CHAPTER 8 Segment Reporting


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CHAPTER 8 REPORTING SEGMENT AND RELATED INFORMATION I. FOCUS OF CHAPTER 8 Objectives and Applicability of FAS 131 (ASC 280) Reporting Operating Segment Information Reporting Enterprise-wide Information Geographic areas Major customers II. Segment and Related Information Reporting: Objectives A. To provide information about a reporting entity’s different types of: Business activities. Economic environments . B. This information should help financial statement users: Better understand past performance. Better assess prospects for future net cash flows. Make more informed judgments about the entity as a whole. III. Segment and related information reporting consists of disclosing the following 4 informational items: Operating segments. Foreign operations/sales. Major customers. IV. Segment and related information reporting is: 1. Needed because of the limitations of consolidated financial statements. 2. Done in notes to the financial statements. 3. Applicable to: 1. Both ANNUAL & INTERIM statements. 2. PUBLIC BUSINESS ENTERPRISES ONLY ( excludes not-for-profit entities). Public business enterprises are entities that: a. Have issued debt or equity securities that are traded in a public market , b. Are required to file financial statements with the SEC , or c. Provide financial statements for the purpose of issuing any class of securities in the public market. 3. Segment and related information reporting even applies to the following entities if they issue “separate company ” statements that are NOT in the same FINANCIAL REPORT as a set of consolidated statements: a. Parent enterprises. b. Subsidiaries. c. Joint ventures. d. Investees— if the equity method is used.
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V. Basis of Segmentation A. Disaggregated financial information could be presented in several ways, for example: 1. By products & services (rejected) . 2. By geographic area (rejected) . 3. By legal entity (rejected). 4. By type of customer (rejected) . 5. By organization of the segments for reporting to management for decision- making (the “management” approach). B. FAS 131(ASC 280) requires : 1. A SINGLE basis of segmentation. 2. The MANAGEMENT approach basis of segmentation . C. Merits of the “Management” Approach: 1. Facilitates consistent descriptions in (1) annual reports and (2) various other published information. 2. Entities need not develop a separate measure of profitability solely for segment reporting purposes. Thus: A non-GAAP method used internally is also used for segment reporting. D. The components that management establishes for reporting & decision-making are called OPERATING SEGMENTS . 1. Such components engage in activities from which they may earn revenues and incur expenses (and include revenues and expenses resulting from transactions with other segments called inter segment transactions ). 2. Such components have their operating results
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