Segment and Interim Financial Reporting
1. What is an operating segment?
An operating segment is a component of an enterprise: (1) that engages in business activities from which it may earn revenues and incur expenses, either internal or external; (2) whose operating results are regularly reviewed by the enterprise’s chief operating decision maker and (3) for which discrete financial information is available.
2. What is a reportable segment according to FASB ASC Topic 280? What criteria are used in determining what operating segments are also reportable segments?
A reportable segment is an operating segment, either single or aggregated, for which information has to be reported under FASB ASC Topic 280. An operating segment is a reportable segment if (a) its revenue is 10 percent or more of the combined revenue of all operating segments, (b) its absolute profit or loss is 10 percent or more of the greater of combined profit of all segments that have profit or combined losses of all segments that have losses, or (c) its assets are 10 percent or more of the combined assets of all operating segments.
3. How are the segments that are not reportable segments handled in the required disclosures of FASB ASC Topic 280?
Segments not meeting one of these tests are subject to a reevaluation, and possible aggregation, if the combined revenue from sales to external customers of all reportable segments is less than 75 percent of consolidated revenue. Segments that are not reportable segments are combined with other business activities and reported under an “all other” category.
4. Revenue information for Mahoney Corporation is as follows:
Consolidated revenue (from the income statement) $400,000
Intersegment sales and transfers 80,000
Combined revenues of all industry segments $480,000
Does the 10 percent revenue test for a reportable segment apply to 10 percent of the $400,000 or 10 percent of the $480,000?
The 10 percent revenue test applies to the $480,000. Revenue for purposes of FASB ASC Topic 280 includes revenue from both external and intersegment customers.
5. Describe the 10 percent operating-profit test for determining reportable segments.
An industry segment is a reportable segment under the 10 percent operating profit test if its operating profit or loss, in absolute amount, equals or is greater than the greater of combined operating profits for all operating segments having operating profits or the absolute value of the combined operating losses for all operating segments having operating losses.
6. Describe the 10 percent asset test for determining reportable segments.
A segment is a reportable segment under the 10 percent asset test if its assets are 10 percent or more of the combined assets of all operating segments. The allocation of general corporate assets depends on the internal operations of the enterprise. The key is the asset figure given to the chief operating decision maker on which he or she evaluates performance. If corporate assets are allocated, they become part of the reconciliation between the reportable segments’ assets and consolidated assets.
7. Describe the 10 percent revenue test for determining reportable segments.
A segment is a reportable segment under the 10 percent revenue test if its intersegment and external sales is 10 percent or more of the combined intersegment and external sales of all the operating segments.
8. Assume that an enterprise has 10 operating segments. Of these, five segments qualify as reportable segments by passing one of the 10 percent tests. However, their combined revenues from sales to unaffiliated customers total only 70 percent of the combined unaffiliated revenues from all operating segments. Should the remaining five operating segments be aggregated and shown as an “other segments” category? Explain.
No. If the combined revenue from sales to external customers is less than 75 percent of total consolidated revenues, additional operating segments must be identified as reportable segments until the 75 percent test is met. Either some of the remaining segments must be aggregated, if they meet the aggregation criteria, so that the combined segment meets the materiality criteria of 10%, or one or more of the five operating segments that were not reportable segments under the 10 percent tests must be identified as reportable segments.
9. What disclosures are required for the reportable segments and all remaining segments in the aggregate?
10. When is an enterprise required to include information in its financial statements about its foreign and domestic operations?
If the enterprise is segmented on a geographic basis, complete segment information would be supplied by country of operation. If a different criteria is used for segmentation, more limited geographic information is supplied. Revenues and long lived assets attributed to the country of domicile and all foreign operations are disclosed. Any single country with material operations must also be disclosed separately.
11. Must a major customer be identified by name?
The fact of and the amount of revenue from each customer must be disclosed if 10 percent or more of an enterprise’s revenue is derived from that customer. If 10 percent or more of an enterprise’s revenue is derived from sales to the federal government, or to a state, local, or foreign governmental unit, that fact and the amount of revenue must be disclosed. The identity of the segment making such sales must be disclosed, but the customer need not be identified by name.
12. Do the requirements of FASB ASC Topic 280 apply to financial statements for interim periods? If so, how?
The requirements of FASB ASC Topic 280 do apply to interim financial statements. Like other aspects of interim reporting, segment disclosure is more limited in the interim reports than in the annual reports. Required disclosure for each reportable segment in the interim reports include: (1) revenues 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 amount disclosed in the annual report, (5) a description of any changes in the basis for segmentation or the basis of measurement of segment profit or loss, (6) a reconciliation of total reportable segment profit or loss and consolidated income before income taxes.
13. Explain how a company estimates its annual effective tax rate for interim reporting purposes.
An annual effective tax rate is computed as the sum of estimated income taxes for each quarter of the year, divided by the estimated income for the year. This approach spreads any progression in tax rates over the entire year in accordance with the integral theory of interim reporting.
14. What is the difference between the integral theory and the discrete theory with respect to interim financial reporting?
The discrete theory assumes that each quarter is a separate and independent accounting period that stands alone. By contrast, the integral theory treats each interim period as an essential part of each annual period. The integral theory is required under GAAP reporting for interim reports.
15. Describe the minimum financial information to be disclosed in interim reports under the provisions of FASB ASC Topic 270.
FASB ASC Topic 270 specifies that minimum disclosures for interim reports should include gross revenues, provision for income taxes, extraordinary items, comprehensive income, net income and related EPS amounts as basic reporting items. In addition, disclosures are required of seasonal cost and revenue, significant changes in income tax estimates, or changes in financial position, and material contingencies, extraordinary and unusual or infrequently occurring items. Also, disclosures are required for the disposal of a component of an entity, change in accounting principles, change in estimate, reportable operating segments, pension plans, derivatives, permanent impairments, certain types of investments, use of fair value to measure assets and liabilities, and the fair value of financial instruments.
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