Chapter 13: Segment and Interim Reporting Flashcards
Controllable earnings (per example)
Interest revenue and interest expense in segment profit or loss
Accepted materiality threshold
10%
Enterprise-wide disclosures: information on major customers
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
What interim reports are publicly held companies REQUIRED TO FILE?
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
Depletion and segment reporting
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)
Characteristics of an operating segment
- 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
Accelerated filers
-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)
Do interim reports have to be audited?
No
but since select data is included in the annual report some of it is audited then
Items included in quarterly reports (public entities)
- 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
ASC 270
Pronouncement on interim reporting
standardized preparation and reporting of interim income statements
ASC 740
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
ASC 250
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
Accounting for a change of entity in an interim period
Retrospective changes only
IAS 34
international financial standards for interim reporting
Revenue on interim period statements
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
Modifications to calculation of cost of goods sold for interim reports
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
Reporting reductions in inventory value interim reports
- 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
Allocation of other costs and expenses to interim statements (non-cogs)
based on evaluation of which period benefits from the expenditure
Types of expenses that may be allocated over multiple interim periods
- major repairs
- property tax
- major advertising (not beyond fiscal year end)
can even start allocating before the expense is incurred it is reliably known
Method to allocate expenses across interim periods when paid in a single period
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
Permanent book vs tax differences and interim tax determination
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
Temporary book vs tax differences and interim tax determination
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
Estimated effective annual tax rate
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
Recording estimated interim period tax provision
DR Income tax expense
CR income taxes payable
amount = period income x estimated effective annual tax rate on continuing operations
If estimated effective annual tax rate changes in following period
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
Recognition of temporary book vs tax differences
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
Reason for allowing recognition of tax benefit for company with year-to-date operating loss
Company has had consistent seasonal trends in yearly income
General rule for realization of a tax benefit
benefit must be assured beyond a reasonable doubt before the benefit is recognized in the financial statements
Criteria for being “beyond reasonable doubt”
more than 50% likely
If realization of a tax benefit of an interim operating loss is not assured by the end of a fiscal period
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
Tax benefit from operating loss
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
Tax reported in year-end period
Should bring the balance of tax provisions to the required annual provision now that annual income is known
Interim period reporting of discontinued ops and unusual or infrequent items
Reported when occur and not allocated to other periods
materiality test based on operating income for period in which first reported
Interim reporting of contingencies and major uncertainties
Disclosed on same basis as in annual report
(required to provide information on items that might affect fairness of the interim report)
ASC 450
Procedures for measuring and reporting contingencies are found in:
ASC 450
Upper limit on number of reportable segments
10
practical limitation. more than 10 segments leads to too much detail
if more than 10 reportable segments exist the company should consider aggrigating
Applying inter-period comparability to segment reporting
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)
If a segment becomes reportable that was not previously reportable
comparative disclosures included in the annual report should be restated to obtain comparability
allocation of costs to operating segments per ASC 280
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
Reportable operating segments
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
Measures of segment profit or loss which must be disclosed
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)
Information required reported for each segment determined to be separately quantifiable
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)
Presentation of required reporting segment disclosures
May be schedules or footnotes
generally include comparative data for three years
Segment disclosures required for quarterly/ interim statements
- 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
Major categories of required enterprise-wide disclosures
1) information about products and services
2) information about geographic areas
3) information about major customers
Enterprise-wide disclosures: products and services
- 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
What assets are EXCLUDED from the “long-lived productive assets” that must be included in enterprise-wide disclosures
- financial instruments
- long-term customer relationships of a financial institution
- mortgage/ other servicing rights
- deferred policy acquisition costs
- certain deferred tax assets
- CURRENT assets
Enterprise-wide disclosures: geographic area information
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
Accounting pronouncements covering interim reporting
ASC 270, 250, and 740
10% significance rules
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
What must disclosures about reportable operating segments include?
- 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
Requirements if separately reportable operating segments revenues < 75% of total consolidated revenue
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
Information about operating segments not separately reportable
Combined and disclosed in “all other” categories
Items that must be dis-aggregated from consolidated statements
- sales
- total assets
- inter-segment transactions eliminated for purposes of consolidation
10% revenue test
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
10% profit (loss) test
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
10% assets test
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
Difference between total combined assets and total consolidated assets
Unrealized inter-company profit from inter-segment inventory transactions
75% consolidated revenue test
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
