Chap13, Segment

5/27/2018 Chap13, Segment

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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


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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


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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--


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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.


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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


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13-6

Its assets are 10 percent or more of the combined

assets of all operating segments.

Ten Percent Quantitative Thresholds


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.



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.

*



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?



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?



13-11Asset Test

Items comprising eachsegments assets are defined

by management.



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.



13-13Reporting Segment Information

FASB 131states that the following

must be disclosed for eachsegmentdetermined to be separately

reportable.



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



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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



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.

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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

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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

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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

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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

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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--

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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

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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

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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

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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


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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

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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


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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


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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.

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E ti ti f A l Eff ti T R t


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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


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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


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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

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Ch t Thi t


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13 33Chapter Thirteen

TheEnd

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Documents

Chap13, Segment