Financial Reporting Essentials: Segments, Interim Periods, & FX Rates

Operating Segments & Disclosures

Revenue Test Criteria

Both external and intersegment revenue are included in the revenue test.

Profit & Loss (P&L) Test

The P&L test includes 10% of the higher absolute value of intersegment revenue and expenses.

Management's Business Evaluation

Management evaluates business results along product, customer, or geographic lines, not based on legal entity results.

Defining an Operating Segment

• Includes state
• Reviewed by the chief decision maker
• Discrete information available
• Product is the primary breakdown, with geographic and customer as secondary.

Operating Segment Disclosure Rules

• Must reconcile to GAAP.
• For immaterial operating segments, revenue, P&L, and assets must be disclosed.

Non-Operating Segment Disclosures

Disclose assets, revenue, expenses, gains, losses, depreciation, amortization, and depletion.

Geographic Segment Disclosures

1. Revenue from external customers.
2. Long-lived assets.

Reliance on Major Customers

1. Disclose the amount of revenue and state the operating segment to which the customer belongs.
2. Note that the government can be considered a customer.

SFAS 131: Export Sales Disclosure

SFAS 131 drops the requirement for disclosure of export sale amounts.

Interim Financial Reporting (APB 28)

Integral vs. Discrete Methods Overview

APB 28 treats an interim period as an integral part of the annual period, not as a discrete period.

Inventory & COGS: Integral Method Rules

• Rules for LIFO apply.
• Inventory and Lower of Cost or Market under the integral method.
• Accrued as incurred, unless cost benefits future periods.

Integral vs. Discrete: GAAP & IFRS Standards

• Integral: GAAP (FASB)
• Discrete: IFRS (IASB)

LIFO Liquidation: Integral Method Application

Under the integral method, replacement cost is used for LIFO liquidation.

Inventory & LCM: Integral Method Application

If market is anticipated to recover, no write-down is taken. If not, a full or partial write-down is taken.

Inventory & LCM: Discrete Method Application

If market is less than cost, the difference is recorded as: Debit Loss on Inventory Write-down, Credit Inventory.

Extraordinary Items in Interim Periods

• Integral Method: If an item is expected to be material, treat it as an extraordinary item for the quarter. If not, it is treated as an operating expense.
• Discrete Method: Treat the full amount as extraordinary.

Income Taxes in Interim Periods

• Integral Method: Use the estimated annual effective tax rate.
• Discrete Method: Use the effective tax rate for the period.

Foreign Currency Exchange Rate Methods

Temporal Method Exchange Rate Application

Assets and Liabilities:

• Current Rate (C): Cash/Receivables, Marketable Securities, Inventory @ Market, Current Liabilities, Long-Term Debt.
• Historical Rate (H): Inventory @ Cost, Prepaid Expenses, Property Plant & Equipment, Intangible Assets, Deferred Income, Capital Stock, Additional Paid-in Capital, Retained Earnings, Dividends.

Current Rate Method Exchange Rate Application

Assets and Liabilities:

• Current Rate (C): Cash/Receivables, Marketable Securities, Inventory @ Market, Inventory @ Cost, Prepaid Expenses, Property Plant & Equipment, Intangible Assets, Current Liabilities, Deferred Income, Long-Term Debt.
• Historical Rate (H): Capital Stock, Additional Paid-in Capital, Retained Earnings, Dividends.