclosures

 ASC 280 established enterprise-wide

disclosure standards to provide users
more information about the risks of the
company
 Typically made in a footnote to the financial
statements.

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 Enterprise-wide Disclosures

 Information about products and services

 A company is required to report the revenues
from external customers for each major product
and service, or each group of similar products
and services, unless it is impracticable for it to
do so.
 The reason for this requirement is that the
company may have organized its operating
segments on a basis different from its product
lines.

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 Enterprise-wide Disclosures

 Information about geographic areas

 If practical to do, the company must report
revenues from external customers attributed to
the company’s home country of domicile and the
revenue from external customers attributed to
all foreign countries in which the enterprise
generates revenues.
 If revenues from external customers generated
in an individual country are material, then the
revenues for that country shall also be separately
disclosed.
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 Enterprise-wide Disclosures

 Information about geographic areas

 Long-lived productive assets located in the
entity’s home country of domicile and the total
assets located in all foreign countries in which
the entity holds assets.
 If assets in an individual foreign country are
material, then the amount of assets held in that
specific country shall also be disclosed separately.
 ASC 280 specified no materiality threshold for
specific country disclosures.
 The 10 percent has gained acceptance.

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 Enterprise-wide Disclosures

 Information about major customers

 Defining an individual customer
 An individual customer could be any single
customer, the federal government, a state
government, a local government, or a foreign
government
 Materiality is not defined, but the 10 percent
guideline has gained the support of practice

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Practice Quiz Question #3
Which of the following is NOT true about
enterprise-wide disclosures?
a. The auditor determines the materiality
threshold for these disclosures.
b. A company is required to report revenues
for each major product and service or each
group of similar products and services.
c. Company’s must report revenues
attributed to the company’s home country
and the revenue from external customers
attributed to all foreign countries.
d. There is no materiality threshold for
geographic segments.
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Practice Quiz Question #3 Solution
Which of the following is NOT true about
enterprise-wide disclosures?
a. The auditor determines the materiality
threshold for these disclosures.
b. A company is required to report revenues
for each major product and service or each
group of similar products and services.
c. Company’s must report revenues
attributed to the company’s home country
and the revenue from external customers
attributed to all foreign countries.
d. There is no materiality threshold for
geographic segments.
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Learning Objective 13-4

Understand the rules for

interim financial reporting.

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 Interim Financial Reporting

 Interim reports cover a time period of less

than one year
 Publicly held companies are required to publish
quarterly reports.
 The quarterly report is, in many ways, a smaller
version of the annual report.

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 Interim Financial Reporting

 Form 10-Q is the SEC’s quarterly report

 This must be filed within 35 days after the end of
each of the first three quarters for publicly
owned companies classified as “accelerated
filers.”
 Quarterly financial statements need not be
audited.
 Selected quarterly financial data must be
reported in a footnote in the annual financial
report.

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 The Format of the Quarterly Financial Report

 Items in quarterly financial reports:

1. An income statement for the most recent quarter
of the current fiscal period and a comparative
income statement for the same quarter for the
prior fiscal year.
2. Income statements for the cumulative year-to-
date time period and for the corresponding
period of the prior fiscal year.
3. A condensed balance sheet at the end of the
current quarter and a condensed balance sheet
at the end of the prior fiscal year.
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 The Format of the Quarterly Financial Report

 Items in quarterly financial reports:

4. A statement of cash flows as of the end of the
current cumulative year-to-date period and for
the same time span for the prior year.
5. Footnotes that update those in the last annual
report.
6. A report by management analyzing and
discussing the results for the latest interim
period.

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 Accounting Issues

 Interim reporting presents several

technical and conceptual measurement
issues.
 Most of these center on the accounting
concept of periodicity and the division of
the annual period into interim periods.

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 Accounting Issues

 Accounting pronouncements on interim

reporting
 ASC 270 - Standardized the preparation and
reporting of interim income statements.
 ASC 250 - Specifies that a change in an
accounting principle made in an interim period
is reported using the retrospective application to
the prechange interim periods for the direct
effects of the change.

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 Accounting Issues

 Accounting pronouncements on interim

reporting
 ASC 740 - Tackles the problems of measuring the
tax provision for interim reports when the actual
tax expense is based on annual income.
 IAS 34 - International Financial Reporting
Standards for interim reporting; similar to those
of U.S. GAAP.

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Reporting Standards for Interim Income
Statements

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 Reporting Standards for Interim Income
Statements
 Revenue
 The measurement basis used in an interim
period should be the same as that used for the
full fiscal year.
 Revenue from seasonal businesses cannot be
manipulated to eliminate seasonal trends.

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 Reporting Standards for Interim Income
Statements
 Cost of goods sold and inventory
 General rule: Interim cost of goods sold should
be computed with the direct and allocated cost
elements on the same basis as used to compute
the annual cost of goods sold.
 ASC 270 and ASC 740 does permit the following
practical modifications to this rule:
 Use estimated gross profit rates
 LIFO temporary liquidations
 Lower-of-cost-or-market valuations
 Standard cost systems

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 Reporting Standards for Interim Income
Statements
 All other costs and expenses
 General principle: Costs and expenses should be
charged to interim income in the interim period
in which they are incurred.
 Some costs and expenses however, are allocated
among the interim periods based on:
 An estimate of time used
 An estimate of benefit received, or
 Activity level of the interim period

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 Reporting Standards for Interim Income
Statements
 Income taxes in interim periods
 The first step is to determine the effective annual
tax rate for use in computing the interim income
tax provision.
 The estimated rate includes all anticipated tax
credits, state income taxes, foreign income taxes,
capital gains taxes, and other tax planning efforts
expected for the full fiscal.
 The estimate is updated each interim period and
the interim tax provision or benefit is then
determined.
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 Reporting Standards for Interim Income
Statements
Income taxes in interim periods
 Items such as unusual or infrequent events,
discontinued operations, and extraordinary
items are not included in the estimate.
 Differences between book and tax income
 “Permanent” or nontemporary differences
 “Temporary” differences
 Loss carryback and carryforward provisions
apply only to annual results, not to interim
results.
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 Reporting Standards for Interim Income
Statements
 Disposal of a component or extraordinary,
unusual, infrequently occurring, and
contingent items
 Measurement and reporting on the same bases
as used to prepare the annual report.
 Extraordinary items, discontinued operations,
and unusual and infrequently occurring items
should be reported in the interim period in
which they occur.
 The materiality test for extraordinary items
should be based on the income estimate for the
entire fiscal year. 13-43
 Reporting Standards for Interim Income
Statements
 Disposal of a component or extraordinary,
unusual, infrequently occurring, and
contingent items
 The materiality test for discontinued operations
and unusual and infrequent transactions should
be based on the operating income of the interim
period in which the discontinued operations are
first reported.
 Contingencies that could affect the company also
must be disclosed on the same basis as that used
in the annual report.
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 Accounting Changes in Interim Periods

 Change in an accounting principle

 Requires retrospective application.
 Only the direct effects of the change, including
any related tax effects, are included in the
retrospective application.
 A change from an accounting principle not
generally accepted to a generally accepted
accounting principle is a correction of an error,
requiring restatement of all prior financial
statements.

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 Accounting Changes in Interim Periods

 Change in an accounting estimate

 The result of new information that becomes
available to the entity.
 These changes are reported on a current and
prospective basis only.

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 Accounting Changes in Interim Periods

 Change in a reporting entity

 Requires retrospective application.
 Primary examples of changes:
 Presenting consolidated or combined financial
statements rather than individual statements for
the separate entities.
 Changing the specific subsidiaries that comprise
the consolidated entity for which consolidated
financials are presented.
 Changing the entities that are included in
combined financial statements.

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 Accounting Changes in Interim Periods

 International Financial Reporting

Standards for accounting changes
 IAS 8 provides the accounting treatment and
disclosures for changes in accounting policies,
changes in accounting estimates, and corrections
of errors.
 The international standards for these changes
are very similar to U.S. GAAP.

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Practice Quiz Question #4
Which of the following is NOT an item
required in quarterly financial reports?
a. An income statement for the quarter.
b. Income statements for the cumulative
year-to-date time period.
c. A condensed balance sheet at the end of
the current quarter.
d. A statement of cash flows at the end of the
current cumulative year-to-date period.
e. Footnotes that update those in the last
annual report .
f. Statement of retained earnings
g. MD&A for the period.
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Practice Quiz Question #4 Solution
Which of the following is NOT an item
required in quarterly financial reports?
a. An income statement for the quarter.
b. Income statements for the cumulative
year-to-date time period.
c. A condensed balance sheet at the end of
the current quarter.
d. A statement of cash flows at the end of the
current cumulative year-to-date period.
e. Footnotes that update those in the last
annual report .
f. Statement of retained earnings
g. MD&A for the period.
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Conclusion

The End

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