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by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn
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Objectives (cont.)
5. Understand what segment disclosures are reconciled to the consolidated amounts. 6. Know the types of enterprise-wide disclosures related to products and services, geographic areas of operation, and major customers that are required to be disclosed. 7. Understand the similarities and differences in the reporting of operations in an interim versus an annual reporting period. 8. Compute interim-period income tax expense.
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Operating Segments
FASB Statement No. 131 governs segment reporting Firm's internal reporting and evaluation system: If it is geographically based External segment reporting is geographically based If it is product-line or industry based External reporting is product-line or industry based
Pearson Education, Inc. publishing as Prentice Hall 14-5
Combining Segments
Similar economic characteristics Products and services Production processes Classes of customers Distribution systems Regulatory environment, if applicable
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Quantitative Thresholds
Three tests to see if a segment exists: 1. 10% Revenue test 2. 10% Profit or loss test 3. 10% Asset test One test to see if sufficient segments have been identified 1. 75% External revenue test
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2: Threshold Tests
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Reportable Segments
Operating segments are reportable and material if any one of the three threshold tests are met 1. Revenue test 2. Asset test 3. Profit or loss test Segments not meeting any of the three tests are combined into one "all other" category
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4: Disclosures
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Reconciliations
Reconciliation schedules should be provided to explain the difference between segment amounts and consolidated totals 1. Reportable segment revenue to consolidated revenue Intersegment revenues 2. Reportable segment profit and loss to consolidated income before taxes Intersegment revenues, expenses, and common or allocated costs
Pearson Education, Inc. publishing as Prentice Hall 14-24
Reconciliations (cont.)
3. Reportable segment assets to consolidated assets Corporate assets 4. If other significant information is disclosed, reconcile the segment amounts with consolidated amounts for each item
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Additional Disclosures
Additional enterprise-wide disclosures Needed if not already reported with segment information 1. Products and services Revenues by product/product line, service 2. Geographic information Revenues and fixed assets Domestic and foreign Specific country if > 10%
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An Integral Part
As an integral part of the annual report Basically follow annual reporting procedures May make some modifications to allow more frequent reporting Integral to the annual report Quarterly taxes are a portion of the annual taxes, probably use average effective rate Separate reports Each quarter bears its own taxes, probably use marginal tax rate
Pearson Education, Inc. publishing as Prentice Hall 14-31
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Tax Rates
Interim taxes on operations are based on estimated effective annual tax rate If expected annual taxable income = $120,000 Taxes = $22,250 + .39(120,000 100,000) = $30,050 Effective tax rate = 30,050 / 120,000 = 25.042% The 25.042% rate is used for all four quarters.
Pearson Education, Inc. publishing as Prentice Hall 14-35
Additional items: 1. Basic, diluted EPS 2. Seasonal revenues, costs and expenses 3. Significant change in estimated taxes 4. Disposals, extraordinary, unusual, infrequent items 5. Contingent items 6. Changes in accounting principles or estimates 7. Significant change in financial position
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