Chapter 13: Segment and Interim Reporting

Question 1

Controllable earnings (per example)

Answer 1

Interest revenue and interest expense in segment profit or loss

Question 2

Accepted materiality threshold

Answer 2

10%

Question 3

Enterprise-wide disclosures: information on major customers

Answer 3

Major customers = 10% or more of an entity’s revenue

Specific names need not be disclosed but need to include the amount of income from each significant customer and which segment reported the revenues

Question 4

What interim reports are publicly held companies REQUIRED TO FILE?

Answer 4

Quarterly: abbreviated version of much of the annual content

form 10-Q filed within 40 days of the end of each of the first three quarters

Question 5

Depletion and segment reporting

Answer 5

Reported separately

if depletion, amortization, depreciation expense included in measure of segment profit or loss ASC 280 requires they be disclosed separately (to make it easy to determine cash flow)

Question 6

Characteristics of an operating segment

Answer 6

• Component unit engages in business activities from which it may generate revenue and incur expenses (including from transactions with other company units)
• component units operating results regularly reviewed by chief operating decision maker for the overall entity, who determines what resources to allocate and evaluates performance
• separate financial information is available for the component unit

HQ is never an operating segment

Question 7

Accelerated filers

Answer 7

-publicly owned companies
- aggregate $75M + market value
- have been subject to periodic annual filing requirements for at least 1 year (including 1 annual report)

Have 40 days after the end of the quarter to file interim report (non-accelerated have 45 days)

Question 8

Do interim reports have to be audited?

Answer 8

No

but since select data is included in the annual report some of it is audited then

Question 9

Items included in quarterly reports (public entities)

Answer 9

• income statement for most recent quarter and comparative from same quarter prior year
• cumulative YTD income statement with prior year comparison
• condensed balance sheet for end of current quarter and end of prior fiscal year (and end of corresponding interim period of previous year if it aids understanding)
• statement of cumulative cash flows (and comparative prior years)
• footnotes of updates from annual report
• management analysis and discussion

Question 10

ASC 270

Answer 10

Pronouncement on interim reporting

standardized preparation and reporting of interim income statements

Question 11

ASC 740

Answer 11

Pronouncement on interim reporting

guidelines for measuring tax provision for interim reports.
How to estimate the relationship between interim operating income and income tax provision

Question 12

ASC 250

Answer 12

Pronouncement on interim reporting

Guidance for handling a change in accounting principle in an interim period

accounting principle: retrospective application to preceding interim periods for direct effects of change

change in estimate: only current and prospective, no retrospective changes

Question 13

Accounting for a change of entity in an interim period

Answer 13

Retrospective changes only

Question 14

IAS 34

Answer 14

international financial standards for interim reporting

Question 15

Revenue on interim period statements

Answer 15

Measurement basis same as (and consistent with) the rest of the year

recognized and reported when earned

if seasonality is an issue encouraged to supplement with 12 month information ending at interim date

Question 16

Modifications to calculation of cost of goods sold for interim reports

Answer 16

1) may use estimated gross profit rates (do not need to do physical inventory count)
2) LIFO temporary liquidations at replacement cost
3) Lower of cost or market: losses from market value decreases still recognized and increases back up to cost (but not above cost). No loss needs to be recognized if decline expected to reverse by end of fiscal year
4) when using standard cost system to compute COGS do not need to report variances that are expected to be resolved within the year

Question 17

Reporting reductions in inventory value interim reports

Answer 17

• if expected to recover by end of the year - no recognition
• if not, loss is recognized in quarter in which reductions occur

COGS for quarter = cost of goods sold that quarter + effects of any write downs - effects of any recoveries of prior losses

Question 18

Allocation of other costs and expenses to interim statements (non-cogs)

Answer 18

based on evaluation of which period benefits from the expenditure

Question 19

Types of expenses that may be allocated over multiple interim periods

Answer 19

• major repairs
• property tax
• major advertising (not beyond fiscal year end)

can even start allocating before the expense is incurred it is reliably known

Question 20

Method to allocate expenses across interim periods when paid in a single period

Answer 20

Accruals (estimated liabilities)
Deferrals (prepaid assets)

Record expense as prepaid asset and expense out OR record as expense liability and don’t charge whole to expense when paid

Question 21

Permanent book vs tax differences and interim tax determination

Answer 21

Not included in determining taxable income for an interim period

items that are not taxable or not deductible

used for computation of book income but not taxable income

Question 22

Temporary book vs tax differences and interim tax determination

Answer 22

Temporary differences where an expense or revenue item is recognized in a different period for financial accounting vs tax accounting

deferred tax asset or liability reported on balance sheet

amounts included in calculating tax expense for the year

Question 23

Estimated effective annual tax rate

Answer 23

Estimated income from continuing operations
Adjusted for permanent differences
= estimated annual taxable income
x tax rate (combined state and federal)
= estimated annual taxes before credits
less expected credits
= estimated income tax for year
/ estimated income from continuing operations
= estimated effective annual tax rate on continuing operations

Question 24

Recording estimated interim period tax provision

Answer 24

DR Income tax expense
CR income taxes payable

amount = period income x estimated effective annual tax rate on continuing operations

Question 25

If estimated effective annual tax rate changes in following period

Answer 25

NO retroactive restatement

must adjust the income tax expense/ income tax payable to corrected amount for cumulative earnings and new rate

actual cumulative income x updated rate
= cumulative tax provision
less provision made in previous periods
= provisions required for current periods

Question 26

Recognition of temporary book vs tax differences

Answer 26

Do not effect the estimated tax provision

included as DR deferred tax asset or CR deferred tax liability in entry to record income tax expense or payable

Question 27

Reason for allowing recognition of tax benefit for company with year-to-date operating loss

Answer 27

Company has had consistent seasonal trends in yearly income

Question 28

General rule for realization of a tax benefit

Answer 28

benefit must be assured beyond a reasonable doubt before the benefit is recognized in the financial statements

Question 29

Criteria for being “beyond reasonable doubt”

Answer 29

more than 50% likely

Question 30

If realization of a tax benefit of an interim operating loss is not assured by the end of a fiscal period

Answer 30

company must be able to recognize the benefit as a deferred tax asset at the end of the year in order to show any tax benefit from loss on interim statements

Question 31

Tax benefit from operating loss

Answer 31

If assured beyond reasonable doubt that there will be later income to benefit from the reduction due to the loss

operating loss is decreased by tax effect: (Loss x tax rate)

no benefit recognized if not assured beyond reasonable doubt

Question 32

Tax reported in year-end period

Answer 32

Should bring the balance of tax provisions to the required annual provision now that annual income is known

Question 33

Interim period reporting of discontinued ops and unusual or infrequent items

Answer 33

Reported when occur and not allocated to other periods

materiality test based on operating income for period in which first reported

Question 34

Interim reporting of contingencies and major uncertainties

Answer 34

Disclosed on same basis as in annual report

(required to provide information on items that might affect fairness of the interim report)

ASC 450

Question 35

Procedures for measuring and reporting contingencies are found in:

Answer 35

ASC 450

Question 36

Upper limit on number of reportable segments

Answer 36

10

practical limitation. more than 10 segments leads to too much detail

if more than 10 reportable segments exist the company should consider aggrigating

Question 37

Applying inter-period comparability to segment reporting

Answer 37

Companies should continue to separately report segments that have been reported in prior years but fail current period’s significance tests

do not need to separately report a segment that only meets the 10% test due to an abnormality (though must disclose why not reporting)

Question 38

If a segment becomes reportable that was not previously reportable

Answer 38

comparative disclosures included in the annual report should be restated to obtain comparability

Question 39

allocation of costs to operating segments per ASC 280

Answer 39

allocate revenues and costs to an operating segment only if they are included in the segment’s profit and loss used by the overall entity’s chief decision maker

same with asset assignment

Question 40

Reportable operating segments

Answer 40

Segments for which separate supplemental disclosures must be made

determined based on management’s specifications of those operating segments that are used internally for evaluating the enterprise’s financial position and operating performance

Question 41

Measures of segment profit or loss which must be disclosed

Answer 41

Disclosed if used by chief decision maker in measuring profit and loss
- revenue from external sales
- revenue from intercompany transactions
- interest revenue
- interest expenses
- depreciation and amortization expense
- unusual items
- equity in income of investees accounted for with equity method
- income tax expense or benefit
- significant noncash items (besides depreication)

Question 42

Information required reported for each segment determined to be separately quantifiable

Answer 42

1) general information (how segments identified, what segments do to earn revenues)
2) amounts (P&L and measurements used to determine - including inter-segment transactions, assets)
3) measures of segment profit or loss
4) segment assets (amount of investment in equity method investments, total capital expenditures)
5) measurement basis (basis of accounting and any changes from prior periods)
6) reconciliation to consolidated totals, including for liabilities if they are disclosed)

Question 43

Presentation of required reporting segment disclosures

Answer 43

May be schedules or footnotes

generally include comparative data for three years

Question 44

Segment disclosures required for quarterly/ interim statements

Answer 44

• revenues from external customers
• intersegment revenues
• measures of segment profit or loss
• total assets where there has been a material change from the most recent annual report
• any differences from most recent annual report in how operating segments are defined or how profit and loss is computed
• reconciliation of total of segment profit and loss to company totals

Question 45

Major categories of required enterprise-wide disclosures

Answer 45

1) information about products and services
2) information about geographic areas
3) information about major customers

Question 46

Enterprise-wide disclosures: products and services

Answer 46

• revenues from external customers for each major product and service or each group of products and services (unless impracticable)

segment disclosures may fulfill this requirement if operating segments organized by product line

Question 47

What assets are EXCLUDED from the “long-lived productive assets” that must be included in enterprise-wide disclosures

Answer 47

• financial instruments
• long-term customer relationships of a financial institution
• mortgage/ other servicing rights
• deferred policy acquisition costs
• certain deferred tax assets
• CURRENT assets

Question 48

Enterprise-wide disclosures: geographic area information

Answer 48

Unless impracticable
- revenues from external customers attributed to the company’s home country of domicile and external revenues attributed to all foreign countries in which enterprise generates revenues (separate if material)
- long-lived productive assets located in the home country and total assets in all countries in which the entity owns assets

No materiality threshold specified: 10% generally used

Question 49

Accounting pronouncements covering interim reporting

Answer 49

ASC 270, 250, and 740

Question 50

10% significance rules

Answer 50

Used to determine which operating segments have separately reported information.
if meets any one of the following:
- segment’s revenue (including inter-segment sales and transfers) is 10%_ of total revenue from external sales and inter-segment transactions for all segments
- absolute value of segment’s profit of loss is 10% or more of the GREATER of: a) the total profit of all operating segments that did not report a loss or b) the total loss of operating segments reporting a loss
- segment’s assets 10% or more of total assets of all segments

Question 51

What must disclosures about reportable operating segments include?

Answer 51

• profit and loss (same measures used for decision making)
• required to report assets
  (including commonly used assets allocated to segement)
• allowed to report liabilties full disclosure is meaningful

Question 52

Requirements if separately reportable operating segments revenues < 75% of total consolidated revenue

Answer 52

Management must select and disclose same information about additional operating segments until 75% of consolidated revenue is included in the reported statements

management gets to choose which segments

Question 53

Information about operating segments not separately reportable

Answer 53

Combined and disclosed in “all other” categories

Question 54

Items that must be dis-aggregated from consolidated statements

Answer 54

• sales
• total assets
• inter-segment transactions eliminated for purposes of consolidation

Question 55

10% revenue test

Answer 55

Applied to each operating segments total revenue as a percentage of combined revenue before elimination of intercompany transfers and sales

if segment revenue is 10%+ of combined then it must be separately reported

Question 56

10% profit (loss) test

Answer 56

used to determine which operating segments are reportable

if an individual segment’s (absolute value of) profit or loss is 10%+ of the absolute value of greater of total combined operating profits or combined operating losses

Question 57

10% assets test

Answer 57

Management defines what items make up each segment’s assets as used for internal decision making. can include intercompany items

if segment assets are 10%+ of total assets segment is separately reported

Question 58

Difference between total combined assets and total consolidated assets

Answer 58

Unrealized inter-company profit from inter-segment inventory transactions

Question 59

75% consolidated revenue test

Answer 59

Used after 10% tests determining which segments are reportable

separately reportable operating segments must total at least 75% of consolidated revenue

must add additional segments till 75% met