Kế toán, kiểm toán - Chapter eight: Eegment and interim reporting

Chapter EightSegment and Interim ReportingCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 8-1Understand how an enterprise determines its operating segments and the factors that influence this determination.Rationale for Segment ReportingSegment reporting provides information to help users of financial statements to:Better understand the entity’s performance.Better assess the entity’s prospects for future net cash flow.Make more informed judgments about the enterprise as a whole.The Management ApproachAn operating segment is a component of an enterprise:That engages in business activities from which it earns revenues and incurs expenses,Whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions,For which discrete financial information is available.Learning Objective 8-2Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.Determining SegmentsManagement must consider these aggregation criteriato determine whether to combine operating segments:nature of the products or services provided by each operating segment.nature of the production process.type or class of customer.distribution methods.nature of the regulatory environment.Quantitative ThresholdsA Segment is considered reportable if it satisfies one of these tests:Revenue test - Its revenues are 10% or more of the combined revenue of all segments.Profit or Loss test - Its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit.Asset test - Its assets are 10% or more of the combined assets of all operating segments.Reportable Segments - ExampleRevenue Test:Atkinson Company is a business with the following six segments. Reportable Segments - ExampleBased on the test for revenue, three of the following segments will be reportable (they exceed 10% of $97.8 million):Reportable Segments - ExampleAtkinson’s six segments had the following financial results:Profit or Loss Test:Reportable Segments - ExampleThe individual profits and losses are compared to 10% of the LARGER of the profit and loss totals, and four are determined to be reportable because they are greater than $1.65 million = ($16.5 X .10).Reportable Segments - ExampleAtkinson’s segments have the following total assets in each segment. Any segment with assets that are 10% or more of the combined assets total is reportable. The Asset Test: Reportable Segments - ExampleThree of Atkinson’s segments have at least 10% of the total assets ($4.43 million):Reportable Segments - ExampleBecause four of Atkinson’s operating segments meet at least one of the quantitative tests, they are considered reportable.Operating Segment Tests - Other GuidelinesThe combined sales revenues of the disclosed segments must be at least 75% of total company sales, excluding intra-entity sales.Segments must be added until the 75% test is met (even if the additional segments do not meet the reportable segment criteria).Although a maximum number is not prescribed, authoritative literature suggests that 10 separately reported segments might be the practical limit.Learning Objective 8-3List the basic disclosure requirements for operating segments.Required Segment DisclosuresA company is required to disclose general information about each operating segment. Segment profit or lossRevenuesInterest revenue and expenseDepreciation, depletion and amortization expenseSignificant noncash and unusual items Income Tax expense or benefitInvestment in equity method affiliatesTotal assetsCapital expendituresOther Enterprise DisclosuresProducts & ServicesGeographic AreasMajor Customers The company must also disclose additional information regarding . . . Products & Services GAAP 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. Learning Objective 8-4Determine when and what types of information must be disclosed for geographic areas.Geographic Areas Revenues from external customers and long-lived assets must be disclosed for:The domestic country.All foreign countries where the enterprise derives revenue or holds assets.Each foreign country in which a material amount of revenue is derived or assets are held.Learning Objective 8-5Apply the criterion for determining when disclosure of a major customer is required.Major CustomersWhen 10% or more of a company’s revenue is derived from one or more customer, the company MUST disclose all of the companies as major customers.The IDENTITY of the major customer need not be disclosed.Learning Objective 8-6Recognize differences between U.S. GAAP and IFRS in segment reporting.IFRS and Segment ReportingIFRS and GAAP are substantially the same, exceptIFRS requires disclosure of total assets AND liabilities if that information is provided to the chief decision maker.IFRS specifically includes intangible assets as long-lived assets.In a company with a matrix form of organization, IFRS permits operating segments to be based on geographic area, as opposed to products/services.Learning Objective 8-7Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.Interim ReportingTo provide more timely information, the SEC requires quarterly financial statements from publicly-traded companies in the U.S.But how do the statements fairly reflect expenses that do not occur evenly throughout the year?Interim ReportingThere are two possible approaches:Discrete – the accounting period stands on its own.Integral – treat the accounting period as a portion of a longer period.FASB ASC 270 requires companies to use the Integral Approach.Interim Reporting - RevenuesRevenues are recognized in the interim periods in which they are earned.Revenues from long-term contracts should be recognized using the same methodology as used on an annual basis. A company should recognize projected losses on long-term contracts to their full extent in the interim period in which it becomes apparent that a loss will arise.Interim Reporting - Inventory and Cost of Goods SoldLIFO 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.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.Interim Reporting - Expenses To provides for less volatility of information:Expenses that are not incurred evenly throughout the year should be predicted early in the year and allocated to each of the interim reporting periods. Costs not directly matched to revenues should be allocated among interim periods on a reasonable basis through the use of accruals and deferrals.Interim Reporting – Other ItemsExtraordinary Items should be reported separately and in full 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.A change in accounting principles should be reported as if it occurred in the first interim period shown. (This may require restatement.)Learning Objective 8-8List the minimum disclosure requirements for interim financial reports.Interim Reporting – Minimum DisclosuresEPSSeasonal Revenues & ExpensesProvision for Income Taxes (and significant changes in estimates)Sales or Gross RevenuesUnusual or Extraordinary ItemsOther significant changesNet IncomeDisposal of a Business SegmentContingent itemsInterim Reporting – Segment DisclosuresGAAP requires the following interim disclosure for each reportable operating segment:Revenues from external customersIntersegment revenuesSegment profit or lossTotal assets (if there has been a material change from the last annual report)There are no interim disclosure about major customers or geographic areas.Learning Objective 8-9Recognize differences between U.S. GAAP and IFRS in interim reporting.IFRS -- Interim ReportingIAS 34 requires the following minimum components in an interim report:Condensed statement of financial position (balance sheet).Condensed statement of comprehensive income, presented as:A condensed single statement of net income and comprehensive income, or Separate condensed statements of net income and comprehensive income.Condensed statement of changes in equity.Condensed statement of cash flows.Selected explanatory notes.IFRS - Interim ReportingIAS 34 requires each interim period to be treated as a discrete period in determining the amounts to be recognized. Expenses that are incurred in one quarter are recognized in full in that quarter, even though the expenditure benefits the entire year. No accrual of expenses in earlier quarters for expenses expected to be incurred in a later quarter of the year. The only exception to this rule is the accrual of income tax expense at the end of each interim period.