14 14 Reporting for Segments and for Interim Financial Periods Advanced Accounting, Fifth Edition Slide 14-1 Learning Learning Objectives Objectives Slide 14-2 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 Learning Learning Objectives Objectives Slide 14-3 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 10 Indicate some problems with interim reporting and the authoritative position on the issue Need Need for for Disaggregated Disaggregated Financial Financial Data 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 expected cash flows Slide 14-4 LO The need for disaggregated financial data Standards Standards of of Financial Financial Accounting Accounting and and Reporting Reporting FASB ASC topic 280 (Segment Reporting): Segmental disclosures have limitations as well as strengths Primary benefit - unveiling information Arguments against segmental disclosures include: May be misleading due to accounting problems, lack of user knowledge, different measurement techniques Disclosures to competing firms, labor unions, etc Adds to already excessive amount of disclosures Slide 14-5 LO disclosure financial requirements LO The need forBasic disaggregated data Standards Standards of of Financial Financial Accounting Accounting and and Reporting Reporting Basic Disclosure Requirements (Management Approach): Objective is to facilitate consistency between internal and external reporting Segmented by Reporting Requirement Product or Segmental profit or loss, service, Geographic area, Customer type, or Legal entity Certain items of revenue and expense, Segmental assets, and Other items Slide 14-6 LO Basic disclosure requirements Standards Standards of of Financial Financial Accounting Accounting and and Reporting Reporting Common Cost Allocation Common costs should be allocated to a segment (external reporting purposes only) if they are included in the segment’s profit or loss calculations that are used internally by the chief operating decision maker 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 Slide 14-7 LO Basic disclosure requirements Appropriate operating segments Standards Standards of of Financial Financial Accounting Accounting and and Reporting 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 Slide 14-8 Standards Standards of of Financial Financial Accounting Accounting and and Reporting 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 Slide 14-9 Significant to an enterprise’s operations Has passed one of three 10% tests or Determined to be reportable by other criteria LO Operating segment LO Reportable segment Standards Standards of of Financial Financial Accounting Accounting and and Reporting Reporting Determining Operating Segments Modified Management Approach Aggregation Criteria Quantitative Thresholds Slide 14-10 LO Determine an operating segment Interim Interim Financial Financial Reporting Reporting Acceptable alternatives for inventory costing: COGS can be estimated using gross profit rates Liquidated LIFO base should be charged at replacement cost if expected to be replaced by year end 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 used for the fiscal year Slide 14-28 LO 10 Problems in interim reporting Interim Interim Financial Financial Reporting 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 Slide 14-29 Interim Interim Financial Financial Reporting 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 If 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 yearend should not be deferred at interim periods Slide 14-30 LO 10 Problems in interim reporting Interim Interim Financial Financial Reporting 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 Slide 14-31 d As reporting of a basic accounting period Interim Interim Financial Financial Reporting 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 Slide 14-32 The effective rate should reflect anticipated tax credits, foreign tax rates, percentage depletion, and other availableLO tax alternatives 10planning Problems in interim reporting Interim Interim Financial Financial Reporting Reporting –– Income Income Taxes Taxes Exercise 14-8: Spur Company’s actual earnings for the first two quarters of 2008 and its estimate during each quarter of its annual earnings are: Actual first-quarter earnings Actual second-quarter earnings First-quarter estimate of annual earnings $ 400,000 510,000 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 2008 as: Environmental violation penalties Dividend income exclusion $ 25,000 180,000 The combined state and federal tax rate for 2008 is 42% Slide 14-33 Interim Interim Financial Financial Reporting Reporting –– Income Income Taxes Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008 First Quarter Estimated Annual Earnings $ 1,350,000 Add: Environmental Violation Penalties 25,000 Deduct: Dividend I ncome Exclusion (180,000) Estimated Taxable I ncome $ 1,195,000 Estimated Annual I ncome Tax Payable * $ Estimated Eff ective Combined Annual Tax Rate ** 37.2% Actual First Quarter Earnings x 400,000 First Quarter I ncome Tax Provision (Expense) $ 148,800 * ($1,195,000 x 42%) Slide 14-34 501,900 ** ($501,900 / $1,350,000) Interim Interim Financial Financial Reporting Reporting –– Income Income Taxes Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008 First Quarter Journal Entry Income Tax Expense Income Tax Payable Slide 14-35 148,800 148,800 Interim Interim Financial Financial Reporting Reporting –– Income Income Taxes Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008 Second Quarter Estimated Annual Earnings $ 1,420,000 Deduct: Net Permanent Diff erence ($180,000- $25,000) (155,000) Estimated Taxable I ncome $ 1,265,000 Estimated Annual I ncome Tax Payable * $ Estimated Eff ective Combined Annual Tax Rate ** Cumulative I ncome to Date ($400,000 + $510,000) 37.4% x $ 910,000 Cumulative Tax Provision Needed 340,340 Tax Provision in 1st Quarter 148,800 Tax Provision in 2st Quarter * ($1,265,000 x 42%) Slide 14-36 531,300 ** ($531,300 / $1,420,000) $ 191,540 Interim Interim Financial Financial Reporting Reporting –– Income Income Taxes Taxes Exercise 14-8: Prepare journal entries to record Spur Company’s provisions for income taxes for the first two quarters of 2008 Second Quarter Journal Entry Income Tax Expense 191,540 Income Tax Payable Slide 14-37 1st 2nd 1st Quarter tax provision = $148,800 2nd Quarter tax provision = $191,540 * * $340,340 - $148,800 191,540 3rd Year-to-Date tax provision = $340,340 4th Interim Interim Financial Financial Reporting Reporting Accounting Changes in Interim Periods Changes in Estimate Accounted for in interim period when change is made No restatement of previous interim reports Effect on earnings disclosed for current and subsequent interim periods Current GAAP requires retrospective application to financial statements of prior periods where practical Slide 14-38 LO 10 Problems in interim reporting Interim Interim Financial Financial Reporting Reporting Minimum Disclosures in Interim Reports Slide 14-39 • 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 • LO 10 Problems in interim reporting International International Issues Issues in in Interim Interim Reporting Reporting IAS 34, “Interim Financial Reporting”, does not state which entities should prepare and publish interim financial statements The standard determines the minimum content of the interim reports if the entity elects or is required to prepare interim financial statements IAS 34 generally requires that the interim period be a discrete reporting period IAS 34 applies when an entity publishes an interim financial report in accordance with International Financial Reporting Standards (IFRS) Slide 14-40 Differences Differences between between IFRS IFRS and and US US GAAP 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 Under U.S GAAP, an interim period is an integral part of the full year (again, with certain exceptions) Slide 14-41 Copyright Copyright Copyright © 2012 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Slide 14-42 ... 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