F1.05 – Notes, Interim & Segment Reporting (1.4 - 1.6) Flashcards
Interim Financial Reporting
Interim financial reporting is not required by US GAAP or IFRS, but they provide guidance
Interim financial reporting in the US is generally concerned with the quarterly reports that public companies must file with SEC
Timeliness is emphasized over reliability for interim reporting
Interim financial statements are not audited, and should be marked “unaudited”
Interim financial statements are prepared using the same principle and practices used in the most recent annual report, unless a change in accounting principle is adopted in the current year
– Additionally US GAAP allows certain principles and practices to be be modified for interim financial reporting. IFRS does not allow this.
Notes to the Financial Statements - Disclosures
Summary of significant accounting policies
- Always first or second note
Estimates made by management
Related party transactions
Related party receivables
Control relationships with other entities even if no transactions between them
Disclosures of risks and uncertainties (US GAAP only)
- Narrower disclosure requirements for IFRS
Additional disclosures for IFRS:
- Judgments made by management
- Compensation arrangements by key management
Interim Financial Reporting – Minimum Presentation Requirements
US GAAP has no minimum presentation requirements
IFRS and SEC have minimum presentation guidelines
Balance Sheet (IFRS & SEC)
- For the quarter
- Preceding fiscal year end
Income statement (IFRS & SEC)
- For the quarter – current and previous year
- Year-to-date – current and previous year
Cash flow statement (IFRS & SEC)
- Year-to-date – current and previous year
- Required by IFRS (condensed) & SEC
Change in Equity (IFRS only)
- Year to date – current and previous year
- IFRS only
Interim Financial Reporting – Matching of Revenues and Expenses
Costs and expenses that benefit more than one period should be properly allocated to the periods affected.
Revenues should be recognized in the period in which they were earned and realized.
Report a total for comprehensive income in condensed financial statements of interim periods issued to shareholders
Interim Financial Reporting – Income Taxes
Income taxes estimated each quarter
Multiply the year-to-date income by the estimated effective rate and subtract the result from the provision included in the previous quarter.
US GAAP uses enacted tax rates only
IFRS uses enacted tax rates and substantially enacted changes in tax rates
Segment Reporting
Financial statements for public business enterprises must report information about a company's – Operating segments – Products and services – Geographic areas – Major customers
Required by IFRS and US GAAP
Applies to public companies only
– not-four-profit organizations exempt
– Nonpublic companies exempt
– Doesn’t apply to separate financial statements of members of a consolidated group if both the separate company stated statements and the consolidated or combined financial statements are included in the same financial report.
Operating Segment Defined
An operating segment is a component of an enterprise
– that engages in business activities from which it may earn revenues and incur expenses
– whose operating results are regularly reviewed by the enterprises’s “chief operating decision maker” to make decisions about resources to be allocated to the segment and assess its performance, and
– for which discrete financial information is available
The definition of a segment depends on how management uses information, which is called the management approach method
Components that are not Segments
Corporate headquarters
Pension plans
Segment Reporting – 10% Size Test
Must meet at least 1 of the following tests to be reportable segment
- Segment revenue > 10% revenue of all operating segments
2 Absolute amount of profit or loss > 10% of the greater of
i. Total profit of all profitable segments
ii. Total loss of all segments with net loss
- Segment’s assets > 10% of total assets
Segment Reporting – 75% Reporting Sufficiency Test
If external revenue of reporting segments is < 75% of goal external revenue, add more segments till break 75% threshold
Segment Reporting – Comparative Reporting
Operating segment that was reportable in the previous period, but not the current one may continue to be reported separately if management things the segment has continuing significance
Must restate prior period presented to reflect operating segments that were not deemed reportable in the prior period but are reportable in the current period.
Segment Profit (or Loss) Formula
Revenues
– Directly traceable costs
– Reasonably allocated costs
= OPERATING PROFIT (LOSS)
Income and expenses are not allocated to a segment unless they are included in the determination of segment profit or loss reported to the “Chief Operating Decision Maker”
Items Excluded from Segment Profit (or Loss)
- General corporate revenues
- General corporate expenses
- Interest expense (except financial institutions)
- Income taxes
- Equity in earnings and losses on uncontradicted subsidiary (i.e. under the equity method)
- Gains or losses from discontinued operations
- Extraordinary items
- Minority interest
Reportable Segment Disclosures
- Identifying factors
- Products and services
- Profit or loss
- Assets
- Liabilities (IFRS only)
- Measurement criteria
- Reconciliations
Segment Reporting – Reportable Segment Disclosures: Reconciliations
- Total of reportable segments’ revenues to the enterprise’s consolidated revenues
- Total of the reportable segments’ measurement of profit or loss to the enterprise’s consolidated income before income taxes, extraordinary items, discontinued operations, and the cumulative effect of changes in accounting principles.
- Total of the reportable segments’ assets to the enterprise’s consolidated assets
- Total of the reportable segment’s liabilities to the enterprise’s consolidated liabilities (IRS only)
- Total of the reportable segments’ amount for every other significant item of information disclosed to the corresponding consolidated amount.
