slide 14-1 14 chapter 14 reporting segment and related information

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14 CHAPTER 14

REPORTING SEGMENT AND RELATED INFORMATION

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14FOCUS OF CHAPTER 14

Objectives and Applicability of FAS 31

Reporting Operating Segment Information

Reporting Enterprise-wide Information Products & services Geographic areas Major customers

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14 Segment and Related Information Reporting: Objectives

To provide information about a reporting entity’s different types of: Business activities. Economic environments.

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14 Segment and Related Information Reporting: Objectives

This information should help financial statement users: Better understand past

performance. Better assess prospects for future

net cash flows. Make more informed judgments

about the entity as a whole.

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14 Segment and Related Information Reporting: Overview & Applicability

Segment and related information reporting under FAS 131 consists of disclosing the following 4 informational items: Operating segments. Products & services. Foreign operations/sales. Major customers.

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#2, #3, & #4 are “entity-wide disclosures.” Theyapply to ALL entities--even those having only l segment.

FAS 131

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Segment and related information reporting is: Needed because of the limitations of

consolidated financial statements. Done in notes to the financial statements. Applicable to:

Both ANNUAL & INTERIM statements. PUBLIC BUSINESS ENTERPRISES

ONLY (excludes not-for-profit entities).

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Public business enterprises are entities that: Have issued debt or equity securities

that are traded in a public market, Are required to file financial

statements with the SEC, or Provide financial statements for the

purpose of issuing any class of securities in the public market.

Wall Street

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Segment and related information reporting even applies to the following entities if they issue “separate company ” statements that are NOT in the same FINANCIAL REPORT as a set of consolidated statements: Parent enterprises. Subsidiaries. Joint ventures. Investees--if the equity method is used.

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14 Segment Reporting:Basis of Segmentation

Disaggregated financial information could be presented in several ways, for example: By products & services (rejected). By geographic area (rejected). By legal entity (rejected). By type of customer (rejected). By organization of the segments for

reporting to management for decision-making (the “management” approach).

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FAS 131 requires :

A SINGLE basis of segmentation.

The MANAGEMENT approach basis of segmentation.

In contrast, FAS 14 (which was superseded byFAS 131) required TWO bases of segmentation--by industry and by geographic areas.

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Merits of the “Management” Approach: Facilitates consistent descriptions

in (1) annual reports and (2) various other published information.

Entities need not develop a separate measure of profitability solely for segment reporting purposes. Thus: A non-GAAP method used internally

is also used for segment reporting.

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The components that management establishes for reporting & decision-making are called OPERATING SEGMENTS. Such components: Engage in activities from which they may

earn revenues and incur expenses. Such activities include revenues and

expenses resulting from transactionswith other segments (calledintersegment transactions).

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Such components (continued): Have their operating results regularly

reviewed by a chief operating decision maker.

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#3 Have discrete financial information available.

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What Could Be an Operating Segment: A start-up operation that has yet to

report any revenues. A component of a vertically

integrated operation--providing these operations are managed that way.

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What Could Not Be an Operating Segment: A corporate headquarters. Functional departments that earn either

no revenues or only incidental revenues.

What Is Definitely Not an Operating Segment: An entity’s pension plan. An entity’s postretirement benefit plan.

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14 Segment Reporting:Disclosures Required

An entity must disclose 4 types of information about its REPORTABLE OPERATING SEGMENTS:

General information. Specified amounts. Reconciliations of specified amounts

to consolidated amounts. Certain interim period information.

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TYPE

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14 Segment Reporting: Disclosures Required--General Information

TYPE 1--General Information Disclosures: Factors used to identify the entity’s

reportable segments, including the basisof organization, such as based on: Products and services. Geographic areas. Regulatory environments. A combination of factors.

Types of products & services from which each reportable segment derives its revenues.

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14 Segment Reporting: Disclosures Required--Specified Amounts Information

TYPE 2--Specified Amounts Disclosures: For each reportable segment, a measure

of: Profit or loss. Total assets (but not liabilities).

Certain account amounts (listed on next

slide) if they are included in the measure of segment profit or loss.

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Certain Account Amounts That May Have to Be Disclosed: Revenues from external customers. Intersegment revenues. Interest revenue and interest

expense. Depreciation & amortization expense

and significant other NONCASH items. Unusual items & extraordinary items. Equity method income on investees. Income tax expense or benefit.

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Key Point #1--LACK OF UNIFORMITY: FAS 131 does NOT define segment operating profit or loss (as did FAS 14, its predecessor). Thus any measure of performance

may be displayed--AS LONG AS THAT MEASURE OF PERFORMANCE IS REVIEWED BY THE CHIEF OPERATING DECISION MAKER.

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Key Point #2--Terminology: In dealing with segment reporting, the term “intercompany” is NOT RELEVANT. The RELEVANT terms are: Intersegment (sales between segments). Intrasegment (sales between components

of a vertically integrated operation deemed to be a single operating segment).

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Key Point #3--Terminology: In presenting operating segment information: Intersegment sales must be disclosed

separately ONLY IF they are included in the measure of profitability.

Intrasegment sales need NOT be disclosed.

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Key Point #4--Transfer Pricing: FAS 131 did not establish a basis

for setting prices for sales or transfers either between or within segments.

Transfer pricing is more likely to bean issue within vertically integrated operations than between nonvertically integrated segments.

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Key Point #5--Allocations: A segment’s expenses (used in its measure of operations) may include BOTH: Directly traceable costs and Allocated common costs (costs that

benefit two or more segments). Costs that are allocated must be

allocated on a reasonable basis.

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Key Point #6--Nonallocations: Common costs need not be allocated

to or between segments. Costs accounted for on a consolidated

basis need not be allocated to segments (e.g. pension costs).

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Key Point #7--Asymmetrical Allocations: Permitted in determining a segment’s: Measure of profitability Total assets.

Thus depreciation expense could be allocated to a segment but the related fixed assets could not.

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Key Point #8--R&D Costs: Disclosure of segment research & development costs is NOT required because: Doing so could result in competitive

harm by providing competitors with early insight into strategic plans.

R& D costs are often (1) incurred centrally and (2) NOT allocated to segments.

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Key Point #9--Liabilities: Disclosure of segment liabilities is NOT required: The value of information about

segment liabilities in assessing segment performance was deemed limited, partly because in many cases liabilities are:

Incurred centrally and NOT allocated to segments.

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Additional Asset-Related Disclosures for Reportable Segments--if the items are included in the determination of segment assets: The amount of investment in

equity method investees. Total expenditures for additions to

long-lived assets.

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MEASUREMENT--BASIC RULE: Each segment item amount reported must be the measure reported to the chief operating decision maker for assessing performance & allocating resources to the segment. Eliminations & Adjustments Made in

Consolidation: Allocate to a segment ONLY IF they are included in the measure of profit and loss used by the chief operating decision maker.

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MEASUREMENT--MULTIPLE MEASURES: If more than one measure of a segment’s profit or loss and assets is used by the chief operating decision maker, the measure selected for segment reporting must be the measure most consistent with: Those used in measuring those items in

the entity’s consolidated financial statements.

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MEASUREMENT--DISCLOSURES: For reportable segment’s profit or loss and assets, disclose as a minimum: The basis of accounting for

intersegment transactions. The nature of differences reported

on the specified reconciliations (for P/L and for assets), if not apparent thereon.

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MEASUREMENT--DISCLOSURES (cont.): The nature and effect of any changes

from prior periods in the measurement methods used to determine a reported segment P/L .

The nature and effect of any asymmetrical allocations to segments.

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14 Segment Reporting: Disclosures Required--Reconciliations

TYPE 3--Reconciliations of SPECIFIED Amounts to CONSOLIDATED Amounts: Reconcile the total of the reportable

segments’: Revenues. Measure of profit or loss. Assets. Other significant items of

information disclosed for reportable segments(e.g. liabilities, R&D expense).

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14 Segment Reporting: Disclosures Required--Interim Period Information

TYPE 4--Certain Interim Period Information: For each reportable segment, disclose:

Revenues from external customers. Intersegment revenues. A measure of profit or loss. Total assets, if a material change from

amount disclosed in last annual report. Changes in the segmentation basis or in

basis of measurement of segment P/L. Reconciliations to consolidated amounts.

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14 Segment Reporting: Disclosures Required--Cash Flow Information

Reporting segment cash flows is NOT required. An indication of both an operating

segment’s cash-generating ability and its cash requirements may be gathered from the required profitability and asset related disclosures.

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14 Segment Reporting:Aggregation of Similar Segments

Operating segments that have similar economic characteristics often have similar long-term financial performance.

Thus two or more operating segments may be combined into a single operating segment if 3 criteria (on thenext two slides) are met.

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14 Segment Reporting:Aggregation Criteria

The Three Aggregation Criteria: Aggregation must be consistent with the

objectives & principles of FAS 131. The segments must have similar

economic characteristics. The segments are similar in each of the

following 5 areas: The nature of the products &

services.

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14 Segment Reporting:Aggregation Criteria

Segments similar in 5 areas (Cont’d): The nature of the production

processes. The type or class of customer for

their products & services. The methods used to distribute their

products or provide services. If applicable, the nature of the

regulatory environment (e.g. banking, insurance, or public utilities).

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14 Segment ReportingQuantitative Thresholds--Overview

Not all operating segments are REPORTABLE operating segments.Three 10% tests are performed todetermine if an operating segmentis a reportable operating segment.

ONLY ONE of the three 10% testsneed be passed. The tests involve: REVENUES, PROFITABILITY,

and ASSETS.

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14 Segment Reporting: Quantitative Thresholds--The 10% Tests

REVENUES: Are the segment’s reported revenues [includes both sales to external customers and intersegment sales or transfers] 10% or more of the combined revenue, internal and external, of ALL reported operating segments?

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14 Segment Reporting: Quantitative Thresholds--The 10% Tests

PROFITABILITY: Is the absolute amount of the segment’s reported profit or loss 10% or more of the greater, in absolute amount, of the combined reported: PROFIT of all operating profits

that DID NOT report a loss or LOSS of all operating segments

that DID report a loss?

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Winners

Losers

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14 Segment Reporting:Quantitative Thresholds--The 10% Tests

ASSETS: Are the segment’s assets 10%or more of the combined assets of ALL operating segments?

Operating segments that do NOT meet any of the three 10% tests may be COMBINED with Other such operating segments to produce a

reportable segment--ONLY IF they share a majority of the specified aggregation criteria (listed on slides #38 & #39).

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14 Segment Reporting:Nonreportable Operating Segments

Nonreportable operating segments and other business activities are: Combined and Disclosed in an “ALL OTHER” category.

The Judgment Factor: A reportable segment in the preceding period that does NOT qualify as a reportable segment in the current period may be presented if management deems it to be of continuing significance.

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14 Segment Reporting:The 75% Test

Determining Reportable Operating Segments: Enough operating segments must be selected

so that at least 75% of the total consolidated revenues (sales to external customers) is included in reportable operating segments.

Describing Reportable Operating Segments: The product or service of each industry

segment must be identified.

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14 Enterprise-Wide Disclosures: The Three Categories of Information

Three types of enterprise-wide disclosures are called for. Information about: Products and Services. Geographic Areas. Major Customers.

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14 Enterprise-Wide Disclosures: Products and Services

An entity must report REVENUES FROM EXTERNAL CUSTOMERS--unless it is impractical to do so--for: Each product and service, or Each group of similar products

and services. If it is impractical to disclose this product

and service information, disclose that fact.

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14 Enterprise-Wide Disclosures: Geographic Areas--General

An entity must report geographic information--unless it is impracticalto do so--for : REVENUES LONG-LIVED ASSETS

If it is impractical to disclose this geographicinformation, disclose that fact.

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14 Enterprise-Wide Disclosures: Geographic Areas--Revenues

REVENUES--Disclose: Revenues from external customers

located: In the United States.

Outside the United States,in total.

Revenues attributed to an individual

foreign country, if material.

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14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets

LONG-LIVED ASSETS--Disclose: Long-lived assets located:

In the United States.

Outside the United States,in total.

In an individual foreign country,if material.

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14 Enterprise-Wide Disclosures: Geographic Areas--Long-Lived Assets

Long-lived assets exclude: Financial instruments. Long-term customer relationships

of a financial institution. Mortgage or other servicing

rights. Deferred policy acquisition costs. Deferred tax assets.

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14 Enterprise-Wide Disclosures: Major Customers

When an entity has revenues from any single customer in excess of 10% of total revenues, disclose: The fact of such revenues. The amount of revenues from each

customer [but not the identity of each].

The industry segment(s) making the salesto each such customer.

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14 Enterprise-Wide Disclosures:Major Customers

Each is considered a SINGLE customer : A group of entities known to be

under common control. The federal government. A state government. A local government. A foreign government.

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14Review Question #1

Revtex’s 5 operating segments have total revenues of: #1--$100,000, #2--$200,000, #3--$300,000 (includes intrasegment revenues of $30,000), #4--$400,000, and #5--$500,000 (includes intrasegment revenues of $50,000). The revenues test is based on revenues of:A. $1,420,000 B. $1,450,000 C. $1,470,000 D. $1,500,000

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14Review Question #1--With Answer

Revtex’s 5 operating segments have total revenues of: #1--$100,000, #2--$200,000, #3--$300,000 (includes intrasegment revenues of $30,000), #4--$400,000, and #5--$500,000 (includes intrasegment revenues of $50,000). The revenues test is based on revenues of:A. $1,420,000 B. $1,450,000 ($1,500,000 - $50,000)C. $1,470,000 D. $1,500,000

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14Review Question #2

Optex’s 5 operating segments have operating profits and losses of: #1--$100,000, #2--$(200,000), #3--$300,000, #4--$400,000, and #5--$500,000. The operating profit or loss test is based on 10% of:

A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000

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14Review Question #2--With Answer

Optex’s 5 operating segments have operating profits and losses of: #1--$100,000, #2--$(200,000), #3--$300,000, #4--$400,000, and #5--$500,000. The operating profit or loss test is based on 10% of:

A. $200,000 B. $1,100,000 C. $1,300,000 D. $1,500,000

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14End of Chapter 14

Time to Clear Things Up--Any Questions?

slide 14-1 14 chapter 14 reporting segment and related information

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