5/27/2018 Chap13, Segment
1/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-1
Segment and
Interim
Reporting
13Electronic Presentation by
Douglas CloudPepperdine University
Baker / Lembke / King
5/27/2018 Chap13, Segment
2/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-2
FASB 131 specified the Management Approach to
the definition of segments. Revenue, profits or losses, and assets for each
segment are defined by the management as used
for internal decision making purposes.
Operating segments can be product lines,
geographical areas, service lines of business, or
other segments of the entity determined by
management. The segment reporting footnote presents
information on operating segments in the same
manner as used for internal decision making.
The Management Approach
5/27/2018 Chap13, Segment
3/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-3
That engages in business activities from which itmay earn revenues and incur expenses (including
revenues and expenses relating to transactions
with other components of the same enterprise).
Whose operating results are regularly reviewed
by the enterprises chief operating decision
maker to make decisions about resources to be
allocated to the segment and assess itsperformance.
For which discrete financial information is
available.
FASB 131 Defines an Operating Segment
as a component of an enterprise--
5/27/2018 Chap13, Segment
4/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-4Ten Percent Quantitative Thresholds
What is the 10 percentsignificance rule
concerning segment
disclosure?
The FASB specified three 10
percent significance rules. Separate
disclosures are required if an
operating segment meets at least one
of the tests on Slides 5 and 6.
5/27/2018 Chap13, Segment
5/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-5
Its reported revenue, including both sales to
external customers and intersegment sales ortransfers, is 10 percent or more of the combined
revenue, internal and external, of all operating
segments,
The absolute amount of its reported profit or loss
is 10 percent or more of the greater, in absolute
amount, of (a) the combined reported profit of all
operating segments that reported a profit or (b) thecombined reported loss of all segments that
reported a loss.
Ten Percent Quantitative Thresholds
Continued
5/27/2018 Chap13, Segment
6/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-6
Its assets are 10 percent or more of the combined
assets of all operating segments.
Ten Percent Quantitative Thresholds
5/27/2018 Chap13, Segment
7/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-7I l lustration of 10 Percent Tests
Peerless owns 80 percent of Special Foods common
stock. Special Foods reports a profit of $50,000 for20X1 and pays dividends of $3,000. The December 31,
20X1, balances in Special Foods stockholders equity
accounts total $300,000, of which the noncontrolling
interest is 20 percent.
Peerless acquires 40 percent of Barclay Company stock
on January 1, 20X1, for a cost of $160,000, which isequal to the book value of the stock on that date.
Barclay Company earns $80,000 in profit during 20X1
and pays $20,000 in dividends.
The equity method is used to account for the Barclay investment.
5/27/2018 Chap13, Segment
8/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-8Ten Percent Revenue Test
Segment Percent of Combined ReportableSegment Revenue Revenue of $600,000 Segment
Food Products $323,000 53.8%
Plastic and Packaging 113,000 18.8
Consumer and Commercial 45,000 7.5Health and Scientific 86,000 14.3
Chemicals 33,000 5.5
Total $600,000 100.0%
Yes
Yes
NoYes
No
Separately
reportable?
*Unrounded percents for segments total to 100 percent.
*
5/27/2018 Chap13, Segment
9/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-9Ten Percent Profi t (Loss) Test
Profit Percent of Test Separately
Segment (Loss) Amount of $279,000 Reportable
Food Products $198,000 71.0%
Plastic and Packaging 59,000 21.1Consumer and Commercial (25,000) 9.0
Health and Scientific 22,000 7.9
Chemicals (9,000) 3.2
Yes
YesNo
No
No
Separately
reportable?
5/27/2018 Chap13, Segment
10/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-10Asset Test
Percent ofSegment Test Amount of Separately
Segment Assets $1,276,000 Reportable
Food Products $ 411,000 32.2%
Plastic and Packaging 375,000 29.4Consumer and Commercial 100,000 7.8
Health and Scientific 310,000 24.3
Chemicals 80,000 6.3
Total $1,276,000 100.0%
Yes
YesNo
Yes
No
Separately
reportable?
5/27/2018 Chap13, Segment
11/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-11Asset Test
Items comprising eachsegments assets are defined
by management.
5/27/2018 Chap13, Segment
12/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-12Seventy-F ive Percent Revenue Test
Sales to unaffiliated customer byreportable segments:
Food Products $317,000
Plastic and Packaging 95,000
Health and Science 86,000Total of reportable segments $498,000
Consolidated revenue 572,000
Reportable segments percentage of
consolidated revenue 87.1%
$498,000 $572,000
Because this percentage if equal to or greater
than 75 percent, no further operating
segments must be separately reported.
5/27/2018 Chap13, Segment
13/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-13Reporting Segment Information
FASB 131states that the following
must be disclosed for eachsegmentdetermined to be separately
reportable.
5/27/2018 Chap13, Segment
14/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-14
General information about (a) the factors used toidentify the entitys reportable segments,
including the basis organization, and (b) types of
products and services from which each reportable
segment obtains its revenue. Information about the reported profit or loss,
including specified revenues and expenses
included in reported segment profit or loss,
segment assets, and the basis of measurement
used to determine profits.
Reporting Segment Information
Continued
5/27/2018 Chap13, Segment
15/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-15
Information on the following if these items areincluded in the determination of segment assets:
(a) the amount of investment in equity method
investees and (b) the total expenditures for
additions to long-term productive assets. Reconciliations of the total reportable segments
revenues, measures of segment profit or loss, and
segments assets to the related consolidated totals
for those items.
Reporting Segment Information
5/27/2018 Chap13, Segment
16/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-16Enterprisewide Disclosures
Information about Products and ServicesThe company is required to report the revenues
from external customers for each product and
service, or each group of similar products andservices, unless it is impractical.
13 17
5/27/2018 Chap13, Segment
17/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-17
Information about Geographic Areas Revenues from external customers attributed to
home country of domicile and from external
customers attributed to foreign countries.
Long-lived productive assets located in the entitys
home country and the total assets located in all
foreign in which the entity holds assets.
Revenues from, and long-term productive assets in,any individual country, if material, must be
separately disclosed
Enterprisewide Disclosures
13 18
5/27/2018 Chap13, Segment
18/34McGraw-Hill/ IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-18
Information about Major Customers First issue is how to define an individual customer.
For applying the disclosure test, any single
customer, the federal government, a state
government, a local government, or a foreign
government is considered to be an individual
customer.
Materiality is not defined by FASB 131, but the 10percent guideline seems to have gained the support
of practice.
Enterprisewide Disclosures
13 19
5/27/2018 Chap13, Segment
19/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-19
Revenues Long-Lived Assets
Example of a Footnote Disclosure
Geographic Information
United States $380,000 $471,000
Total Foreign 192,000 369,000
Total $572,000 $840,000Significant Countries:
Canada $116,000 $220,000
Mexico 28,000 102,000
13 20
5/27/2018 Chap13, Segment
20/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-20
An income statement for the most recent quarter
of the current fiscal period and a comparativeincome statement for the same quarter for the
prior fiscal year.
Income statements for the cumulative year-to-date time period and for the corresponding period
of the prior fiscal year.
A condensed balance sheet at the end of the
current quarter and a condensed balance sheet atthe end of the prior fiscal year.
I nter im Reports Generally Contain--
Continued
13 21
5/27/2018 Chap13, Segment
21/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-21
A statement of cash flows as of the end of thecurrent cumulative year-to-date period, and for
the same time span for the prior year.
Footnotes that update those in the last annual
report. A report by management analyzing and
discussing the results for the latest interim period.
I nter im Reports Generally Contain--
13 22
5/27/2018 Chap13, Segment
22/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-22
Estimated gross profit rates may be usedtodetermine an interim periods cost of goods sold.
Companies using lifo inventory valuation may
experience a temporary liquidation of li fo-base
inventories that should be charged to cost ofgoods sold at expected replacement cost. Such
temporary reductions of inventories expected to
be replaced by the end of the fiscal year should
notbe expensed through cost of goods sold at
historical cost.
Practical Modif ications for Determining Inter im Income
13 23
5/27/2018 Chap13, Segment
23/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-23
Inventory losses due to an apparent permanent
decline in market price are recognizedin the
period of decline using the lower-of-cost-or-
market valuation method. Recoveries of market
prices in later interim periods of the same fiscalyear should be recognized up to the original
cost.
Companies using a standard cost system for
inventories should use the same procedureforcomputing and reporting variances in an interim
period as used for the fiscal year.
Practical Modif ications for Determining Inter im Income
13 24
5/27/2018 Chap13, Segment
24/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-24Temporary L ifo L iquidation
During the third quarter of its fiscal year, Special Foods Inc.
experienced a temporary liquidation of 2,000 units in its lifo baseowing to seasonal fluctuations. The lifo unit cost is $25. The
liquidation is normal, and the company plans to replace the
liquidation inventory during the early part of the fourth quarter.
The estimated replacement cost is $35.
Cost of Goods Sold (2,000 x $35) 70,000
Inventory (2,000 x $25) 50,000
Excess of Replacement Cost
over Lifo Cost of InventoryLiquidation (2,000 x $10) 20,000
Record temporary lifo inventory
liquidation.current liability
13 25
5/27/2018 Chap13, Segment
25/34McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-25
When the inventory is replaced at $36 per
unit during the fourth quarter, theExcess account is cancelled.
Cost of Goods Sold(2,000 x $1) 2,000
Inventory (2,000 x $25) 50,000Excess of Replacement Cost over
Lifo Cost of Inventory Liquidation 20,000
Accounts Payable 72,000
Record replacement of lifo
inventory liquidation.
2,000 x $36
Temporary L ifo L iquidation
2,000 x $25
13 26M k W i D d R
5/27/2018 Chap13, Segment
26/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-26Market Write-Down and Recovery
At the beginning of its fiscal year, Peerless
Products Corporation has 10,000 units of
inventory on hand with a fifo cost of $10 each.
No additional purchases are made during the year.
The sales and market value at the end of each
quarter are as follows:
Units Sold Unit Market ValuesQuarter Goods Sold at End of Quarter
1 2,000 $ 7
2 2,000 6
3 2,000 74 2,000 11
13 27M k t W it D d R
5/27/2018 Chap13, Segment
27/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-27Market Write-Down and Recovery
Beginning inventory is 10,000 units.
Each quarter 2,000 units are sold.
Ending Inventory Cost of
Cost Assigned to Write-Down to Market Goods Sold
Qtr. Goods Sold or (Loss Recovery) Total
1 $20,000 = 2,000 units x $10 $24,000 = 8,000 units x $3 $44,000
2 14,000 = 2,000 units x $7 6,000 = 6,000 units x $1 20,000
3 12,000 = 2,000 units x $6 (4,000)=(4,000 units x $1) 8,000
4 14,000 = 2,000 units x $7 (6,000)=(2,000 units x $3) 8,000
Total sold 8,000 units End. Inv. 2,000 units
13-28G h f M k t P i f I t
5/27/2018 Chap13, Segment
28/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-28Graph of Market Pr ices of I nventory
Date
Quarter 1 2 3 4
11
10
9
8
76
1/1 3/31 6/30 9/30 12/31
Price ($)
(Cost)
(7) (7)
(6)
(11)
13-29Wh E dit M B D f d
5/27/2018 Chap13, Segment
29/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13 29When an Expenditure May Be Deferred
1. Some costs such as major machinery repairs are
expensed for annual reporting purposes but clearly
benefit more than one interim period; therefore, the
cost should be allocated to the benefited periods.
2. Quantity discounts offered to customers based on
annual sales should be estimated and charged to salesduring each of the interim periods.
3. Property taxes should be deferred or accrued to ensure
an appropriate allocation to each interim period.
4. Major advertising costs may be deferred in the period
incurred and allocated to the other interim periods that
benefit.
13-30
E ti ti f A l Eff ti T R t
5/27/2018 Chap13, Segment
30/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13 30
Estimated income from continuing operations $225,000
Adjust for permanent differences:Add premiums on key officers life insurance 2,000
Deduct dividends received deduction - 27,000
Estimated annual taxable income $200,000
Combined federal and state income taxes x 38 %Estimated annual taxes before tax credits $ 76,000
Deduct business tax credits - 22,000
Estimated income taxes for year $ 54,000
Divided by estimated income from continuous
operations $225,000
Estimated effective annual tax rate on continuous
operations 24%
Estimation of Annual Effective Tax Rate
13-31I t i I T
5/27/2018 Chap13, Segment
31/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13 31
(1) (2) (3) (4) (5) (6) (7)
Pd. Income Cum. Est.T rate Cum.Tax Prior This Pd.Tax
I 20,000 20,000 .24 4,800 -0- 4,800
II 25,000 45,000 .34 15,300 4,800 10,500
III 80,000 125,000 .34 42,500 15,300 27,200
IV 97,000 222,000 .28* 62,000 42,500 19,500
*rounded
Interim Income Tax
13-32A ti Ch I t i P i d
5/27/2018 Chap13, Segment
32/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13 32
Cumulative effect accounting changesmake effective as of first day of fiscal period,
restating prior interim statements of this year
Accounting Changes I nter im Periods
Retroactive-type accounting changes
restate all prior statements, interim and annual
13-33
Ch t Thi t
5/27/2018 Chap13, Segment
33/34
McGraw-Hill/ Irwin Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13 33Chapter Thirteen
TheEnd
13-34
5/27/2018 Chap13, Segment
34/34