Case 1
SPI states that it has a total of seven operating segments, which are shampoo, cosmetics, diapers, paper towels, Jazzy Juice, Blasto Energy Drink, and fruit & granola snacks. These seven items can be considered operating segments, because each one of these meet the three requirements of operating segments. The three requirements are: 1) It engages in business activities which it may even earn revenues and incur expenses; 2) Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; 3) Its discrete financial information is available. All seven items have revenues and incur expenses according to the financial statements. The auditor finds a press release from the chief decision maker and states that, “On page 6 of the annual reports of your (SPI) annual report, you (chief decision maker) identify seven product lines.” Finally, all the information is available because they are in the annual reports.
According to FASB Accounting Standards Codification 280-10-50-11: Two or more operating segments maybe aggregated into a single operating segment if they have similar economic characteristics and if they are similar in all of the following: Nature of products and services. Nature of the production processes. Type or class of customer for their products and services. Methods of distribution. Nature of regulatory environment if applicable. After reviewing Sell-it Products Inc.’s monthly operating package for 2011 only four of the seven can be considered for reporting segments. I came to this conclusion by performing the revenue test.
The revenue test states, “If revenues from a single external customer amount to 10 percent or more of a public entity’s revenues, disclose that fact, the total amount of revenues from each such customer, and the segment or segments reporting the revenue. Not required to disclose the identity of the major customer or the amount of revenue from that customer.” The four that I chose, after doing the revenue test, were cosmetics, paper towels, Blasto energy drink, and I aggregated Jazzy Juice and fruit & granola snacks together. I combined these two because they were similar in nature and met the codification 280-10-50-11, as stated above. Both Jazzy Juice and fruit & granola snacks are part of the food production and services for SPI. Both have the same type of customer class. I am assuming they both have the same methods of distribution. Also, they did not pass the revenue test of 26.2 million but combined they totaled 34.2 million. With Jazzy Juice and granola snacks aggregated, four of the segments passed the revenue test, and are considered as reportable segments. On the other hand, both diapers and shampoo could not be considered reportable segments. We cannot aggregate them because they do not meet any of the criteria for codification 280-10-50-11, as stated above. We cannot aggregate diapers and shampoo because, they do not have the same type of customer class or products and services. Since they do not meet all the requirements of aggregation these two cannot be aggregated.