Pertemuan 3 PPt Ch15 Beams.pptx

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Dra.Retno Suliati Akt. MM
EBA601
Advance Financial Accounting
Segment and Interim Financial Reporting (
Ch 15) to accompanying Adv Accounting
13th Global Ed. By Beams, Anthony and
Smith

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
Segment and Interim Financial
Reporting: Objectives
15.1 Understand how firms use the management
approach to identify potentially reportable
operating segments.
15.2 Apply the threshold tests to identify reportable
operating segments: the revenue test, the asset
test, and the operating-profit test.
15.3 Determine the reporting of any additional segments
using the 75 percent external-revenue test.
15.4 Understand the types of disclosure information for
segments and the reasons that the levels of
disclosure may vary across companies.

Segment and Interim Financial
Reporting: Objectives (continued)
15.5 Understand what segment disclosures are
reconciled to the consolidated amounts.
15.6 Know the required enterprise-wide disclosures with
respect to products and services, geographic areas
of operation, and major customers.
15.7 Understand the similarities and differences in the
reporting of operations in an interim versus an
annual reporting period.
15.8 Compute interim-period income tax expense.

15.1: Reportable Operating Segments
Segment and Interim Financial Reporting

Operating Segments
According to GAAP, companies that have publicly
traded debt or equity instruments must report on
their business segments.
Reporting is based on the structure used by
management to make decisions or evaluate
performance. For example,
● if the company’s internal reporting and evaluation
system is geographically based, the segment
reporting is geographically based.
● if the internal reporting and evaluation system is
product-line based, the segment reporting is
product-line based.

Operating Segment (definition)
A component of a business enterprise
1. Engages in business activities
●Revenues and expenses tracked
●Intercompany amounts included
2. Operating results are reviewed by chief
operating decision maker
3. Discrete financial information is available
Excludes pension and post-retirement plans, and
general corporate headquarters

Combining Segments
Segments with similar economic characteristics may
be combined.
● Products and services
● Production processes
● Classes of customers
● Distribution systems
● Regulatory environment, if applicable

15.2: Threshold Tests

Reportable Segments
Operating segments are reportable and material if
any one of the three threshold tests are met.
1. 10% Revenue test
2. 10% Profit or loss test
3. 10% Asset test
Segments not meeting any of the three tests are
combined into one "all other" category.
The 75% External revenue test is an additional test
to identify sufficient number of reportable segments.

10% Revenue Test
Segment reported revenue, including intersegment
revenues, is 10% or more of the combined revenue
of all operating segments.
– Combined includes "all other" category
– Intersegment revenues are not eliminated so
that combined revenue may be > consolidated
revenue.

Example: 10% Revenue Test
Blank
Operating
segment
revenue
Intersegment
revenue
Total
segment
revenue Reportable?
Transportation $ 360 $ 0 $ 360 Yes
Oil refining 405 480 885 Yes
Insurance 95 20 115 No
Finance 140 0 140 No
Total $1,000 $500 $1,500 Blank
A segment is reportable if its total revenue ≥ 10% of
combined segment revenue.
Threshold = 10%(1,500) = $150
Transportation ($360) and Oil refining ($885) are
reportable segments.

10% Asset Test
Segment assets are 10% or more of combined
assets of all operating segments.
– Combined includes "all other"
– Use the segment's identifiable assets
– General corporate assets
● May be excluded or included
● Consider organization of assets for decision-
making purposes
– Combined assets of segments may be less than
total corporate assets.

Example: 10% Asset Test
Blank
Operating segment's
identifiable assets Reportable?
Transportation $ 700 Yes
Oil refining 950 Yes
Insurance 180 No
Finance 1,170 Yes
Total $3,000 Blank
A segment is reportable if its identifiable assets ≥
10% of combined segment assets.
Threshold = 10%(3,000) = $300
Transportation, Oil refining, and Finance
are reportable segments.

10% Profit or Loss Test
The absolute value of the segment's reportable profit
or loss is 10% or more of the greater of:
1. The combined reported profit of all segments
reporting profits, or
2. The absolute value of the combined reported
losses of all segments reporting losses.
Operating segment profit or loss
● Is not defined by GAAP
● Is based on the calculation used by
management for decision making
● May include or exclude common revenues
and costs

Example: 10% Profit or Loss Test
Separate profitable and unprofitable segments
Blank
Segment
operating profit
Segment
operating loss Reportable?
Transportation Blank (100) Yes
Oil refining 200 Blank Yes
Insurance 20 Blank No
Finance 50 Blank Yes
Total 270 (100) Blank
A reportable segment's |profit or loss| ≥ 10% of the
greater of |combined profits or combined losses|.
$270 is greater than $100.
Threshold = 10%(270) = $27.
Transportation, Oil refining, and Finance are
reportable segments.

15.3: Tests for Additional Segments

75% External Revenue Test
GAAP does not specify the number of segments that
must be reported; however, the external revenue of
reportable segments must be at least 75% of the
total consolidated revenue.
● Exclude intersegment revenues
● Add other segments until the 75% test is met
● Segments are typically aggregated so that there
are not more than ten separate segments
reported.

Preliminary Segment Test Results:
Example (continued)
Based on the 10% revenues, 10% assets, 10% profit
and loss tests:
● Three reportable segments
- Transportation
- Oil refining
- Finance
● One non-reportable segment which becomes "all
other"
- Insurance
Now, check to see if the three are enough!

75% External Revenue: Example
Now we examine the operating segment revenue
without intersegment sales data. Have sufficient
segments been identified?
Threshold = 75%(1,000) = $750
$360 + 405 + 140 > $750 … Yes!
Blank
Operating
segment revenue
Intersegment
revenue
Total segment
revenue Reportable?
Transportation $ 360 $ 0 $ 360 Yes
Oil refining 405 480 885 Yes
Insurance 95 20 115 No
Finance 140 0 140 No
Total $1,000 $500 $1,500 Blank

15.4: Segment Disclosures

Reportable Segment Disclosures
● Profit or loss
● Total assets
● Revenue from external customers
● Revenue from other operating segments
● Interest income and expense
● Depreciation and amortization expense
● Unusual items
● Income from equity method investments
● Income tax expense or benefit
● Extraordinary items
● Significant noncash items other than depreciation

Reportable Segment Disclosures (continued)
Remember:
GAAP is depending on the company’s chief operating
decision maker to determine the most useful
information.
Whatever data is required internally will also be used
for external disclosures. However, the company
allocating expenses among the operating segments
should be continued for external segment disclosure
purposes.

15.5: Reconciling Segments to
Consolidated Amounts

Reconciliations
Reconciliation schedules should be provided to
explain the difference between segment amounts
and consolidated totals for:
1.Reportable segment revenue to consolidated
revenue
• Intersegment revenues
2.Reportable segment profit and loss to consolidated
income before taxes
• Intersegment revenues, expenses, and common
or allocated costs

Reconciliations (continued)
3.Reportable segment assets to consolidated assets
• Corporate assets
4.If other significant information is disclosed,
reconcile the segment amounts with consolidated
amounts for each item.

15.6: Enterprise-Wide Disclosures

Additional Disclosures
Additional enterprise-wide disclosures are required if
not already reported with segment information
1. Products and services
– Revenues by product/product line, service
2. Geographic information
– Revenues and fixed assets
– Domestic and foreign
– And if >10%, the specific country must be
disclosed

Additional Disclosures (continued)
3. Major customers
– Customer revenues > 10% Total Revenues
– Segment which has those revenues
– Not required: customer identity

15.7: Interim Financial Reporting

Accounting for Interim Periods
Are interim reports “stand-alone” periods, or an
integral part of the annual period?
GAAP has concluded that an interim period is an
integral part of the whole, and should be based on
the same accounting principles and practices used
in the annual financial statements.

Product Cost Modifications
● Companies that determine Cost of Goods Sold via
a physical inventory may use the Gross Profit
method for interim periods.
● LIFO inventory layers that are liquidated in an
interim period may be expensed at current cost if
the layer will be replaced by year end.
● Inventory market declines are not required to be
recorded if the decline is temporary.
● Variances under a standard cost system that are
expected to be absorbed by year end may be
deferred at the interim date.

Other Interim Modifications
● Annual expenses may be allocated, such as
property taxes or major annual repairs.
● Advertising expenses may be deferred to later
interim periods if the benefits clearly apply.
● Income taxes from continuing operations use an
estimated effective annual tax rate.
● Income taxes on unusual, infrequent, and other
items are calculated separately and included in the
interim period containing that item.

15.8: Interim-Period Income Taxes

Estimated Annual Effective Tax Rate
If Taxable Income Is: blank Blank Blank The Tax Is: Blank
Over But Not Over Pay + Excess Of the Amount Over
$ 0 $ 50,000 Blank Blank 15% $ 0
50,000 75,000 $ 7,500 + 25 50,000
75,000 100,000 13,750 + 34 75,000
100,000 335,000 22,250 + 39 100,000
335,000 -- Blank Blank 34 0
If expected annual taxable income = $100,000
Taxes= $22,250
Effective tax rate = 22,250 / 120,000 = 22.5%
The 22.5% rate is used for all four quarters.

Interim Period Disclosures
● Sales or gross revenues
● Provision for taxes
● Extraordinary items, net of tax
● Net income and Comprehensive income
● Basic and Diluted EPS
● Seasonal revenues, costs, or expenses
● Significant changes in estimated taxes
● Disposals, extraordinary, unusual, or infrequent
items
● Contingent items
● Changes in accounting principles or estimates
● Significant change in financial position

Other Interim Disclosures
● Segment information disclosures are reduced for
interim reporting.
● Certain information about defined benefit pension
plans
● Certain information about the use of fair value
measurements, derivatives, and other financial
instruments
● Information about impairments

SEC Interim Financial Disclosures
SEC requires
● Q1, Q2, Q3 and annual reports
● Quarterly requirements similar to annual
● Comparative information
– Current quarter vs. prior year quarter
– Quarterly and year-to-date for current and
prior year

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