Chapter 14: REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS I. Need for disaggregated financial data: When a firm engages in activities in several industries and /or geographic areas, financial analysis and cash flow predictions are difficult. Major uncertainty results from: A. Factors unique to individual companies; B. Factors related to the industries and geographical areas in which those companies operate, and; C. Related national and international economic and political factors. Therefore, disaggregated information is needed to assist in analyzing the uncertainties surrounding the timing and amounts of expected cash flows. II Basic requirements of public companies in reporting segmental date : A. Major customers B. Countries in which they earn revenues and hold assets C. Revenues for each product and service D. A discussion of the firm’s relational or method for categorizing its operations into segments, as well as any difference in measurement techniques between periods being reported or between the segment and the entire entity. In general, SFAS No.131 [ASC 280] implemented a management approach, focusing on the way in which management organizes segments internally to make operation decisions and to assess performance. III.Definition of the following terms that have been given specific connotations for purposes of segmental reporting: A. Operating segment: A component of an enterprise that may earn revenues and incur expenses, about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. B. Reportable segment: A segment considered to be significant to an enterprise’s operations; specifically, one which has passed one of three 10% tests or has been identified as being reportable through other criteria (aggregation, for example). C. Chief operating decision maker: A person whose general function (not specific title) is to allocate resources to, and assess the performance of, the segments of an enterprise. D. Segment revenue: The revenue from sales to unaffiliated customers and from intersegment sales or transfers. E. Segment operating profit or loss: All of a segment’s revenue minus all operating expenses, including any allocated revenues or expenses (e.g., common costs).
F. Common costs: Operating expenses incurred by the enterprise for the benefit of more than one segment. G. Segment assets: Those tangible and intangible assets directly associated with, or used by, a segment, including any allocated portion of assets used jointly by more than one segment. If portions of assets are allocated internally and used by the chief operating decision maker, then those amounts should be allocated on a reasonable basis and disclosed for external reporting purposes as well.