CHAPTER 8
SEGMENT AND INTERIM REPORTING
Chapter Outline
I. FASB Accounting Standards Codification Topic 280, Segment Reporting (FASB ASC 280),
provides current guidance on segment reporting.
A. ASC 280 follows a management approach in which segments are based on the way
that management disaggregates the enterprise for making operating decisions; these
are referred to as operating segments.
B. Operating segments are components of an enterprise which meet three criteria.
1. Engage in business activities and earn revenues and incur expenses.
2. Operating results are regularly reviewed by the chief operating decision-maker to
assess performance and make resource allocation decisions.
3. Discrete financial information is available from the internal reporting system.
C. Once operating segments have been identified, three quantitative threshold tests are
then applied to identify segments of sufficient size to warrant separate disclosure. Any
segment meeting even one of these tests is separately reportable.
1. Revenue test—segment revenues, both external and intersegment, are 10 percent
or more of the combined revenue, external and intersegment, of all reported
operating segments.
2. Profit or loss test—segment profit or loss is 10 percent or more of the greater (in
absolute terms) of the combined reported profit of all profitable segments or the
combined reported loss of all segments incurring a loss.
3. Asset test—segment assets are 10 percent or more of the combined assets of all
operating segments.
D. Several general restrictions on the presentation of operating segments exist.
1. Separately reported operating segments must generate at least 75 percent of total
(consolidated) sales made by the company to outside parties.
2. Ten is suggested as the maximum number of operating segments that should be
separately disclosed. If more than ten are reportable, the company should consider
combining some operating segments.
E. Information to be disclosed by operating segment.
1. General information about the operating segment including factors used to identify
operating segments and the types of products and services from which each
segment derives its revenues.
2. Segment profit or loss and the following components of profit or loss.
a. Revenues from external customers.
b. Revenues from transactions with other operating segments.
c. Interest revenue and interest expense (reported separately).
d. Depreciation, depletion, and amortization expense.
e. Other significant noncash items included in segment profit or loss.
f. Unusual items and extraordinary items.
g. Income tax expense or benefit.
3. Total segment assets and the following related items.
a. Investment in equity method affiliates.
b. Expenditures for additions to long-lived assets.
II. Enterprise-wide disclosures.
A. Information about products and services.
1. Additional information must be provided if operating segments have not been
determined based on differences in products and services, or if the enterprise has
only one operating segment.
2. In those situations, revenues derived from transactions with external customers
must be disclosed by product or service.
B. Information about geographic areas.
1. Revenues from external customers and long-lived assets must be reported for (a)
the domestic country, (b) all foreign countries in which the enterprise has assets or
derives revenues, and (c) each individual foreign country in which the enterprise
has material revenues or material long-lived assets.
2. U.S. GAAP does not provide any specific guidance with regard to determining
materiality of revenues or long-lived assets; this is left to management’s judgment.
C. Information about major customers.
1. The volume of sales to a single customer must be disclosed if it constitutes 10
percent or more of total sales to unaffiliated customers.
2. The identity of the major customer need not be disclosed.
III. International Financial Reporting Standards (IFRS) also provide guidance with respect to
segment reporting.
A. IFRS 8, “Operating Segments,” is based on U.S. GAAP. Major differences between
IFRS 8 and U.S. GAAP are:
1. IFRS 8 requires disclosure of total assets and total liabilities by operating segment if
these are regularly reported to the chief operating decision maker. U.S. GAAP
requires disclosure of segment assets but does not require disclosure of segment
liabilities.
2. IFRS 8 specifically includes intangibles in the scope of “non-current assets” to be
disclosed by geographic area. Authoritative accounting literature (FASB ASC)
indicates that “long-lived assets” to be disclosed by geographic area excludes
intangibles.
3. U.S. GAAP requires an entity with a matrix form of organization to determine
operating segments based on products and services. IFRS 8 allows such an entity
to determine operating segments based on either products and services or
geographic areas.
IV. To provide investors and creditors with more timely information than is provided by an
annual report, the U.S. Securities and Exchange Commission (SEC) requires publicly
traded companies to provide financial statements on an interim (quarterly) basis.
A. Quarterly statements need not be audited.
V. FASB Accounting Standards Codification Topic 270, Interim Reporting (FASB ASC 270)
requires companies to treat interim periods as integral parts of an annual period rather than
as discrete accounting periods in their own right.
A. Generally, interim statements should be prepared following the same accounting
principles and practices used in the annual statements.
B. However, several items require special treatment for the interim statements to better
reflect the expected annual amounts.
1. Revenues are recognized for interim periods in the same way as they are on an
annual basis.
2. Interim statements should not reflect the effect of a LIFO liquidation if the units of
beginning inventory sold are expected to be replaced by year-end; inventory
should not be written down to a lower market value if the market value is expected
to recover above the inventory’s cost by year-end; and planned variances under a
standard cost system should not be reflected in interim statements if they are
expected to be absorbed by year-end.
3. Costs incurred in one interim period but associated with activities or benefits of
multiple interim periods (such as advertising and executive bonuses) should be
allocated across interim periods on a reasonable basis through accruals and
deferrals.
4. The materiality of an extraordinary item should be assessed by comparing its
amount against the expected income for the full year.
5. Income tax related to ordinary income should be computed at an estimated annual
effective tax rate; income tax related to an extraordinary item should be calculated
at the margin.
VI. FASB ASC 270 provides guidance for reporting changes in accounting principles made in
interim periods.
A. Unless impracticable to do so, an accounting change is applied retrospectively, that is,
prior period financial statements are restated as if the new accounting principle had
always been used.
B. When an accounting change is made in other than the first interim period, information
for the interim periods prior to the change should be reported by retrospectively
applying the new accounting principle to these pre-change interim periods.
C. If retrospective application of the new accounting principle to interim periods prior to
the change of change is impracticable, the accounting change is not allowed to be
made in an interim period but may be made only at the beginning of the next fiscal
year.
VII. Many companies provide summary financial statements and notes in their interim reports.
A. U.S. GAAP imposes minimum disclosure requirements for interim reports.
1. Sales, income tax, extraordinary items, cumulative effect of accounting change,
and net income.
2. Earnings per share.
3. Seasonal revenues and expenses.
4. Significant changes in estimates or provisions for income taxes.
5. Disposal of a business segment and unusual items.
6. Contingent items.
7. Changes in accounting principles or estimates.
8. Significant changes in financial position.
B. Disclosure of balance sheet and cash flow information is encouraged but not required.
If not included in the interim report, significant changes in the following must be
disclosed:
1. Cash and cash equivalents.
2. Net working capital.
3. Long-term liabilities.
4. Stockholders’ equity.
VIII. Four items of information must also be disclosed by operating segment in interim financial
statements: revenues from external customers, intersegment revenues, segment profit or
loss, and, if there has been a material change since the annual report, total assets.
IX. IAS 34, “Interim Financial Reporting,” provides guidance in IFRS with respect to interim
financial statements.
A. Unlike U.S. GAAP, IAS 34 requires each interim period to be treated as a discrete
accounting period in terms of the amounts to be recognized. As a result, expenses
that are incurred in one quarter are expensed in that quarter even though the
expenditure benefits the entire year. And there is no accrual in earlier quarters for
expenses expected to be incurred later in the year.
Answer to Discussion Question: How Does a Company Determine Whether a
Foreign Country is Material?
In his well-publicized “The Numbers Game” speech delivered in September 1998, former SEC
chairman Arthur Levitt cited “materiality” as one of five gimmicks used by companies to manage
To make the point even more salient, ASC 250-10-S99 (SAB Topic 1.M, Assessing Materiality,
originally issued by the SEC as Staff Accounting Bulletin (SAB) 99, “Materiality”), warns financial
statement preparers that reliance on a simple numerical rule of thumb, such as 5% of net
income, is not sufficient. And in paragraph QC 11 of Statement of Financial Accounting
Concepts (SFAC) 8, the FASB stated the essence of the materiality aspect of relevance as
follows:
Further, ASC 250-10-S99 reminds companies that both quantitative and qualitative factors
should be considered in determining materiality. With respect to segment reporting, ASC 250-
10-S99 states:
“The materiality of a misstatement may turn on where it appears in the financial statements.
For example, a misstatement may involve a segment of the registrant’s operations. In that
instance, in assessing materiality of a misstatement to the financial statements taken as a
whole, registrants and their auditors should consider not only the size of the misstatement
Thus, in addition to quantitative factors, such as the relative percentage of total revenues
generated in an individual foreign country, companies should consider qualitative factors as
There are competing arguments for the FASB establishing a significance test for determining
material foreign countries. On one hand, such a quantitative materiality test flies in the face of
the warning provided in ASC 250-10-S99 and SFAC 8. For example, a “10% of total revenue or
On the other hand, one could argue that if the FASB were to establish a relatively low disclosure
threshold of, say, “5% of total revenues,” that many countries that financial statement users
would deem to be of significance would be disclosed regardless of whether they are deemed
Answers to Questions
1. Consolidation presents the account balances of a business combination without regard for
the individual component units that comprise the organization. Thus, no distinction can be
2. The word disaggregated refers to a whole that has been broken apart. Thus,
3. According to the FASB, the objective of segment reporting is to provide information to help
users of financial statements:
4. Defining segments on the basis of a company’s organizational structure removes much of
the flexibility and subjectivity associated with defining industry segments under prior
5. An operating segment is defined as a component of an enterprise:
a. that engages in business activities from which it earns revenues and incurs expenses,
6. Two criteria must be considered in this situation to determine an enterprise’s operating
segment. If more than one set of organizational units exists, but there is only one set for
7. The Revenue Test. An operating segment is separately reportable if its total revenues
amount to 10 percent or more of the combined total revenues of all operating segments.
8. For reportable operating segments, the following information must be disclosed:
a. Revenues from sales to unaffiliated customers.
b. Revenues from intercompany transfers.
c. Profit or loss.
d. Interest revenue.
e. Interest expense.
revenues.
9. If operating segments are not based upon products or services, or a company has only one
operating segment, then revenues from sales to unaffiliated customers must be disclosed
for each of the company’s products and services.
10. Information must be provided for the domestic country, for all foreign countries in which the
11. Two items of information must be reported for the domestic country, for all foreign countries
12. The minimum number of countries to be reported separately is one: the domestic country.
If no single foreign country is material, then all foreign countries would be combined and
13. The existence of a major customer and the related amount of revenues must be disclosed
when sales to a single customer are 10 percent or more of consolidated sales.
14. U.S. GAAP requires disclosure of a measure of segment assets, but does not require
15. U.S. publicly traded companies are required to prepare quarterly financial reports to provide
16. Companies are required to follow an “integral” approach in which each interim period is
considered to be an integral part of an annual accounting period, rather than a “discrete”
17. Cost-of-goods-sold should be adjusted in the interim period to reflect the cost at which the
18. Income tax expense related to interim period income is determined by estimating the
effective tax rate for the entire year. That rate is then applied to the cumulative pre-tax
19. When an accounting change occurs in other than the first interim period, information for the
pre-change interim periods should be reported based on retrospective application of the
20. The following minimum information must be disclosed in an interim report:
a. Sales, income tax, extraordinary items, cumulative effect of accounting change, and
net income.
3. Long-term liabilities.
4. Stockholders’ equity.
21. Four items of segment information are required to be included in interim reports: revenues
22. Under IAS 34, an annual bonus paid in the fourth quarter of the year would be recognized
fully in that quarter. There would be no accrual of an estimated bonus expense in the first
each of the first three quarters.
Answers to Problems
1. D
2. C
12. C
13. C With regard to major customers, U.S. GAAP (FASB ASC 280) only requires
14. D
20. B
21. C (Determine quantitative threshold under revenue test for reportable
segments)
22. A (Determine quantitative threshold for disclosure of a major customer)
Revenues from a single customer must be disclosed if the amount is 10
percent or more of consolidated sales. Consolidated sales only includes
sales to outsiders; intersegment sales are eliminated.
23. D (Determine reportable segments under the profit or loss test)
Total operating losses of $1,020,000 (K and M) are larger than total