Question

Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports. An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit. Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.

Instructions

(d) Identify the accounting difficulties inherent in segment reporting.

Short answer

Deciding income tax, changes in accounting principles, and methods of computing net income are some of the difficulties inherent in segment reporting.

Step-by-step solution

Meaning of Segment Reporting

The financial statements of a company's operating segments or divisions are called segment reporting. Publicly traded companies must provide segment data, while privately-owned companies are not obligated to do so.

Explaining the accounting difficulties inherent in segment reporting

Following are some of the accounting challenges that come with segment reporting:

1. Establishing transfer pricing is essential. When a section of an enterprise belongs to another sector of the same enterprise, the transfer fee is levied. There are several possible transfer values, and the corporation must choose one.
2. The method for computing segment net income should be defined. Net income may simply be a contribution margin (sales minus variable expenses), or it may be a more traditional measure of net income. Variable costs must be recognized if a contribution-margin strategy is adopted. If a traditional net income measure is used, the net income of each segment must be determined for various things managed. The following are examples of such items:
3. Determining whether ordinary expenses should be distributed across segments
4. If general expenditures us to be allocated, choose the allocation bases.
5. Identify which capital costs (interest, preferred dividends, and so on) should be allocated across segments.
6. Determining whether a change in accounting principle should be attributed to the segments.
7. Deciding how the income tax should be distributed in parts.
8. To determine how minority share revenue, as well as income from investee enterprises, should be allocated to segments.
9. It is necessary to determine how to segment information will be treated in interim financial reports.
10. It's time to learn how to depict segment data in financial statements. Notes or separate financial statements may be used to make such a presentation.
11. Additional disclosures, such as planned accounting policies, should be established.
12. Annual comparisons should be taken into account. This would require a recapitulation of the previously reported segment data which is now being given for comparative reasons.