10% rule for including reporting segments when using segment profit/loss?

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  • #3306062
    Thea L.
    Participant

    Alpha Co. has $100 billion in assets, $100 billion in revenues, and $10 billion in profits for the current year. There are four operating segments that report directly to the chief operating officer. Which of the following segments is required to present key disclosures?

    Segment Assets (billions) Revenues (billions) Profits (billions)
    1 $40 $70 $10.5
    2 30 16 0.5
    3 21 9 (1.5)
    4 9 5 0.5

    A. Segments 1, 2, and 3 (Correct Answer)
    B. Segments 1 and 2
    C. Segment 1
    D. Segments 1, 2, 3, and 4

      The explanation given by Becker states:

    Choice “A” is correct. A segment is deemed significant and requires disclosure as long as it meets the 10 percent “size” test. This test is met using any of the three criteria shown below:

    Assets: The segment’s identifiable assets are 10 percent or more of the combined assets of all operating segments.
    Revenue: The segment’s revenue (external and internal) is 10% or more of the combined revenue of all operating segments.
    Reported profit or loss: The absolute value of the segment’s reported profit or loss is 10 percent or more of the greater (absolute amount) of the combined profit of all segments that did not report a loss and the combined reported loss of all segments that did report a loss.

    With $100 billion in assets, the 10 percent threshold is $10 billion. Segments 1, 2, and 3 all have assets over $10 billion. With $100 billion in revenues, the 10 percent threshold is $10 billion. Segments 1 and 2 each have revenues over $10 billion. With $10 billion in profits, the 10 percent threshold is $1 billion. Segment 1 meets this threshold. Because only one of the three criteria need to be met for a segment to have required disclosure, Segments 1, 2, and 3 will all qualify.

    I’m confused regarding the measure of profit and loss. When doing the problem, I compared the profit of all profitable segments (10.5 + 0.5 + 0.5 = $11.5) with the loss of all segments that reported a loss ($1.5). Because 11.5 was greater, I used that to determine the 10% threshold (11.5 * .10 = $1.15). Because it says to compare this with the absolute values, I found that segments 1 and 3 both met the threshold (10.5 > 1.15 and 1.5 > 1.15). In their explanation, they used the sum of all profits/losses to get the 10% threshold (10.5 + 0.5 – 1.5 + 0.5 = $10), which doesn’t seem to adhere to the rule? The rule says to compare the absolute value of the segment to either the total profit of profitable segments or the total loss of segments that reported a loss, whichever is greater.

    Am I not understanding this rule correctly?

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    #3306065
    Thea L.
    Participant

    The chart got messed up when I posted, and it wont let me edit, so here it is in a more readable format:

    Segment 1: Assets = $40 / Revenues $70 / Profits $10.5
    Segment 2: Assets = $30 / Revenues $16 / Profits $0.5
    Segment 3: Assets = $21 / Revenues $9 / Profits ($1.5)
    Segment 4: Assets = $9 / Revenues $5 / Profits $0.5

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