Advanced Accounting Jeter ● Chaney Reporting for Segments and for Interim Financial Periods Prepared by Sheila Ammons, Austin Community College Learning Objectives • Understand the need for disaggregated financial data • Describe the basic requirements of public companies in reporting segmental data • Determine an operating segment • Define a reportable segment • Identify the information to be presented for each reportable segment Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives • Explain when and what types of geographic data must be reported • Explain when information about major customers must be reported • Compare the international accounting standards for segmental reporting with the U.S requirements • Describe current requirements for companies to report interim information • Indicate some problems with interim reporting and the authoritative position on the issue Copyright © 2015 John Wiley & Sons, Inc All rights reserved Need for Disaggregated Financial Data • Users need information to determine conditions, trends, and ratios that assist in predicting cash flows of firms • Different industries or geographic areas have different – rates of profitability, – opportunities for growth, and – types of risk • Disaggregated information is useful to assist in analyzing uncertainties surrounding the timing and amounts of expected cash flows LO The need for disaggregated financial data Copyright © 2015 John Wiley & Sons, Inc All rights reserved Standards of Financial Accounting and Reporting • FASB ASC topic 280 (Segment Reporting): Segmental disclosures have limitations as well as strengths • Primary benefit - unveiling information that has been merged and possibly buried in the consolidated data • Arguments against segmental disclosures include: – May be misleading or meaningless due to accounting and allocation problems, lack of user knowledge, different measurement techniques – Disclosures to competing firms, labor unions, etc – Adds to already excessive amount of accounting detail • Most people believe the advantages outweigh the disadvantages LO Basic disclosure requirements Copyright © 2015 John Wiley & Sons, Inc All rights reserved Standards of Financial Accounting and Reporting • In general, the FASB implemented a management approach: – Focusing on the way in which management organizes segments internally • To make operating decisions • To assess performance • The objective of the management approach: – To facilitate consistence between internal and external reporting LO Basic disclosure requirements Copyright © 2015 John Wiley & Sons, Inc All rights reserved Standards of Financial Accounting and Reporting Basic Disclosure Requirements (Management Approach): Objective is to facilitate consistency between internal and external reporting Segmented by Reporting Requirement Product or service, Segmental profit or loss, Geographic area, Certain items of revenue and expense, Customer type, or Legal entity Segmental assets, and Other items LO Basic disclosure requirements Copyright © 2015 John Wiley & Sons, Inc All rights reserved Standards of Financial Accounting and Reporting Operating Segment - Component of an enterprise that – May earn revenues and incur expenses – Chief operating decision maker regularly reviews the component’s operating results – Discrete financial information is available Reportable Segment – Significant to an enterprise’s operations • Has passed one of three 10% tests or • Determined to be reportable by other criteria LO Determine an operating segment Copyright © 2015 John Wiley & Sons, Inc All rights reserved LO Reportable segment Standards of Financial Accounting and Reporting Common Cost Allocation – If portions of assets are allocated internally and used by the chief operating decision maker, • those amounts should be allocated on a reasonable basis and disclosed for external reporting purposes as well – Two of the most difficult tasks in applying the segment disclosure requirements are those of determining An appropriate basis for the allocation of common costs and Appropriate operating segments LO Reportable segments Copyright © 2015 John Wiley & Sons, Inc All rights reserved Standards of Financial Accounting and Reporting Question A component of an enterprise that may earn revenues and incur expenses, and about which management evaluates separate financial information in deciding how to allocate resources and assess performance is a(n) a) identifiable segment b) operating segment c) reportable segment d) industry segment LO Reportable segments Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting • The Board concluded that “each interim period should be viewed as an integral part of an annual period” – Financial statements for each interim period should be based on the same accounting practices used for annual statements – Revenue should be recognized on same basis as used for the full year – Costs and expenses that are associated directed with or allocated to the products sold (or services rendered) should be similarly treated for interim purposes LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting • Acceptable alternatives for inventory costing: – COGS can be estimated using gross profit rates – Liquidated LIFO base that is expected to be replaced by year end: cost of goods sold should be charged at expected replacement – Inventory loss from market declines expected to recover before year end need not be recognized – Standard cost for determining inventory and product cost should be based on the procedures for reporting variances that are used for the fiscal year LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting Review Question Which of the following methods of inventory valuation is allowable at interim dates but not at year-end? a) Estimated gross profit rates b) Retail method c) Specific identification d) Weighted average Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting • All Other Costs and Expenses (other than product costs) – Charged to income as incurred or allocated based on • an estimate of time expired, • benefit received or • activity associated with the periods – Costs not readily identified with activities or benefits should be charged when incurred – Arbitrary assignment of costs should not be made – Gains and losses that would not be deferred at year-end should not be deferred at interim periods LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting Review Question In considering interim financial reporting, how did the Accounting Principles Board conclude that such reporting should be viewed? a) As useful only if activity is evenly spread throughout the year so that estimates are unnecessary b) As a “special” type of reporting that need not follow generally accepted accounting principles c) As reporting of an integral part of an annual period d) As reporting of a basic accounting period Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting Provision for Income Taxes • The basic technique for computing income tax provisions for interim financial statements is described in FASB ASC subtopic 740-270 (Income Taxes – Interim Reporting) – At the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year • The effective rate should reflect anticipated tax credits, foreign tax rates, percentage depletion, and other available tax planning alternatives – No effect should be included for the tax related to significant unusual or extraordinary items LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting – Income Taxes Exercise 14-8: Spur Company’s actual earnings for the first two quarters of 2014 and its estimate during each quarter of its annual earnings are: Actual first-quarter earnings $ 400,000 Actual second-quarter earnings 510,000 First-quarter estimate of annual earnings 1,350,000 Second-quarter estimate of annual earnings 1,420,000 Spur Company estimated its permanent differences between accounting income and taxable income for 2014 as: Environmental violation penalties $ 25,000 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2014 First Quarter Estimated Annual Earnings $ 1,350,000 Add: Environmental Violation Penalties 25,000 Deduct: Dividend Income Exclusion (180,000) Estimated Taxable Income $ 1,195,000 Estimated Annual Income Tax Payable * $ Estimated Effective Combined Annual Tax Rate ** 501,900 37.2% Actual First Quarter Earnings x 400,000 First Quarter Income Tax Provision (Expense) $ 148,800 * ($1,195,000 x 42%) ** ($501,900 / $1,350,000) Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2014 First Quarter Journal Entry Income Tax Expense Income Tax Payable 148,800 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 148,800 Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the second quarter of 2014 Estimated Taxable Income $ 1,265,000* Est Annual Income Tax Payable 531,300** Est Effective Combined Cumulative Income to Date ($400,000 + $510,000) $ 910,000 Estimated Income Tax Rate: 0.374 *** Cumulative Tax Provision Needed 340,340 Tax Provision in 1st Quarter 148,800 Tax Provision in 2nd Quarter $191,540 *Est Annual Earnings $1,420,000 less Net Permanent Differences $155,000 ** $1,265,000 X 42 *** $531,300/$1,420,000 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting – Income Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2014 Second Quarter Journal Entry Income Tax Expense 191,540 Income Tax Payable 191,540 1st 2nd 1st Quarter tax provision = $148,800 2nd Quarter tax provision = $191,540 * 3rd Year-to-Date tax provision = $340,340 * $340,340 - $148,800 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 4th Interim Financial Reporting Accounting Changes in Interim Periods • Changes in Estimate – Accounted for in the interim period in which the change is made – No restatement of previous interim reports should be made – Effect on earnings disclosed for current and subsequent interim periods • Current GAAP requires retrospective application to financial statements of prior periods where practical LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved Interim Financial Reporting Minimum Disclosures in Interim Reports • Sales or gross revenues, provision for income taxes, extraordinary items (including related income tax effects), and net income • Basic and diluted earnings-per-share data • Seasonal revenue, costs, or expenses • Significant changes in estimates or provisions for income taxes • Disposal of a segment of a business and extraordinary, unusual, or infrequently occurring items • Contingent items • Changes in accounting principles or estimates • Significant changes in financial position LO 10 Problems in interim reporting Copyright © 2015 John Wiley & Sons, Inc All rights reserved International Issues in Interim Reporting • IAS 34, “Interim Financial Reporting”, does not state which entities should prepare and publish interim financial statements – Determines the minimum content of the interim reports if the entity elects or is required to prepare interim financial statements – Generally requires that the interim period be a discrete reporting period – Applies when an entity publishes an interim financial report in accordance with International Financial Reporting Standards (IFRS) Copyright © 2015 John Wiley & Sons, Inc All rights reserved Differences between IFRS and US GAAP • The view of an interim period is conceptually quite different under U.S GAAP and under IFRS – Under IFRS, the interim period is defined as a discrete reporting period, with certain exceptions • Recall that discrete reporting treats each interim period as a basic accounting period to be evaluated as if it were an annual period – Under U.S GAAP, an interim period is an integral part of the full year (with certain exceptions) • Thus, the adjustments and deferrals may be affected by judgment about the expected results for the entire year Copyright © 2015 John Wiley & Sons, Inc All rights reserved ... due to accounting and allocation problems, lack of user knowledge, different measurement techniques – Disclosures to competing firms, labor unions, etc – Adds to already excessive amount of accounting. .. of Financial Accounting and Reporting Basic Disclosure Requirements (Management Approach): Objective is to facilitate consistency between internal and external reporting Segmented by Reporting... to be reportable by other criteria LO Determine an operating segment Copyright © 2015 John Wiley & Sons, Inc All rights reserved LO Reportable segment Standards of Financial Accounting and Reporting