Advanced Accounting by Debra Jeter and Paul Chaney Chapter 15: Reporting for Segments and for Interim Financial Periods Slides Authored by Hannah Wong, Ph.D. Rutgers University

Need for Disaggregated Financial Data lDifferent industries or geographic areas may have different n rates of profitability n growth opportunities n types of risks lDifficult to analyze a firm engaging in several industries or geographic areas based on aggregated information

Segmental Disclosures lAdvantage n unveiling of information that has been merged in the consolidated data lDisadvantages n may be misleading due to classification and allocation problems, lack of user knowledge, etc. n disclosure to competing firms and labor unions n information overload for users

Common Cost Allocation - Which? lCommon costs should be allocated to a segment for external reporting purposes only if they are included in the segment’s internal profit or loss calculations

Common Cost Allocation - How? Steps lJoint costs are accumulated into logical and relatively homogeneous expense pools lThe pools are allocated to segments on the basis of beneficial or casual relationships as measured by activity or output of the segments

Common Cost Allocation - How? Data processing expenses Joint costs Expense pools Segments Centralized warehouse expenses

Operating Segment Definition: lIt is a component of the firm that engages in business activities that earns revenues and incur expenses lThe entity’s chief operating decision maker regularly reviews the component’s operating results lDiscrete financial information is available

Determining Operating Segments lModified management approach n focus on the way in which management organizes segments internally to make operating decisions and to assess performance laggregation criteria lquantitative thresholds

Aggregation Criteria An entity is permitted to aggregate operating segments which are similar in all the following areas: n nature of their products or services n nature of the production process n types or classes of customers n methods used to distribute products or provide services n nature of regulatory environment

Quantitative Thresholds A segment is significant enough to be a reportable segment if : n its combined external and internal revenue > 10% of the combined external and internal revenue of all reportable segments; n its reported profit or loss > 10% of the total gross profit (loss) of all operating segments reporting a profit (loss); or n its assets > 10% of combined assets of all operating segments

% Combined Revenue Test C ombined sales to unaffiliated customers of all reportable segments Combined sales to unaffiliated customers of all operating segments > 75% Must be If the 75% test is not met, additional segments must be identified

Segmental Disclosure Requirements n general information n segment operating profit or loss n segment assets n bases for measurement n reconciliation of segment amounts and consolidated amounts for  revenue  profit or loss  assets  other significant items

n interim disclosures n enterprisewide disclosures  product or service  geographic area  major customers - each customer representing 10% or more of total enterprise revenues n methods of presentation  financial statements  footnotes to the financial statements  separate schedule Segmental Disclosure Requirements

Geographic Area loperations in foreign countries should be grouped on the basis of n proximity n economic affinity n similarities of business environments n nature, scale, and degree of interrelationship of the operations in the various countries

Major Customers lPurpose: To provide information about dependency on one or more major customers lDisclosure requirement n each customer representing 10% or more of total enterprise revenues n customers who are federal, state, local, or foreign government n amount of sales n segment making the sales

Interim Financial Reporting lPurpose: to provide timely financial information for investment decision making lSEC disclosure requirement: Form 10-Q n comparative income statements for the quarter and year-to-date for the current and preceding year n comparative statements of financial position at the end of the most recent quarter for the current and preceding year

Interim Reporting - Inventory Costing n COGS can be estimated using gross profit rate n Liquidated LIFO base should be charged at replacement cost if expected to be replaced by year end n Inventory loss from market declines expected to recover before year end need not be recognized n Price and volume variances under standard costing should be deferred if expected to be absorbed by year end

Interim Reporting - Income Taxes estimate effective tax rate for the full year year-to-date tax provision current quarter’s tax provision income of year-to-date year-to-date tax provision estimated tax rate tax provision up to preceding quarter = = x _ Steps (1) (2) (3)

Interim Reporting - Income Taxes Income tax expense42,300 Income tax payable42,300 To record income tax provision for the first quarter as: (actual first quarter income) x (estimated tax rate for the year) = $15,000 x 28.2% First Quarter JE

Interim Reporting - Income Taxes Income tax expense48,900 Income tax payable48,900 Second Quarter JE Year to date tax provision = $42,300 First quarter Second quarter Year to date tax provision = $91,200 Difference = $48,900

Interim Reporting - Accounting Changes lChanges in estimate n accounted for in the interim period when the change is made n no restatement of previous interim reports n effect on earnings disclosed for current and subsequent interim periods

Interim Reporting - Accounting Changes lChanges in principle n if the change occurs in the first quarter: the cumulative effect should be included in the first quarter income. n if the change occurs in other than the first quarter: the cumulative effect should be shown as if it had occurred in the first quarter. All other quarters should be restated using the new method.

Interim Reporting - Minimum Disclosure n Gross revenues, income tax provisions, extraordinary items, cumulative effect of a change in accounting principles, net income n basic and diluted EPS n seasonal revenue, or expenses n segment disposal; extraordinary, unusual or infrequent items n contingent items n changes in accounting principles or estimates n significant changes in financial position

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