Consistent with requests from the financial analyst community, a significant amount of infor- mation is required to be disclosed for each operating segment:
1. General informationabout the operating segment:
• Factors used to identify reportable operating segments.
• Types of products and services from which each operating segment reported derives its revenues.
2. Segment profit or lossand the following revenues and expenses included in segment profit or loss:
• Revenues from external customers.
• Revenues from transactions with other operating segments.
• Interest revenue and interest expense (reported separately); net interest revenue may be reported for finance segments if this measure is used internally for evaluation.
• Depreciation, depletion, and amortization expenses.
• Other significant noncash items included in segment profit or loss.
• Unusual items (discontinued operations and extraordinary items).
• Income tax expense or benefit.
3. Total segment assetsand the following related items:
• Investment in equity method affiliates.
• Expenditures for additions to long-lived assets.
Authoritative guidance does not specifically require cash flow information to be reported for each operating segment because this information often is not generated by segment for internal reporting purposes. The requirement to disclose significant noncash items other than
342 Chapter 8
LO3
List the basic disclosure requirements for operating segments.
hoy36628_ch08_335-374.qxd 1/23/10 9:06 PM Page 342
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
Segment and Interim Reporting 343
depreciation is an attempt to provide information that might enhance users’ ability to estimate cash flow from operations.
Immaterial items need not be disclosed. For example, some segments do not have material amounts of interest revenue and expense, and therefore disclosure of these items of information is not necessary. In addition, if the internal financial reporting system does not generate information for an item on a segment basis, that item need not be disclosed. This is consistent with the ratio- nale that segment reporting should create as little additional cost to an enterprise as possible.
To demonstrate how the operating segment information might be disclosed, we return to the Atkinson Company example earlier in this chapter. Application of the quantitative threshold tests resulted in four separately reportable segments (automotive, furniture, motion picture, and finance). The nonsignificant operating segments (textbook and appliance) are combined in an All Other category. Exhibit 8.2 shows the operating segment disclosures included in Atkinson’s financial statements.
In addition to the information in Exhibit 8.1, data on depreciation and amortization, other significant noncash items, and expenditures for long-lived segment assets were gathered for each operating segment to comply with the disclosure requirements. Only the automotive seg- ment has other significant noncash items, and none of the segments has equity method invest- ments. Atkinson had no unusual items during the year.
To determine whether a sufficient number of segments is included, the ratio of combined sales to unaffiliated customers for the separately reported operating segments must be com- pared with total company sales made to outsiders. The combined amount of revenues from ex- ternal customers disclosed for the automotive, furniture, motion picture, and finance segments is $61.7 million. Total revenues from external customers are $71.4 million:
$61.7 million/$71.4 million ⫽86.4%
Because 86.4 percent exceeds the FASB’s lower limit of 75 percent, Atkinson’s level of disag- gregation is adequate.
Reconciliations to Consolidated Totals
As noted earlier, information is to be provided as the company’s internal reporting system prepares it even if not based on GAAP. Preparing segment information in accordance with au- thoritative accounting literature used at the consolidated level would be difficult because some GAAP is not intended to apply at the segment level. Examples are accounting for (1) inven- tory on a LIFO basis when inventory pools include items in more than one segment, (2) com- panywide pension plans, and (3) purchased goodwill. Accordingly, allocation of these items to individual operating segments is not required.
EXHIBIT 8.2 Operating Segment Disclosures
ATKINSON COMPANY
Operating Segment Motion
Automotive Furniture Picture Finance All Other
Revenues from external customers . . . $32.6* $6.9 $22.2 –0– $ 9.7
Intersegment revenues . . . 6.6 1.2 –0– –0– 1.9
Segment profit (loss) . . . 11.0 2.0 (2.7) $ 3.0 (0.7)
Interest revenue . . . 2.4 0.9 0.6 –0– 0.5
Interest expense . . . 2.1 1.0 4.6 –0– 2.2
Net interest revenue . . . –0– –0– –0– 6.2 –0–
Depreciation and amortization . . . 2.7 1.5 2.4 0.9 0.4
Other significant noncash items:
Cost in excess of billings
on long-term contracts . . . 0.8 –0– –0– –0– –0–
Income tax expense (benefit) . . . 6.6 1.4 (3.1) 0.1 (1.1)
Segment assets . . . 11.4 1.3 14.5 14.6 2.5
Expenditures for segment assets . . . 3.5 0.4 3.7 1.7 1.3
*All figures in millions.
hoy36628_ch08_335-374.qxd 1/23/10 1:06 AM Page 343
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
However, the total of the reportable segments’ revenues must be reconciled to consolidated revenues, and the total of reportable segments’ profit or loss must be reconciled to income before tax for the company as a whole. Adjustments and eliminations that have been made to develop enterprise financial statements in compliance with generally accepted accounting principles must be identified. Examples are the elimination of intersegment revenues and an adjustment for companywide pension expense. The same is true for reconciliation of total seg- ments’ assets to the enterprise’s total assets.
In addition, in reconciling the total of segments’ revenues, profit or loss, and assets to the enterprise totals, the aggregate amount of revenues, profit or loss, and assets from immaterial operating segments must be disclosed. The company also must disclose assets, revenues, ex- penses, gains, losses, interest expense, and depreciation, depletion, and amortization expense for components of the enterprise that are not operating segments. This includes, for example, assets and expenses associated with corporate headquarters. See Exhibit 8.3 for an example of how Atkinson might present these reconciliations.
Atkinson Company must make three adjustments in reconciling segment results with con- solidated totals. The first adjustment is to eliminate intra-entity revenues, profit or loss, and as- sets that are not included in consolidated totals. The elimination of intersegment revenues includes intersegment transfers amounting to $9.7 million plus $3.6 million of intersegment in- terest revenue generated by the finance segment (total $13.3 million). The second adjustment relates to corporate items that have not been allocated to the operating segments including pur- chased goodwill, a litigation settlement received by the company, and corporate headquarters expenses and assets. The third adjustment reconciles differences in segment accounting prac- tices from accounting practices used in the consolidated financial statements. The only adjust- ment of this nature that Atkinson made relates to the accounting for pension expense. Individual operating segments measure pension expense based on cash payments made to the pension plan. Because GAAP requires measuring pension expense on an accrual basis, an adjustment for the amount of pension expense to be recognized in the consolidated statements is necessary.
Explanation of Measurement
In addition to the operating segment disclosures and reconciliation of segment results to con- solidated totals, companies also must explain the measurement of segment profit or loss and segment assets including a description of any differences in measuring (1) segment profit or
344 Chapter 8
EXHIBIT 8.3
Reconciliation of Segment Results to Consolidated Totals
ATKINSON COMPANY Revenues:
Total segment revenues . . . $ 97.8*
Elimination of intersegment revenues . . . (13.3) Total consolidated revenues . . . $ 84.5 Profit or loss:
Total segment profit or loss . . . $ 12.6 Total segment income taxes . . . 3.9 Total segment profit before income taxes . . . $ 16.5 Elimination of intersegment profits . . . (5.9) Unallocated amounts:
Litigation settlement received . . . 3.6 Other corporate expenses . . . (2.7) Adjustment to pension expense in consolidation . . . (0.8) Consolidated income before income taxes . . . $ 10.7 Assets:
Total for reported segments . . . $ 44.3 Elimination of intersegment loans . . . (5.4) Goodwill not allocated to segments . . . 3.2 Other unallocated amounts . . . 2.6 Total consolidated assets . . . $ 44.7
* All figures in millions.
hoy36628_ch08_335-374.qxd 1/23/10 1:06 AM Page 344
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
Segment and Interim Reporting 345
loss and consolidated income before tax, (2) segment assets and consolidated assets, and (3) segment profit or loss and segment assets. An example of this last item is the allocation of depreciation expense to segments but not of the related depreciable assets. The basis of accounting for intersegment transactions also must be described.
EXAMPLES OF OPERATING SEGMENT DISCLOSURES
A majority of companies are organized along product and/or service lines. Exhibit 8.4 shows operating segment disclosures for Pfizer Inc. Pfizer does not disclose interest revenue and in- terest expense by operating segment because these relate only to the corporate/other category.
EXHIBIT 8.4 Operating Segment Disclosures in Pfizer’s 2008 Annual Report 20. Segment, Geographic and Revenue Information
Business Segments
We operate in the following business segments:
• Pharmaceutical
The Pharmaceutical segment includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye diseases, and endocrine disorders, among others.
• Animal Health
The Animal Health segment includes products that prevent and treat diseases in livestock and companion animals.
For our reportable operating segments (i.e., Pharmaceutical and Animal Health), segment profit/(loss) is measured based on income from con- tinuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase account- ing for acquisitions, acquisition-related costs and costs related to our cost-reduction initiatives and transition activity associated with our former Consumer Healthcare business, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.
Segment (in $ millions)
For/As of the Year Ended December 31,
2008 2007 2006
Revenues
Pharmaceutical . . . . $ 44,174 $ 44,424 $ 45,083 Animal Health . . . . 2,825 2,639 2,311 Corporate/Other . . . . 1,297 1,355 977 Total revenues . . . . $ 48,296 $ 48,418 $ 48,371 Segment Profit/(Loss)
Pharmaceutical . . . . $ 21,786 $ 20,740 $ 21,615 Animal Health . . . . 772 620 455 Corporate/Other . . . . (12,864) (12,082) (9,042) Total profit/(loss) . . . . $ 9,694 $ 9,278 $ 13,028 Identifiable Assets
Pharmaceutical . . . . $ 60,591 $ 67,431 $ 72,497 Animal Health . . . . 2,075 2,043 1,951 Discontinued operations/Held for sale . . . . 148 114 62 Corporate/Other . . . . 48,334 45,680 41,036 Total identifiable assets . . . . $111,148 $115,268 $115,546 Property, Plant and Equipment Additions
Pharmaceutical . . . . $ 1,351 $ 1,608 $ 1,681 Animal Health . . . . 183 70 51 Discontinued operations/Held for sale . . . . — — 162 Corporate/Other . . . . 167 202 156 Total property, plant and equipment additions . . . . $ 1,701 $ 1,880 $ 2,050 Depreciation and Amortization
Pharmaceutical . . . . $ 2,223 $ 1,886 $ 1,765 Animal Health . . . . 61 52 49 Discontinued operations/Held for sale . . . . — — 71 Corporate/Other . . . . 2,806 3,262 3,408 Total depreciation and amortization . . . . $ 5,090 $ 5,200 $ 5,293 hoy36628_ch08_335-374.qxd 1/23/10 1:06 AM Page 345
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
346 Chapter 8
EXHIBIT 8.5 Sales by Product Category in Lowe’s Companies, Inc., 2008 Annual Report
Sales by Product Category (in $ millions)
2008 2007 2006
Product Category Total Sales % Total Sales % Total Sales %
Appliances . . . $ 4,405 9% $ 4,324 9% $ 4,139 9%
Lumber . . . 3,595 8 3,638 8 3,672 8
Paint . . . 3,387 7 3,256 7 3,077 7
Flooring . . . 3,323 7 3,292 7 3,229 7
Building materials . . . 2,971 6 2,749 6 2,880 6
Millwork . . . 2,965 6 3,238 7 3,262 7
Lawn & landscape products . . . 2,581 5 2,446 5 2,263 5
Fashion plumbing . . . 2,572 5 2,762 6 2,635 6
Hardware . . . 2,514 5 2,434 5 2,283 5
Lighting . . . 2,508 5 2,705 6 2,574 5
Tools . . . 2,492 5 2,598 5 2,555 5
Seasonal living . . . 2,136 5 2,107 4 2,072 4
Rough plumbing . . . 1,983 4 1,867 4 1,663 4
Outdoor power equipment . . . 1,963 4 1,838 4 1,805 4
Cabinets & countertops . . . 1,934 4 2,180 4 2,162 5
Nursery . . . 1,808 4 1,687 3 1,569 3
Rough electrical . . . 1,446 3 1,490 3 1,486 3
Home environment . . . 1,235 3 1,218 2 1,200 3
Home organization . . . 1,062 2 1,075 2 1,063 2
Windows & walls . . . 1,054 2 1,090 2 1,103 2
Other . . . 296 1 289 1 235 –
Totals . . . $48,230 100% $48,283 100% $46,927 100%
Nor does it report income tax expense or benefit by segment because the company evaluates the performance of its operating segments based on income before taxes.
Some companies, such as McDonald’s, Coca-Cola, and Nike, are organized geographi- cally and define operating segments as regions of the world. McDonald’s has four operating segments: United States; Europe; Asia, Pacific, Middle East, Africa (APMEA); and Other Countries and Corporate. Some companies report a combination of products or services and international segments. Walmart has four operating segments: Walmart Stores, Sam’s Club, International, and Other. PepsiCo has six reportable segments: Frito-Lay North America (FLNA); Quaker Foods North America (QFNA); Latin America Foods (LAF); PepsiCo Americas Beverages (PAB); PepsiCo International—United Kingdom and Europe (UKEU);
and PepsiCo International—Middle East, Africa, and Asia (MEAA). The nature of these companies’ segmentation provides considerable insight into the way upper management views and evaluates the various parts of the consolidated enterprise.