ACCT 403 Week 7 Group Discussion Board Forum 4 Example

Group Discussion Board Forum 4: Segment and Interim Reporting

ACCT 403 Fund Accounting for Government and Not for Profits, Group Discussion Board Forum 4

Thread by [Student Name]

The company, its segment figures and the classmate are composites; the textbook and the peer-reviewed research cited are real.

Halvorsen Brands has five operating segments, each reviewed separately by its chief executive, who serves as chief operating decision maker. The case gives these amounts in millions of dollars:

Hoyle et al. (2018) explain that passing just one of three size tests makes a segment reportable. The revenue test uses total revenue including intersegment sales: 10% of $2,400 million is $240 million, so home care, personal care and pet products qualify. The profit or loss test compares each segment's absolute result with 10% of the greater of combined profits or combined losses. Profitable segments total $261 million and the one losing segment $45 million, so the threshold is $26.1 million. Home care and personal care pass on profit, and pet products passes on the size of its $45 million loss. The asset test uses 10% of $3,000 million, or $300 million, which the same three segments meet. Outdoor and specialty retail fail every test. Management could still choose to report them separately if it believed the information useful, but it is not required to. Finally, external revenue for the three reportable segments is $1,100 + $640 + $310 = $2,050 million out of consolidated external revenue of $2,300 million, or 89%, well above the 75% minimum, so the other two are combined as all other segments.

The tests apply only after the operating segments are identified, and that step follows the management approach: an operating segment is any component whose results the company's top decision maker reviews on a regular basis when deciding where resources go. A 2023 FASB update went further, requiring public companies to report, quarterly as well as annually, the significant expense categories their decision maker regularly sees for each segment. The reason for the approach is visible in research on the standard it replaced. Botosan and Stanford (2005) studied firms that had reported a single segment under the old industry-based standard and began reporting several under the management approach, and found that these firms had used the old standard's latitude to hide profitable segments operating in less competitive industries. Berger and Hann (2003) found that the change increased the number of segments reported and the amount of disaggregated information, and that analysts' and the market's expectations shifted when the new data were released. A segment note is only as revealing as the way management chooses to look at its own business. For Halvorsen, the pet products loss is exactly the kind of result the old approach might have buried inside a broader consumer segment, and the management approach now brings it into view because the chief executive reviews it separately.

Reply to Hannah

Hannah, your thread focused on segments, and I wanted to add the other half of chapter 8, because Halvorsen's quarterly reports raise a related question. Hoyle et al. (2018) explain that U.S. GAAP treats a quarter as a slice of the year rather than a separate period, so some costs that benefit the whole year are spread across the quarters instead of being recognized when paid. Suppose Halvorsen expects to pay a $12 million annual bonus based on full-year results. Under the integral view, it accrues about $3 million each quarter, adjusted as its estimate of the year's results changes, rather than recognizing the whole bonus in the fourth quarter. Income taxes work the same way: each quarter applies the company's best estimate of the annual effective tax rate to year-to-date income, so a quarter with an unusual deduction does not show a misleading tax rate. The integral view makes quarters comparable, but it also relies on estimates that management controls, which connects to your point about segments. Both segment and interim rules give users more frequent and more detailed information, and both depend on management's judgment about how to divide the business and the year. Berger and Hann (2003) found that more detailed segment data changed what analysts and investors expected, and quarterly segment expense disclosures now required by the 2023 update should extend that benefit to interim reports. The chapter 12 material on the SEC adds that registrants file these quarterly reports on Form 10-Q, reviewed rather than audited by the external auditor, which is one more reason a careful reader treats interim estimates with some caution.

References

Berger, P. G., & Hann, R. (2003). The impact of SFAS No. 131 on information and monitoring. Journal of Accounting Research, 41(2), 163-223. https://doi.org/10.1111/1475-679X.00100

Botosan, C. A., & Stanford, M. (2005). Managers' motives to withhold segment disclosures and the effect of SFAS No. 131 on analysts' information environment. The Accounting Review, 80(3), 751-772. https://doi.org/10.2308/accr.2005.80.3.751

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2018). Advanced accounting (13th ed.). McGraw-Hill Education.