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14
Reporting for Segments
and for Interim
Financial Periods

Advanced Accounting, Fifth Edition

Need for Disaggregated Financial Data

Users need information to determine conditions, trends,

and ratios that assist in predicting cash flows of firms.

Different industries or geographic areas have different

rates of profitability,
opportunities for growth, and
types of risk.

Disaggregated information is useful to assist in analyzing

uncertainties surrounding expected cash flows.

LO 1 The need for disaggregated financial data.

Standards of Financial Accounting and Reporting

Basic Disclosure Requirements (Management Approach):

Objective is to facilitate consistency between
internal and external reporting.

Segmented by Reporting Requirement

 Product or service,  Segmental profit or loss,
 Geographic area,  Certain items of revenue
and expense,
 Customer type, or
 Segmental assets, and
 Legal entity.
 Other items.

LO 2 Basic disclosure requirements.

Standards of Financial Accounting and Reporting

Operating Segment - Component of an enterprise that

 May earn revenues and incur expenses.
 Chief operating decision maker regularly reviews the
component’s operating results.
 Discrete financial information is available.

Reportable Segment
 Significant to an enterprise’s operations.
 Has passed one of three 10% tests or
 Determined to be reportable by other criteria.

LO 3 Operating segment. LO 4 Reportable segment.

Standards of Financial Accounting and Reporting

Determining Operating Segments

Modified Management Approach
Aggregation Criteria
Quantitative Thresholds

LO 3 Determine an operating segment.

Standards of Financial Accounting and Reporting

Determining Operating Segments

Aggregation Criteria - entity is permitted to aggregate
operating segments that have similar economic
characteristics and are similar in ALL the following:
 Nature of their products or services.
 Nature of the production processes.
 Types or class of customers.
 Methods used to distribute products or provide
services.
 Nature of the regulatory environment.

LO 3 Determine an operating segment.

Standards of Financial Accounting and Reporting

Determining Operating Segments

Quantitative Thresholds - Segment is reportable if it
meets one or more of the following:
 Combined (external and internal) revenue is 10% or more of
combined revenue of all reportable segments.
 Profit or loss is 10% or more of the greater absolute amount
of:
 Combined profit of all segments not reporting a loss.
 Combined loss of all segments that reported a loss.
 Assets are 10% or more of the combined assets of all
segments.

LO 3 Determine an operating segment.

Standards of Financial Accounting and Reporting

Problem 14-1: Significance Tests—Segmental Reporting

Bacon Industries operates in seven different segments.
Information concerning the operations of these segments
for the most recent fiscal period follows:

Operating Revenue Operating Identifiable

Segment Total Intersegment Profit (Loss) Assets
1 $ 4,200 $ 800 $ (600) $ 7,000
2 6,000 1,200 2,000 8,800
3 51,000 7,000 2,100 35,400
4 48,000 - 8,800 37,600
5 13,000 - 3,200 14,000
6 64,500 3,400 4,000 52,000
7 12,000 2,000 (3,000) 16,400
Standards of Financial Accounting and Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.

Revenue Test

Operating % of Total Reportable

Segment Revenue Revenue Segment
1 $ 4,200 2.1% No
2 6,000 3.0% No
3 51,000 25.7% Yes
4 48,000 24.2% Yes
5 13,000 6.5% No
6 64,500 32.5% Yes
7 12,000 6.0% No
$ 198,700 100.0%
Standards of Financial Accounting and Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.

Operating Profit Test

% of Largest
Operating Operating Operating of Op. Profit Reportable
Segment Profit Loss or Op. Loss Segment
1 $ (600) 3.0% No
2 $ 2,000 9.9% No
3 2,100 10.4% Yes
4 8,800 43.8% Yes
5 3,200 15.9% Yes
6 4,000 19.9% Yes
7 (3,000) 14.9% Yes
$ 20,100 $ (3,600)
Standards of Financial Accounting and Reporting

Problem 14-1: Determine which of the segments must be

treated as reportable segments.

Identifiable Assets Test

Operating Identifiable Reportable

Segment Assets % of Total Segment
1 $ 7,000 4.1% No
2 8,800 5.1% No
3 35,400 20.7% Yes
4 37,600 22.0% Yes
5 14,000 8.2% No
6 52,000 30.4% Yes
7 16,400 9.6% No
$ 171,200
Summary: Segments 3, 4, 5, 6,
and 7 are reportable segments.
Standards of Financial Accounting and Reporting

Seventy-Five Percent Combined Revenue Test

The combined revenue from sales to unaffiliated customers
of all reportable segments must constitute at least 75% of
the combined revenue from sales to unaffiliated customers
of all operating segments.

LO34 Determine
LO Determinean
a operating
operating segment.
segment.
Standards of Financial Accounting and Reporting

Problem 14-1 Data: 75% Test

Operating Revenue Revenue from

Segment Total Intersegment Nonaffiliates
1 $ 4,200 $ 800 3,400
2 6,000 1,200 4,800 Nonaffiliated
3 51,000 7,000 44,000 Revenue from
4 48,000 - 48,000
reportable
segments
5 13,000 - 13,000
6 64,500 3,400 61,100 $176,100
7 12,000 2,000 10,000
$ 198,700 $ 14,400 $ 184,300

Nonaffiliated revenue (reportable segments) $176,100

= 95.6%
Total nonaffiliated revenue $184,300
Standards of Financial Accounting and Reporting

Information to be Presented

For each reportable segments and in the aggregate for the

segments not separately reported.

 General information.  Enterprise wide disclosures.

 Operating profit or loss.  Product or service.
 Assets.  Geographic area.
 Bases for measurement.  Major customer (10%).
 Interim disclosures.
 Reconciliation of segment amounts and consolidated amounts
for revenue, profit or loss, assets, and other significant items.

LO 5 Reportable segment information to be presented.

Standards of Financial Accounting and Reporting

Geographic Areas
Where operations in foreign countries are grouped into
geographic areas, the groupings should consider
1. proximity,
2. economic affinity,
3. similarities of business environments, and
4. the nature, scale, and degree of interrelationship of
the operations in the various countries.

LO 6 Reporting on geographical areas.

Standards of Financial Accounting and Reporting

Information about Major Customers

If 10% or more of the revenue of a firm is derived from
sales to any single customer, or
If 10% or more of the revenue is derived from sales to
the federal government, a state government, a local
government, or a foreign government,
that fact and the amount of revenue must be disclosed.

LO 7 Reporting on major customers.

Interim Financial Reporting

Interim financial statements are presented to provide

information concerning financial status and progress for
time periods of less than one year.
Normal time period is a quarter of a year.
Prepared for most recent interim period, as well as on
a cumulative or year-to-date basis.
May consists of statements of financial position,
income, and cash flows.
SEC requires public companies to file Form 10-Q.

LO 9 Current interim reporting requirements.

Interim Financial Reporting

Problems in Interim Reporting

Seasonal nature of operations in many industries can
cause wide fluctuations in revenues and expenses.
Short time period to determine interim results.
Some accountants hold that each interim period should
stand alone (discrete view) as a basic accounting period.
Other accountants view each interim period as
essentially an integral part of the annual period.

In response to SEC complaints and general pressure, the

APB issued APB Opinion No. 28 in May 1973 (now included in
FASB ASC topic 270, Interim Reporting).
LO 10 Problems in interim reporting.
Interim Financial Reporting

The Board concluded that “each interim period should be

viewed as an integral part of an annual period”.
Financial statements for each interim period should be
based on accounting practices used for annual
statements.
Revenue should be recognized on same basis as used for
the full year.
Costs Associated with Revenue should be similarly
treated for interim purposes.

LO 10 Problems in interim reporting.

Interim Financial Reporting

Acceptable alternatives for inventory costing:

COGS can be estimated using gross profit rates.

Liquidated LIFO base should be charged at replacement

cost if expected to be replaced by year end.

Inventory loss from market declines expected to

recover before year end need not be recognized.

Standard cost for determining inventory and product

cost should be based on the procedures used for the
fiscal year.

LO 10 Problems in interim reporting.

Interim Financial Reporting – Income Taxes

Exercise 14-8: Spur Company’s actual earnings for the first two
quarters of 2008 and its estimate during each quarter of its
annual earnings are:
Actual first-quarter earnings $ 400,000
Actual second-quarter earnings 510,000
First-quarter estimate of annual earnings 1,350,000
Second-quarter estimate of annual earnings 1,420,000
Spur Company estimated its permanent differences between
accounting income and taxable income for 2008 as:
Environmental violation penalties $ 25,000
Dividend income exclusion 180,000
The combined state and federal tax rate for 2008 is 42%.
Interim Financial Reporting – Income Taxes

Exercise 14-8: Prepare journal entries to record Spur Company’s

provisions for income taxes for the first two quarters of 2008.

First Quarter
Estimated Annual Earnings $ 1,350,000
Add: Environmental Violation Penalties 25,000
Deduct: Dividend Income Exclusion (180,000)
Estimated Taxable Income $ 1,195,000
Estimated Annual Income Tax Payable * $ 501,900
Estimated Effective Combined Annual Tax Rate ** 37.2%
Actual First Quarter Earnings x 400,000
First Quarter Income Tax Provision (Expense) $ 148,800

* ($1,195,000 x 42%) ** ($501,900 / $1,350,000)

Interim Financial Reporting – Income Taxes

Exercise 14-8: Prepare journal entries to record Spur Company’s

provisions for income taxes for the first two quarters of 2008.

First Quarter Journal Entry

Income Tax Expense 148,800

Income Tax Payable 148,800
Interim Financial Reporting – Income Taxes

Exercise 14-8: Prepare journal entries to record Spur Company’s

provisions for income taxes for the first two quarters of 2008.

Second Quarter
Estimated Annual Earnings $ 1,420,000
Deduct: Net Permanent Difference ($180,000-$25,000) (155,000)
Estimated Taxable Income $ 1,265,000
Estimated Annual Income Tax Payable * $ 531,300
Estimated Effective Combined Annual Tax Rate ** 37.4%
Cumulative Income to Date ($400,000 + $510,000) x $ 910,000
Cumulative Tax Provision Needed 340,340
Tax Provision in 1st Quarter 148,800
Tax Provision in 2st Quarter $ 191,540

* ($1,265,000 x 42%) ** ($531,300 / $1,420,000)

Interim Financial Reporting – Income Taxes

Exercise 14-8: Prepare journal entries to record Spur Company’s

provisions for income taxes for the first two quarters of 2008.

Second Quarter Journal Entry

Income Tax Expense 191,540

Income Tax Payable 191,540

1st 2nd 3rd 4th

1st Quarter 2nd Quarter Year-to-Date

tax provision tax provision tax provision
= $148,800 = $191,540 * = $340,340

* $340,340 - $148,800
Interim Financial Reporting

Minimum Disclosures in Interim Reports

• Gross revenues, provision for income taxes, extraordinary items
(including related income tax effects), and net income.
• Basic and diluted earnings-per-share data.
• Seasonal revenue, costs, or expenses.
• Significant changes in estimates or provisions for income taxes.
• Disposal of a segment of a business and extraordinary, unusual,
or infrequently occurring items.
• Contingent items.
• Changes in accounting principles or estimates.
• Significant changes in financial position.
LO 10 Problems in interim reporting.