© The McGraw-Hill Companies, Inc., 2004 Slide 8-1 McGraw-Hill/Irwin Chapter Eight Segment and...

© The McGraw-Hill Companies, Inc., 2004

Slide 8-1

McGraw-Hill/Irwin

Chapter Eight

Segment and Segment and Interim Interim

ReportingReporting


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McGraw-Hill/Irwin

FASB Statement No. 131

. . . Any single segment made up 90% of a

company’s revenues, profit or loss, and identifiable assets.

. . . Any single segment made up 90% of a

company’s revenues, profit or loss, and identifiable assets.

SFAS No. 14 SFAS No. 14 provided that a provided that a company could company could avoid industry avoid industry

segment segment disclosures if . . . disclosures if . . .

SFAS No. 14 SFAS No. 14 provided that a provided that a company could company could avoid industry avoid industry

segment segment disclosures if . . . disclosures if . . .

In 1996, McDonald’s reported having a dominant industry segment and avoided

industry segment disclosure.

In 1996, McDonald’s reported having a dominant industry segment and avoided

industry segment disclosure.


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The special AICPA Committee on Financial Reporting acknowledged that

companies reporting a dominant segment were common . . .

The special AICPA Committee on Financial Reporting acknowledged that

companies reporting a dominant segment were common . . .

In 1997, the Committee’s work resulted in the issuance of

SFAS No. 131 to address the shortcomings of SFAS no. 14

Continue


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Changes to required segment

disclosures.

Changes how segments are determined.


Disclosures about Segments of an Enterprise and Related Information



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Uses the Management Approach to determine segments.

Reportable segments must be operating segments of the company.

Look at the internal reporting system for guidance.

Segment information must be reported for each operating segment that meets one of three tests.

Similar operating segments may be combined.




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How Management disaggregates the enterprise for decision-making purposes will determine which operating segments exists

However, a segment is a component of a company: That engages in business activities from which it earns revenues

and incurs expenses Whose operating results are regularly reviewed by management to

assess performance and allocate resources From which discrete financial information is available.

Additionally (applicable in mixed structures): 1. an operating segment has a segment manager2. If a matrix reporting structure exists e.g. by product and by

geographical region, then the product segment is used

What is an operating segment? What is an operating segment?


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Five similarities must exist before combining segments:

Nature of the products/services provided by each operating segment.

Nature of the production process. Type or class of customer. Distribution methods. Nature of the regulatory

environment. (if applicable)



See Comprehensive example for application of this


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Operating Segment Tests

There are three tests for identifying a Reportable Industry Segment.

1. Revenue Test

2. Operating Profit/Loss Test

3. Identifiable Assets Test

Only one test has to be satisfied for a segment to be reportable.

There are three tests for identifying a Reportable Industry Segment.

1. Revenue Test

2. Operating Profit/Loss Test

3. Identifiable Assets Test

Only one test has to be satisfied for a segment to be reportable.


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Operating Segment TestsRevenue Test

Does a segment’s total revenue equal or

exceed 10% of the combined revenue of

all the industry segments of the

company?Note: Total revenue

includes inter-segment sales.


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Operating Segment TestsProfit or Loss Test

Does the absolute amount of operating profit or loss for each segment equal or exceed

10% of the larger of . . .

. . . the absolute value of the combined operating profit of all industry segments that

did not incur an operating lossOR

. . . the absolute value of the combined operating loss of all industry segments that

incurred an operating loss?

Note - If common costs (expenses) are not normally allocated among segments for internal reporting then they can be excluded when determining the segment profit/loss applicable for this test


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Operating Segment TestsIdentifiable Assets Test

Does a subunit’s identifiable assets equal or exceed 10% of

the combined identifiable assets of all operating segments of the

company?


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Operating Segment TestsOther Guidelines

The combined external sales revenues of the disclosed segments must equal or

exceed 75% of the total company external sales.

(i.e. Inter-segment sales are excluded from this test)

Segments must be added until the 75% test is met, even if the additional segments

do not meet the reportable segment criteria.

Do not disclose more than 10 segments.

The combined external sales revenues of the disclosed segments must equal or

exceed 75% of the total company external sales.

(i.e. Inter-segment sales are excluded from this test)

Segments must be added until the 75% test is met, even if the additional segments

do not meet the reportable segment criteria.

Do not disclose more than 10 segments.

¾


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Operating Segment Tests

Reportable Segment information is reported in the Notes to the Financial Statements.

Required information includes: Segment Revenue Segment Operating Income (or

Loss) Identifiable Segment Assets Other related disclosures

Reportable Segment information is reported in the Notes to the Financial Statements.

Required information includes: Segment Revenue Segment Operating Income (or

Loss) Identifiable Segment Assets Other related disclosures


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Operating SegmentsExample

Examine the information for Rapid

Send, Inc.

Test each product line to determine whether it must be disclosed

as a reportable segment.


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Rapid Send, Inc.Segment Reporting Revenue Test

Total 10% of IsCompany Total Segment Segment

Division Revenue Revenue Revenue Reportable?

Clothing 1,630,000$ 163,000$ Parts 1,630,000$ 163,000 Home 1,630,000$ 163,000 Car 1,630,000$ 163,000 Food 1,630,000$ 163,000


Enter the revenue for each

segment.

Enter the revenue for each

segment.


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Clothing 1,630,000$ 163,000$ 120,000$ ?Parts 1,630,000$ 163,000 150,000 ?Home 1,630,000$ 163,000 265,000 ?Car 1,630,000$ 163,000 955,000 ?Food 1,630,000$ 163,000 140,000 ?



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Clothing 1,630,000$ 163,000$ 120,000$ NOParts 1,630,000$ 163,000 150,000 NOHome 1,630,000$ 163,000 265,000 YESCar 1,630,000$ 163,000 955,000 YESFood 1,630,000$ 163,000 140,000 NO



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Enter the absolute value of the profit or loss

for each segment.

Enter the absolute value of the profit or loss

for each segment.


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Rapid Send, Inc.Segment Reporting Identifiable Assets Test

Company 10% of Segment IsIdentifiable Identifiable Identifiable Segment

Division Assets Assets Assets Reportable?

Clothing 1,520,000 152,000 Parts 1,520,000 152,000 Home 1,520,000 152,000 Car 1,520,000 152,000 Food 1,520,000 152,000


Enter total assets for each segment.

Enter total assets for each segment.


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Clothing 1,520,000 152,000 120,000 ?Parts 1,520,000 152,000 100,000 ?Home 1,520,000 152,000 400,000 ?Car 1,520,000 152,000 600,000 ?Food 1,520,000 152,000 300,000 ?



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Clothing 1,520,000 152,000 120,000 NOParts 1,520,000 152,000 100,000 NOHome 1,520,000 152,000 400,000 YESCar 1,520,000 152,000 600,000 YESFood 1,520,000 152,000 300,000 YES



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Rapid Send, Inc.Segment Reporting Test Summary

Does segment meet the . . .Net Identifiable Is

Revenue Income Assets SegmentDivision Test Test Test Reportable?

Clothing NO YES NO ?Parts NO NO NO ?Home YES YES YES ?Car YES NO YES ?Food NO YES YES ?



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Clothing NO YES NO YESParts NO NO NO NOHome YES YES YES YESCar YES NO YES YESFood NO YES YES YES



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Clothing NO YES NO YESParts NO NO NO NOHome YES YES YES YESCar YES NO YES YESFood NO YES YES YES

The Parts segment did not meet any of the three

tests and so it is not reportable.

The Parts segment did not meet any of the three

tests and so it is not reportable.



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In addition, the 75% test must be met.

Total revenues, excluding inter-segment revenues, are $1,265,000.

75% of $1,265,000 is $948,750.

Combined sales, excluding inter-segment sales, for the Clothing, Home, Car, and Food segments

is $1,195,000.

$1,195,000 > $948,750

Therefore, no other segments must be reported.

In addition, the 75% test must be met.

Total revenues, excluding inter-segment revenues, are $1,265,000.

75% of $1,265,000 is $948,750.

Combined sales, excluding inter-segment sales, for the Clothing, Home, Car, and Food segments

is $1,195,000.

$1,195,000 > $948,750

Therefore, no other segments must be reported.



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Reconciliation of Segment Information

The company must prepare a reconciliation between the reportable segment’s

1. Revenues and consolidated revenues

2. Profit or loss and the Company’s income before tax as a whole

3. Assets and the Company’s total assets

Adjustments and eliminations must be identified

The company must prepare a reconciliation between the reportable segment’s

1. Revenues and consolidated revenues

2. Profit or loss and the Company’s income before tax as a whole

3. Assets and the Company’s total assets

Adjustments and eliminations must be identified


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Other Enterprise Disclosures

1. Products & Services

1. Products & Services

2. Geographic Areas

2. Geographic Areas

3. Major Customers3. Major

Customers

The company must also disclose additional information regarding . . .

The company must also disclose additional information regarding . . .


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Disclosures about . . . 1. Products and Services

In 2001, Lowes In 2001, Lowes made product made product disclosures disclosures even though even though they reported they reported one dominant one dominant

segment.segment.

In 2001, Lowes In 2001, Lowes made product made product disclosures disclosures even though even though they reported they reported one dominant one dominant

segment.segment.

SFAS No. 131 requires disclosure of revenues

derived from transactions with

external customers from each product or service if operating segments have not been determined

based on differences in products and

services.

SFAS No. 131 requires disclosure of revenues

derived from transactions with

external customers from each product or service if operating segments have not been determined

based on differences in products and

services.


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Disclosures about . . . 2. Geographic Areas

(1) Revenues from external customers and

(2) long-lived assets must be disclosed for …

1. The domestic country.

2. All foreign countries in which the enterprise derives revenues or holds assets.

3. Each foreign country in which a material amount of consolidated (i.e. external) revenues is derived or assets are held.

(1) Revenues from external customers and

(2) long-lived assets must be disclosed for …

1. The domestic country.

2. All foreign countries in which the enterprise derives revenues or holds assets.

3. Each foreign country in which a material amount of consolidated (i.e. external) revenues is derived or assets are held.

In 1998, IBM In 1998, IBM reported that reported that 44% of their 44% of their

revenues came revenues came from the U.S. from the U.S.

and 10% came and 10% came from Japan.from Japan.

In 1998, IBM In 1998, IBM reported that reported that 44% of their 44% of their

revenues came revenues came from the U.S. from the U.S.

and 10% came and 10% came from Japan.from Japan.

Profit/ loss is no longer required as was the case with SFAS14


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Disclosures about . . . 3.Major Customers

In 2001, Briggs In 2001, Briggs & Stratton & Stratton reported reported

significant sales significant sales to three “major to three “major

engine engine customers . . .”customers . . .”

In 2001, Briggs In 2001, Briggs & Stratton & Stratton reported reported

significant sales significant sales to three “major to three “major

engine engine customers . . .”customers . . .”

Whenever 10% or more of a company’s consolidated revenues is derived from a

single customer . . .

. . . The company must disclose that it has a “major” customer.

The IDENTITY of the “major” customer does

not have to be disclosed.

Whenever 10% or more of a company’s consolidated revenues is derived from a

single customer . . .

. . . The company must disclose that it has a “major” customer.

The IDENTITY of the “major” customer does

not have to be disclosed.

BRIGGS & STRATTON


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Interim Reporting - APB Opinion 28

Mandatory for SEC Companies: Interim = Quarterly

Requires that interim periods be treated as “integral” parts of the fiscal period.

Expenses, such as bonuses, must be predicted early in the year and allocated to each of the interim reporting periods.

Mandatory for SEC Companies: Interim = Quarterly

Requires that interim periods be treated as “integral” parts of the fiscal period.

Expenses, such as bonuses, must be predicted early in the year and allocated to each of the interim reporting periods.


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Interim Reporting: 1-Revenues

Revenues are recognized in the interim periods in which they are

earned.

Revenues are recognized in the interim periods in which they are

earned.

Revenue from long-term contracts should be recognized on the % of completion basis.

Revenue from long-term contracts should be recognized on the % of completion basis.

Losses from long-term contracts should be recognized fully in the

interim period in which they become apparent.

Losses from long-term contracts should be recognized fully in the

interim period in which they become apparent.


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Interim Reporting:2-Inventory and Cost of Goods Sold

LIFO LiquidationsInterim period gross profit

should not reflect gains resulting from “temporary” LIFO

liquidations.

LIFO LiquidationsInterim period gross profit

should not reflect gains resulting from “temporary” LIFO

liquidations.

Standard Costing Variances that are expected to be absorbed by year-end should

not be recognized in the

interim period.

Standard Costing Variances that are expected to be absorbed by year-end should

not be recognized in the

interim period.

Lower -of-Cost-or-MarketInventory write-downs should be

reflected in interim period numbers if the market value is

not expected to recover by year-end.

Lower -of-Cost-or-MarketInventory write-downs should be

reflected in interim period numbers if the market value is

not expected to recover by year-end.


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Interim Reporting:3-Other Issues

Extraordinary ItemsIf material (when compared to expected income for the year),

disclose separately.

Extraordinary ItemsIf material (when compared to expected income for the year),

disclose separately.

Income TaxesInterim tax should be computed at an estimated annual effective tax rate.

Income TaxesInterim tax should be computed at an estimated annual effective tax rate.

Cumulative Effect of an Accounting ChangeAccounting changes occurring at any time during the year should be retroactively reported in the 1st interim

period.

Cumulative Effect of an Accounting ChangeAccounting changes occurring at any time during the year should be retroactively reported in the 1st interim

period.

Hey, pal! You getting’ this down?

To the extent possible, annual costs should be accrued at interim periods


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Interim ReportingOther Items

Expenses not directly matched with revenues should be charged to

income in the interim period in which they occur.

Expenses not directly matched with revenues should be charged to

income in the interim period in which they occur.

Income Taxes for each interim period should be computed based on an

estimated annual effective tax rate.

Income Taxes for each interim period should be computed based on an

estimated annual effective tax rate.

Extraordinary Items should be reported

separately and in full in the interim period in

which they occur.

Extraordinary Items should be reported

separately and in full in the interim period in

which they occur.


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Interim ReportingSFAS No. 3

Cumulative Effect of Accounting Changes

Cumulative Effect of Accounting Changes

Reported in full in the FIRST interim period of the fiscal year.

Reported in full in the FIRST interim period of the fiscal year.

Even if the change occurs in a later interim period, the FIRST

period must be restated to include the cumulative effect of

the accounting change.

Even if the change occurs in a later interim period, the FIRST

period must be restated to include the cumulative effect of

the accounting change.


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Interim Reporting:Minimum Disclosures

EPSEPS

Seasonal Revenues & Expenses

Seasonal Revenues & Expenses

Significant changes in estimates

Significant changes in estimates

Disposal of a segment

Disposal of a segment

Changes in accounting principles

Changes in accounting principles

Contingent items

Contingent items

Sales, income taxes, extraordinary items, cum effect of change

in accounting principles and net

income

Sales, income taxes, extraordinary items, cum effect of change

in accounting principles and net

income


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THE ENDTHE END

1. The following segment information is required for interim reports:

• External revenues

• Inter-segment revenues

• Segment profit or loss

• Total assets

2. A reconciliation to the company totals (where applicable) is still required

3. Segment information is not required until the second year that a company applies SFAS131

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