Slide 14-2
14FOCUS OF CHAPTER 14
Objectives and Applicability of FAS 31
Reporting Operating Segment Information
Reporting Enterprise-wide Information Products & services Geographic areas Major customers
Slide 14-3
14 Segment and Related Information Reporting: Objectives
To provide information about a reporting entity’s different types of: Business activities. Economic environments.
Slide 14-4
14 Segment and Related Information Reporting: Objectives
This information should help financial statement users: Better understand past
performance. Better assess prospects for future
net cash flows. Make more informed judgments
about the entity as a whole.
Slide 14-5
14 Segment and Related Information Reporting: Overview & Applicability
Segment and related information reporting under FAS 131 consists of disclosing the following 4 informational items: Operating segments. Products & services. Foreign operations/sales. Major customers.
#1
#3
#2
#4
#2, #3, & #4 are “entity-wide disclosures.” Theyapply to ALL entities--even those having only l segment.
FAS 131
Slide 14-6
14 Segment and Related Information Reporting: Overview & Applicability
Segment and related information reporting is: Needed because of the limitations of
consolidated financial statements. Done in notes to the financial statements. Applicable to:
Both ANNUAL & INTERIM statements. PUBLIC BUSINESS ENTERPRISES
ONLY (excludes not-for-profit entities).
Slide 14-7
14 Segment and Related Information Reporting: Overview & Applicability
Public business enterprises are entities that: Have issued debt or equity securities
that are traded in a public market, Are required to file financial
statements with the SEC, or Provide financial statements for the
purpose of issuing any class of securities in the public market.
Wall Street
Slide 14-8
14 Segment and Related Information Reporting: Overview & Applicability
Segment and related information reporting even applies to the following entities if they issue “separate company ” statements that are NOT in the same FINANCIAL REPORT as a set of consolidated statements: Parent enterprises. Subsidiaries. Joint ventures. Investees--if the equity method is used.
Slide 14-9
14 Segment Reporting:Basis of Segmentation
Disaggregated financial information could be presented in several ways, for example: By products & services (rejected). By geographic area (rejected). By legal entity (rejected). By type of customer (rejected). By organization of the segments for
reporting to management for decision-making (the “management” approach).
Slide 14-10
14 Segment Reporting:Basis of Segmentation
FAS 131 requires :
A SINGLE basis of segmentation.
The MANAGEMENT approach basis of segmentation.
In contrast, FAS 14 (which was superseded byFAS 131) required TWO bases of segmentation--by industry and by geographic areas.
Slide 14-11
14 Segment Reporting:Basis of Segmentation
Merits of the “Management” Approach: Facilitates consistent descriptions
in (1) annual reports and (2) various other published information.
Entities need not develop a separate measure of profitability solely for segment reporting purposes. Thus: A non-GAAP method used internally
is also used for segment reporting.
Slide 14-12
14 Segment Reporting:Basis of Segmentation
The components that management establishes for reporting & decision-making are called OPERATING SEGMENTS. Such components: Engage in activities from which they may
earn revenues and incur expenses. Such activities include revenues and
expenses resulting from transactionswith other segments (calledintersegment transactions).
#1
Slide 14-13
14 Segment Reporting:Basis of Segmentation
Such components (continued): Have their operating results regularly
reviewed by a chief operating decision maker.
#2
#3 Have discrete financial information available.
Slide 14-14
14 Segment Reporting:Basis of Segmentation
What Could Be an Operating Segment: A start-up operation that has yet to
report any revenues. A component of a vertically
integrated operation--providing these operations are managed that way.
Slide 14-15
14 Segment Reporting:Basis of Segmentation
What Could Not Be an Operating Segment: A corporate headquarters. Functional departments that earn either
no revenues or only incidental revenues.
What Is Definitely Not an Operating Segment: An entity’s pension plan. An entity’s postretirement benefit plan.
Slide 14-16
14 Segment Reporting:Disclosures Required
An entity must disclose 4 types of information about its REPORTABLE OPERATING SEGMENTS:
General information. Specified amounts. Reconciliations of specified amounts
to consolidated amounts. Certain interim period information.
1
2
3
4
TYPE
Slide 14-17
14 Segment Reporting: Disclosures Required--General Information
TYPE 1--General Information Disclosures: Factors used to identify the entity’s
reportable segments, including the basisof organization, such as based on: Products and services. Geographic areas. Regulatory environments. A combination of factors.
Types of products & services from which each reportable segment derives its revenues.
Slide 14-18
14 Segment Reporting: Disclosures Required--Specified Amounts Information
TYPE 2--Specified Amounts Disclosures: For each reportable segment, a measure
of: Profit or loss. Total assets (but not liabilities).
Certain account amounts (listed on next
slide) if they are included in the measure of segment profit or loss.
Slide 14-19
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Certain Account Amounts That May Have to Be Disclosed: Revenues from external customers. Intersegment revenues. Interest revenue and interest
expense. Depreciation & amortization expense
and significant other NONCASH items. Unusual items & extraordinary items. Equity method income on investees. Income tax expense or benefit.
Slide 14-20
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #1--LACK OF UNIFORMITY: FAS 131 does NOT define segment operating profit or loss (as did FAS 14, its predecessor). Thus any measure of performance
may be displayed--AS LONG AS THAT MEASURE OF PERFORMANCE IS REVIEWED BY THE CHIEF OPERATING DECISION MAKER.
Slide 14-21
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #2--Terminology: In dealing with segment reporting, the term “intercompany” is NOT RELEVANT. The RELEVANT terms are: Intersegment (sales between segments). Intrasegment (sales between components
of a vertically integrated operation deemed to be a single operating segment).
Slide 14-22
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #3--Terminology: In presenting operating segment information: Intersegment sales must be disclosed
separately ONLY IF they are included in the measure of profitability.
Intrasegment sales need NOT be disclosed.
Slide 14-23
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #4--Transfer Pricing: FAS 131 did not establish a basis
for setting prices for sales or transfers either between or within segments.
Transfer pricing is more likely to bean issue within vertically integrated operations than between nonvertically integrated segments.
Slide 14-24
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #5--Allocations: A segment’s expenses (used in its measure of operations) may include BOTH: Directly traceable costs and Allocated common costs (costs that
benefit two or more segments). Costs that are allocated must be
allocated on a reasonable basis.
#1
#2
Slide 14-25
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #6--Nonallocations: Common costs need not be allocated
to or between segments. Costs accounted for on a consolidated
basis need not be allocated to segments (e.g. pension costs).
Slide 14-26
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #7--Asymmetrical Allocations: Permitted in determining a segment’s: Measure of profitability Total assets.
Thus depreciation expense could be allocated to a segment but the related fixed assets could not.
Slide 14-27
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #8--R&D Costs: Disclosure of segment research & development costs is NOT required because: Doing so could result in competitive
harm by providing competitors with early insight into strategic plans.
R& D costs are often (1) incurred centrally and (2) NOT allocated to segments.
Slide 14-28
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Key Point #9--Liabilities: Disclosure of segment liabilities is NOT required: The value of information about
segment liabilities in assessing segment performance was deemed limited, partly because in many cases liabilities are:
Incurred centrally and NOT allocated to segments.
Slide 14-29
14 Segment Reporting: Disclosures Required--Specified Amounts Information
Additional Asset-Related Disclosures for Reportable Segments--if the items are included in the determination of segment assets: The amount of investment in
equity method investees. Total expenditures for additions to
long-lived assets.
Slide 14-30
14 Segment Reporting: Disclosures Required--Specified Amounts Information
MEASUREMENT--BASIC RULE: Each segment item amount reported must be the measure reported to the chief operating decision maker for assessing performance & allocating resources to the segment. Eliminations & Adjustments Made in
Consolidation: Allocate to a segment ONLY IF they are included in the measure of profit and loss used by the chief operating decision maker.
Slide 14-31
14 Segment Reporting: Disclosures Required--Specified Amounts Information
MEASUREMENT--MULTIPLE MEASURES: If more than one measure of a segment’s profit or loss and assets is used by the chief operating decision maker, the measure selected for segment reporting must be the measure most consistent with: Those used in measuring those items in
the entity’s consolidated financial statements.
Slide 14-32
14 Segment Reporting: Disclosures Required--Specified Amounts Information
MEASUREMENT--DISCLOSURES: For reportable segment’s profit or loss and assets, disclose as a minimum: The basis of accounting for
intersegment transactions. The nature of differences reported
on the specified reconciliations (for P/L and for assets), if not apparent thereon.
#1
#2
Slide 14-33
14 Segment Reporting: Disclosures Required--Specified Amounts Information
MEASUREMENT--DISCLOSURES (cont.): The nature and effect of any changes
from prior periods in the measurement methods used to determine a reported segment P/L .
The nature and effect of any asymmetrical allocations to segments.
#3
#4
Slide 14-34
14 Segment Reporting: Disclosures Required--Reconciliations
TYPE 3--Reconciliations of SPECIFIED Amounts to CONSOLIDATED Amounts: Reconcile the total of the reportable
segments’: Revenues. Measure of profit or loss. Assets. Other significant items of
information disclosed for reportable segments(e.g. liabilities, R&D expense).
Slide 14-35
14 Segment Reporting: Disclosures Required--Interim Period Information
TYPE 4--Certain Interim Period Information: For each reportable segment, disclose:
Revenues from external customers. Intersegment revenues. A measure of profit or loss. Total assets, if a material change from
amount disclosed in last annual report. Changes in the segmentation basis or in
basis of measurement of segment P/L. Reconciliations to consolidated amounts.
Slide 14-36
14 Segment Reporting: Disclosures Required--Cash Flow Information
Reporting segment cash flows is NOT required. An indication of both an operating
segment’s cash-generating ability and its cash requirements may be gathered from the required profitability and asset related disclosures.
Slide 14-37
14 Segment Reporting:Aggregation of Similar Segments
Operating segments that have similar economic characteristics often have similar long-term financial performance.
Thus two or more operating segments may be combined into a single operating segment if 3 criteria (on thenext two slides) are met.
Slide 14-38
14 Segment Reporting:Aggregation Criteria
The Three Aggregation Criteria: Aggregation must be consistent with the
objectives & principles of FAS 131. The segments must have similar
economic characteristics. The segments are similar in each of the
following 5 areas: The nature of the products &
services.
#1
#2
#3
Slide 14-39
14 Segment Reporting:Aggregation Criteria
Segments similar in 5 areas (Cont’d): The nature of the production
processes. The type or class of customer for
their products & services. The methods used to distribute their
products or provide services. If applicable, the nature of the
regulatory environment (e.g. banking, insurance, or public utilities).
Slide 14-40
14 Segment ReportingQuantitative Thresholds--Overview
Not all operating segments are REPORTABLE operating segments.Three 10% tests are performed todetermine if an operating segmentis a reportable operating segment.
ONLY ONE of the three 10% testsneed be passed. The tests involve: REVENUES, PROFITABILITY,
and ASSETS.
Slide 14-41
14 Segment Reporting: Quantitative Thresholds--The 10% Tests
REVENUES: Are the segment’s reported revenues [includes both sales to external customers and intersegment sales or transfers] 10% or more of the combined revenue, internal and external, of ALL reported operating segments?
#1
Slide 14-42
14 Segment Reporting: Quantitative Thresholds--The 10% Tests
PROFITABILITY: Is the absolute amount of the segment’s reported profit or loss 10% or more of the greater, in absolute amount, of the combined reported: PROFIT of all operating profits
that DID NOT report a loss or LOSS of all operating segments
that DID report a loss?
#2
Winners
Losers
Slide 14-43
14 Segment Reporting:Quantitative Thresholds--The 10% Tests
ASSETS: Are the segment’s assets 10%or more of the combined assets of ALL operating segments?
Operating segments that do NOT meet any of the three 10% tests may be COMBINED with Other such operating segments to produce a
reportable segment--ONLY IF they share a majority of the specified aggregation criteria (listed on slides #38 & #39).
#3
Slide 14-44
14 Segment Reporting:Nonreportable Operating Segments
Nonreportable operating segments and other business activities are: Combined and Disclosed in an “ALL OTHER” category.
The Judgment Factor: A reportable segment in the preceding period that does NOT qualify as a reportable segment in the current period may be presented if management deems it to be of continuing significance.
Slide 14-45
14 Segment Reporting:The 75% Test
Determining Reportable Operating Segments: Enough operating segments must be selected
so that at least 75% of the total consolidated revenues (sales to external customers) is included in reportable operating segments.
Describing Reportable Operating Segments: The product or service of each industry
segment must be identified.
Slide 14-46
14 Enterprise-Wide Disclosures: The Three Categories of Information
Three types of enterprise-wide disclosures are called for. Information about: Products and Services. Geographic Areas. Major Customers.
#1
#2
#3
Slide 14-47
14 Enterprise-Wide Disclosures: Products and Services
An entity must report REVENUES FROM EXTERNAL CUSTOMERS--unless it is impractical to do so--for: Each product and service, or Each group of similar products
and services. If it is impractical to disclose this product
and service information, disclose that fact.
Slide 14-48
14 Enterprise-Wide Disclosures: Geographic Areas--General
An entity must report geographic information--unless it is impracticalto do so--for : REVENUES LONG-LIVED ASSETS
If it is impractical to disclose this geographicinformation, disclose that fact.
#1
#2
Slide 14-49
14 Enterprise-Wide Disclosures: Geographic Areas--Revenues
REVENUES--Disclose: Revenues from external customers
located: In the United States.
Outside the United States,in total.
Revenues attributed to an individual
foreign country, if material.
Slide 14-50
14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets
LONG-LIVED ASSETS--Disclose: Long-lived assets located:
In the United States.
Outside the United States,in total.
In an individual foreign country,if material.
Slide 14-51
14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets
Long-lived assets exclude: Financial instruments. Long-term customer relationships
of a financial institution. Mortgage or other servicing
rights. Deferred policy acquisition costs. Deferred tax assets.
Slide 14-52
14 Enterprise-Wide Disclosures: Major Customers
When an entity has revenues from any single customer in excess of 10% of total revenues, disclose: The fact of such revenues. The amount of revenues from each
customer [but not the identity of each].
The industry segment(s) making the salesto each such customer.
#1
#2
#3
Slide 14-53
14 Enterprise-Wide Disclosures:Major Customers
Each is considered a SINGLE customer : A group of entities known to be
under common control. The federal government. A state government. A local government. A foreign government.
Slide 14-54
14Review Question #1
Revtex’s 5 operating segments have total revenues of: #1--$100,000, #2--$200,000, #3--$300,000 (includes intrasegment revenues of $30,000), #4--$400,000, and #5--$500,000 (includes intrasegment revenues of $50,000). The revenues test is based on revenues of:A. $1,420,000 B. $1,450,000 C. $1,470,000 D. $1,500,000
Slide 14-55
14Review Question #1--With Answer
Revtex’s 5 operating segments have total revenues of: #1--$100,000, #2--$200,000, #3--$300,000 (includes intrasegment revenues of $30,000), #4--$400,000, and #5--$500,000 (includes intrasegment revenues of $50,000). The revenues test is based on revenues of:A. $1,420,000 B. $1,450,000 ($1,500,000 - $50,000)C. $1,470,000 D. $1,500,000
Slide 14-56
14Review Question #2
Optex’s 5 operating segments have operating profits and losses of: #1--$100,000, #2--$(200,000), #3--$300,000, #4--$400,000, and #5--$500,000. The operating profit or loss test is based on 10% of:
A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000
Slide 14-57
14Review Question #2--With Answer
Optex’s 5 operating segments have operating profits and losses of: #1--$100,000, #2--$(200,000), #3--$300,000, #4--$400,000, and #5--$500,000. The operating profit or loss test is based on 10% of:
A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000