Chapter 14: Segment and Interim

Financial Reporting
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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 Segment and Interim Reporting:
Objectives
1. Understand how the management approach is
used to identify potentially reportable operating
segments.
2. Apply the threshold tests to identify reportable
operating segments: the revenue test, the asset
test, and the operating profit test.
3. Apply the 75% external revenue test to
determine whether additional segments must be
reported.
4. Understand the types of information that may be
disclosed for segments and the reasons that the
levels of disclosure may vary across companies.
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 Objectives (cont.)
5. Understand what segment disclosures are
reconciled to the consolidated amounts.
6. Know the types of enterprise-wide disclosures
related to products and services, geographic
areas of operation, and major customers that are
required to be disclosed.
7. Understand the similarities and differences in the
reporting of operations in an interim versus an
annual reporting period.
8. Compute interim-period income tax expense.

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Segment and Interim Financial Reporting
1: Reportable Operating Segments

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 Operating Segments
• FASB Statement No. 131 governs segment
reporting
• Firm's internal reporting and evaluation
system:
– If it is geographically based
• External segment reporting is
geographically based
– If it is product-line or industry based
• External reporting is product-line or
industry based
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 Operating Segment (def.)
• A component of a business enterprise
1. Engages in business activities
• Revenues and expenses
• Includes intercompany amounts
2. Operating results are reviewed by chief
operating decision maker
3. Discrete financial information is available

Excludes pension and post-retirement plans,

general corporate headquarters
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 Combining Segments
• Similar economic characteristics
– Products and services
– Production processes
– Classes of customers
– Distribution systems
– Regulatory environment, if applicable

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 Tests of Segments
• Three tests to see if a segment exists:
1. 10% Revenue test
2. 10% Profit or loss test
3. 10% Asset test

• One test to see if sufficient segments have been

identified
1. 75% External revenue test

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Segment and Interim Financial Reporting
2: Threshold Tests

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 Reportable Segments
• Operating segments are reportable and
material if any one of the three threshold tests
are met
1. Revenue test
2. Asset test
3. Profit or loss test

• Segments not meeting any of the three tests

are combined into one "all other" category

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 10% Revenue Test
Segment reported revenue, including
intersegment revenues, is 10% or more of the
combined revenue of all operating segments.
– Combined includes "all other" category
– Intersegment revenues are not eliminated so
that combined revenue may be >
consolidated revenue

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 Example: 10% Revenue Test
Operating Total
segment Intersegment segment Report-
revenue revenue revenue able?
Transportation $360 $0 $360 Yes
Oil refining 405 480 885 Yes
Insurance 95 20 115 No
Financing 140 0 140 No
Total $1,000 $500 $1,500
A segment is reportable if its total revenue ≥ 10% of
combined segment revenue.
Threshold = 10%(1,500) = $150
Transportation ($360) and Oil refining ($885) are
reportable segments.
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 10% Asset Test
Segment assets are 10% or more of combined
assets of all operating segments.
– Combined includes "all other"
– Use the segment's identifiable assets
– General corporate assets
• May be excluded or included
• Consider organization of assets for decision
making purposes
– Combined assets of segments may be less
than total corporate assets
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 Example: 10% Asset Test
Operating segment's
identifiable assets Reportable?
Transportation $700 Yes
Oil refining 950 Yes
Insurance 180 No
Financing 1,170 Yes
Total $3,000
A segment is reportable if its identifiable assets ≥ 10% of
combined segment assets.
Threshold = 10%(3,000) = $300
Transportation, Oil refining, and Financing
are reportable segments.

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 10% Profit or Loss Test
The absolute value of the segment's reportable
profit loss is 10% or more of the greater of:
1. The combined reported profit of all segments
reporting profits, or
2. The absolute value of the combined reported
losses of all segments reporting losses.
– Operating segment profit or loss
• Not defined by GAAP
• Management decision making
– May include or exclude common revenues
and costs

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 Example: 10% Profit or Loss Test
Separate profitable and unprofitable segments.
Segment Segment
operating profit operating loss Reportable?
Transportation (100) Yes
Oil refining 200 Yes
Insurance 20 No
Financing 50 Yes
Total 270 (100)
A reportable segment's |profit or loss| ≥ 10% of the greater
of |combined profits or combined losses|.
$270 is greater than $100.
Threshold = 10%(270) = $27.
Transportation, Oil refining and Finance are reportable
segments.
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Segment and Interim Financial Reporting
3: Test for Additional Segments

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 75% External Revenue Test
• FASB Statement No. 131 requires that the
external revenue of reportable segments must
be at least 75% of the total consolidated
revenue.
– Exclude intersegment revenues
– If reportable segment external revenues do
not sufficient
• Add other segments until the 75% test is met

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 Preliminary Segment Test Results
Based on the 10% revenues, 10% assets, 10%
profit and loss tests:
– Three reportable segments
• Transportation
• Oil refining
• Financing
– One non-reportable segment which becomes
"all other"
• Insurance
Now, check to see if the three are enough!
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 Example: 75% External Revenue
Operating Total
segment Intersegment segment Report-
revenue revenue revenue able?
Transportation $360 $0 $360 Yes
Oil refining 405 480 885 Yes
Insurance 95 20 115 No
Financing 140 0 140 No
Total $1,000 $500 $1,500
Re-examining the schedule for the 10% segment revenue test,
we now look at the operating segment revenue without
intersegment sales data.
Sufficient segments have been identified if reportable
segment revenues ≥ 75% consolidated revenues.
Threshold = 75%(1,000) = $750
$360 + 405 + 140 > $750 … Yes!
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Segment and Interim Financial Reporting
4: Disclosures

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 Disclose for Each Reportable
Segment
Profit or loss Expenses items
Total assets • Interest
• Depreciation, depletion
Revenues from and amortization
• External customers
• Other segments Other income statement
• Interest items
• Income from equity • Unusual items
method investments • Extraordinary items

Significant noncash items

other than depreciation…
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Segment and Interim Financial Reporting
5: Reconciling Segments to
Consolidated Amounts

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 Reconciliations
Reconciliation schedules should be provided to
explain the difference between segment
amounts and consolidated totals

1. Reportable segment revenue to consolidated

revenue
• Intersegment revenues
2. Reportable segment profit and loss to
consolidated income before taxes
• Intersegment revenues, expenses, and
common or allocated costs
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 Reconciliations (cont.)
3. Reportable segment assets to consolidated
assets
• Corporate assets
4. If other significant information is disclosed,
reconcile the segment amounts with
consolidated amounts for each item

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Segment and Interim Financial Reporting
6: Enterprise-wide Disclosures

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 Additional Disclosures
Additional enterprise-wide disclosures
– Needed if not already reported with
segment information
1. Products and services
• Revenues by product/product line, service
2. Geographic information
• Revenues and fixed assets
• Domestic and foreign
• Specific country if > 10%

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 Additional Disclosures (cont.)
3. Major customers
• Customer revenues > 10%
• Revenues
• Segment which has those revenues
• Not required: customer identity

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Segment and Interim Financial Reporting
7: Interim versus Annual Reporting

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 Accounting for Interim Periods
Question about interim periods
In terms of quarterly reports:
Is each quarterly report
separate from the other three quarters of the year,
or is each quarterly report
one of four integral parts of the annual report?

APB Opinion No. 28 says it is an integral part of

the annual report

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 An Integral Part
• As an integral part of the annual report
– Basically follow annual reporting procedures
– May make some modifications to allow more
frequent reporting

• Integral to the annual report

– Quarterly taxes are a portion of the annual
taxes, probably use average effective rate
• Separate reports
– Each quarter bears its own taxes, probably
use marginal tax rate
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 Product Cost Modifications
• Use gross profit method to estimate inventory
and cost of sales
• For LIFO inventories, may assume that
liquidation of layers are temporary, with
replacement of layers before year end
• Lower of cost or market for inventories may
consider expected year end outcomes
• Standard costing variances may be deferred if
expected to be absorbed by year end

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 Other Expense Modifications
• Annual expenses may be allocated
• Advertising expenses may be deferred to later
interim periods if clearly applies
– Only in the same fiscal year
• Income taxes from continuing operations
– Use an estimated effective annual tax rate
• Income taxes on unusual, infrequent and other
items
– Calculate separately and include in the
interim period containing that item
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Segment and Interim Financial Reporting
8: Interim-Period Income Taxes

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 Tax Rates

Interim taxes on operations are based on estimated

effective annual tax rate
If expected annual taxable income = $120,000
Taxes = $22,250 + .39(120,000 – 100,000) = $30,050
Effective tax rate = 30,050 / 120,000 = 25.042%
The 25.042% rate is used for all four quarters.
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 Interim Period Disclosures
Sales or gross revenues Additional items:
1. Basic, diluted EPS
2. Seasonal revenues, costs
Provision for taxes and expenses
3. Significant change in
Extraordinary items, estimated taxes
4. Disposals,
net of tax extraordinary, unusual,
infrequent items
Cumulative effect of 5. Contingent items
accounting changes 6. Changes in accounting
principles or estimates
7. Significant change in
Net income financial position

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 Other Interim Disclosures
• Segment information disclosures are reduced
for interim reporting

• SEC requires
– Q1, Q2, Q3 and annual reports
– Quarterly requirements similar to annual
– Comparative information
• Current quarter vs. last year's
• Quarterly and year-to-date

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