Segment and Interim Financial Reporting

1. Segment and InterimFinancial Reporting Chapter 14

2. Learning Objective 1 Understand the management approach to segment reporting.

3. Identifying Reportable Segments Segments determined by the management approach are called operating segments. Statement 131characterizes an operating segment as a component of an enterprise…

4. Identifying Reportable Segments (1) that engages in business activities from which it may earn revenues and incur expenses; (2) whose operating results are regularly reviewed by the chief decision maker; and (3) for which discrete financial information is available.

5. Aggregation Criteria An enterprise may combine similar operating segments if aggregation is consistent with the objectives of StatementNo. 131 and the segments have similar economic characteristics.

6. Quantitative Thresholds Operating segments are reportable if they meet materiality thresholds. Once reportable segments are identified, all other operating segments are combined with other business activities in an “all other” category for reporting purposes.

7. Reconsideration ofReportable Segments Reported segments must include 75% of all external revenue. If reportable segments do not meet this criterion, additional segments must be identified as reportable, even if they do not meet the quantitative thresholds.

8. Learning Objective 2 Apply reportable operating segment tests.

9. Illustration of the Tests forReportable Operating Segments Phil-Brown Corporation applies the three materiality tests. Revenue test Asset test Operating profit test

10. Revenue Test Operating Reportable Segment’s Intersegment Test Value Segment Under Revenue Revenue (10% × $670,000) Revenue Test? Food $150,000 $ 0  $67,000 Yes Paper 170,000 200,000  67,000 Yes Copper 40,000 0 < 67,000 No Finance 60,000 50,000 67,000 Yes Total $420,000 $250,000

11. Asset Test Operating Reportable Segment’s Segment Identifiable Test Value Under Asset Assets (10% × $1,010,000) Test? Food $ 200,000  $101,000 Yes Paper 250,000  101,000 Yes Copper 60,000 < 101,000 No Finance 500,000 101,000 Yes Total $1,010,000

12. Operating Profit Test Reportable Operating Operating Segment Segment’s Segment’s Under Operating Operating Test Value Operating Profit Loss (10% × $130,000) Profit Test? Food $ 25,000  $13,000 Yes Paper 55,000  13,000 Yes Copper $(10,000) < 13,000 No Finance 50,000  13,000 Yes Total $130,000 $(10,000)

13. Learning Objective 3 Comprehend segment disclosure and enterprisewide disclosure details.

14. Segment Disclosures The basis of organization used by the chief operating decision maker to determine operating segments must be disclosed. Any aggregation of operating segments used in arriving at these reportable segments must also be disclosed.

15. Segment Disclosures Profit/loss and asset information Measurement Reconciliation requirements

16. Enterprisewide Disclosures Products and services Geographic information Major customers

17. Learning Objective 4 Understand the similarities and differences of interim reporting and annual reporting.

18. Interim Financial Reporting Interim financial reports are commonly issued on a quarterly basis. They typically include cumulative, year-to-date information, as well as comparative information for corresponding periods of the prior year.

19. Nature of Interim Reports Interim financial reports provide more timely, but less complete, information than annual financial reports.

20. Product Costs Gross Profit Method A company can use this method for interim reporting purposes when it does not use the perpetual inventory method.

21. Product Costs LIFO Inventories LIFO inventory layers can be liquidated during an interim period but expected to be replaced by year end. Cost of sales can include the replacement cost of the liquidated LIFO layer if the reduction is determined to be temporary.

22. Product Costs Inventory Market Declines Permanent inventory market declines are recognized in the interim period.

23. Product Costs Standard Cost System Planned variances under a standard cost system that are expected to be absorbed by year end are usually deferred at the interim date.

24. Expenses Other Than Product Costs Annual expenses Advertising costs Income taxes

25. Learning Objective 5 Compute interim-period income tax expense.

26. Computation of the EstimatedAnnual Effective Tax Rate Small Corporation bases its estimate on the following assumed tax-rate schedule: If Taxable Income Is: But OverNot Over 0 $ 50,000 $ 50,000 75,000 75,000 100,000 100,000 335,000 355,000 – The Tax Is: Of the Pay + ExcessAmount Over 15% 0 $ 7,500 + 25 $ 50,000 13,750 34 75,000 22,250 39 100,000 34 0

27. Small Corporation EstimatedQuarterly Income Tax QuarterEstimated IncomeRateEstimated Tax First $ 20,000 × 15% $ 3,000 Second 30,000 × 15 4,500 Third 25,000 × 25 6,250 Fourth 25,000 × 34 8,500 Totals $100,000 $22,250 $22,250 ÷ $100,000 = 22.25%

28. Small Corporation EstimatedQuarterly Income Tax First Second Third Fourth QuarterQuarterQuarterQuarterFiscal Income year-to-date $20,000 $50,000 $75,000 $100,000 $100,000 Quarterly period income $20,000 $30,000 $25,000 $ 25,000 $100,000 Tax expense (22.25%) – 4,450– 6,675– 5,563– 5,563– 22,250 Net income $15,550 $23,325 $19,438 $ 19,438 $ 77,750 $20,000 × 22.25% = $4,450

29. Learning Objective 6 Grasp both GAAP and SEC interim reporting requirements.

30. Guidelines for PreparingInterim Statements At a minimum (per APB Opinion No. 28), publicly traded companies should report: 1 a Sales or gross revenues b Provision for income taxes c Extraordinary items net of income taxes d Cumulative-effect-type changes in accounting principles e net income

31. Guidelines for PreparingInterim Statements 2 Basic and diluted earnings per share 3 Seasonal revenue, costs, or expenses 4 Significant changes in estimates of income tax expense 5 Disposal of a segment of a business and extraordinary and unusual items 6 Contingent items 7 Changes in accounting principles and estimates 8 Significant changes in financial position

32. Segment Disclosures inInterim Reporting 1 Revenue from external customers 2 Intersegment revenues 3 A measure of segment profit or loss 4 Total assets for which there has been a material change since the last annual report

33. Segment Disclosures inInterim Reporting 5 A description of any differences in the basis of segmentation or measurement of segment profit or loss since the last annual report 6 A reconciliation between segment and total profits

34. SEC Interim Financial Disclosures The SEC requires that quarterly reports be prepared for the company’s stockholders and for filing with the SEC. These reports are to be prepared using GAAP and are filed on Form 10-Q.

35. SEC Interim Financial Disclosures Part I of Form 10-Q contains the following summary of contents: Part I – Financial Information Item 1 – Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 – Management’s Discussion of Financial Condition and Results of Operations

36. SEC Interim Financial Disclosures Companies present comparative balance sheets as of the end of the current quarter and at the prior year-end. Comparative income statements are presented for the current quarter and the same quarter of the prior year plus the current year-to-date and the prior year-to-date.

37. End of Chapter 14