FAR2 M5 - Segment Reporting

Question 1

Objective of segment reporting

Answer 1

1. Better understand entity performance
2. Better assess its prospects for future net cash flows
3. Make informed judgments about the entity as a whole
   In general, the entity is only required to disclose the segment profit or loss, assets and certain related items. A segment cash flow is not required.

Question 2

GAAP vs. IFRS on Segment Reporting

Answer 2

IFRS requires the disclosure of segment liabilities. GAAP does not require.

Question 3

Required Disclosures for All Public Entities

Answer 3

1. Operating Segments (annual and interim)
2. Products or services - revenues from external customers, unless impracticable to do so.
3. Geographic areas - revenues from external customers
4. Major customers

Question 4

Accounting Principles and Segment Reporting

Answer 4

Must use the same accounting principles as the main financial statements. The segment info must be reconciled to the related aggregate amounts in the FS.

Question 5

Intercompany Transactions

Answer 5

Are not eliminated for segment reporting.

Question 6

Segment Reporting & Public Companies

Answer 6

Only required for public companies. Does not apply to not-for-profit and non-public companies.

Question 7

Operating Segments

Answer 7

A component of an entity that:

1. engages in business activities from which it can earn revenues and incur expenses. Even includes revenue from contracting with another segment internally.
2. Operating results are regularly reviewed by the Chief Operating Decision Maker to make decisions anout where resources should be allocated.
3. Its financial information is discrete and available. Traceable cash flows.

Question 8

What are not considered components of operating segment?

Answer 8

1. Corporate Headquarters - does not earn revenues or revenues are incidentally
2. Pension Plan - post retirement plans not considered to be an operating segment.

Question 9

Quantitative Thresholds for Reportable Segments

Answer 9

A segment is considered significant and requires disclosure if it meets any one of the following criteria:
1. If the segment meets 10% size test - both external and internal sales is 10% or more of the combined revenue. Inversely, if one segment accounts for 90% or more of the revenue, no segment reporting is necessary.
2. Reported Profit or Loss the absolute amount of the segment’s profit or loss is 10% or greater of:
a. Combined reported profit of all operating segments
that did not report a loss.
b. Combined reported loss of all operating segments
that did not report a loss.
3. Assets - is a segment’s identifiable assets are 10% or more of the combined assets of all operating segments.

Question 10

75% Reporting Sufficiency Test

Answer 10

If the total external (consolidated) revenue is less than 75% of the external (consolidated revenue, additional segments need to be identified as a reportable segments, even if they don’t meet the three tests, until at least 75% of the external revenue is included in the reportable segments. The limit on the number of segments in 10.

Question 11

All Other Segments

Answer 11

(Not 10% and already showing 75%) - should be combined and disclosed in all other segments.

Question 12

Comparative Reporting

Answer 12

If an operating segment is required to be reported in a prior period, but does not meet the criteria to report in the current period, may continue to be reported separately if management judges the segment to have continuing significance.

However, if the segment was not reported in the prior period, but meets criteria to be reported on in the current period, the segment data for the prior periods must be presented and restated to reflect the new segment.

Question 13

Segment Profit/Loss Calculation

Answer 13

Revenues
Less: Directly Traceable Costs (both internal and external)
Less: Reasonably Allocated Costs (by management)
= Operating Profit/Loss (EBIT)

Question 14

Income & Expense Allocation

Answer 14

• Management determines what is allocated to each segment
• Items generally do not include corporate revenues, corporate expenses, interest expense (except for financial institutions), income taxes, equity earnings/losses on unconsolidated subsidiary, gains/losses from discontinued operations, minority interest.

Question 15

Segment Disclosures

Answer 15

1. Identify the entity’s reportable segments, including the basis of organization (ie. products/services, geographic areas, regulatory environments). Disclose any segments that are aggregated as well.
2. Products/Services from which the segments derives its revenues
3. Profit/Loss - external/internal revenue, interest revenue/expense, depreciation/amortization, unusual items, equity in NI, income tax expense/benefit must be disclosed, if used in the profit/loss calculation
4. Assets - long lived assets, long term customer relationships, deferred policy acquisition costs, deferred tax assets, mortgage and other service rights.
5. Liabilities (IFRS only)
6. Measurement Criteria
   a. Basis for accounting for internal transactions
   b. Reconcile profits/loss and assets with the
   consolidated amounts
   c. changes in prior period measurements
7. Reconciliations - reconcile segment revenues, profit, losses, assets, liabilities (IFRS only) and/or significant item of info.