F2 M4 Flashcards
what are the three charachteristics of operating segments
Operating segment has three characteristics: (1) engages in business activities that
incur revenues and expenses, (2) operating results reviewed by “chief operating decision
maker”, and (3) discrete financial info is available (it has traceable cash flows)
what is the 10% size test
10 Percent “size” Test: Revenue, profit or loss, or assets are 10 percent or more of the
combined rev/assets of ALL operating segments (NOT TOTAL CONSOLIDATED
10 Percent “size” Test: Revenue, profit or loss, or assets are 10 percent or more of the
combined rev/assets of ALL operating segments (NOT TOTAL CONSOLIDATED
REV/ASSETS bc intercomp sales aren’t included in consolidations)
10% rev test: external rev by segment + intercompany sales for that segment / total rev
(from external and intercompany sales across all segments)
75 % “reporting sufficiency” test: If the total of external (consolidated) rev reported by
operating segments constitutes less than 75% of the total external consolidated rev,
additional operating segments need to be identified as reportable segments, even if they
do not meet the above three tests, until at least 75% of external (consolidated) rev is
included in reportable segments (practical limit is 10)
To make sure that the segments that are found to pass the 10% test are the only ones
that need to be classified as reportable segments, I need to do the 75% test. This is
done by dividing EXTERNAL SALES by combined external sales rev (do not include
intercompany sales in this calculation)
“All other segments” category: any operating segment that are not reportable based on
the above criteria should be combined in this section (these are all of the operating
segments that are not disclosed separately)
Segment profit (or loss): Revenues - directly traceable costs (inter-comp and external) -
reasonably allocated costs (determined by mgt) = operating profit (or loss) (earnings
before interest or tax) (EBIT)
An entity that generates 10% or more of rev from sales to a single customer must
disclose the fact, the total amt of rev from each such customer, and from which
segments that >10% rev occurs in (identity of customer not disclosed)
If rev doesn’t meet the 10% deadline for all shown segments, then the 10% rule might be
fulfilled by assets or profit/loss
