According to the FASB, a component of an entity comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes.
The concept of disaggregated disclosure regarding business components dates back more than 40 years, and is opposed to the philosophy that consolidated financial statements rather than separate ones fairly present the financial position and operations of an economic entity, regardless of its legal or business component structure.
In 1976, the FASB required certain information to be disclosed regarding the industry segments, foreign operations and export sales, and major customers of segmented business enterprises. Both maximum and minimum limitations were placed on the number of segments or foreign areas for which information was to be provided. Enterprise management was given considerable latitude in identifying segments, allocating nontraceable expenses to them, and disclosing the required information.
In 1997, the FASB issued Statement No. 131, "Disclosures About Segments . . . ," which provided different standards of disclosure for operating segments of a business enterprise. Statement No. 131 gave far more latitude to enterprise management in identifying segments and measuring the quantitative information to be disclosed for them. The FASB required a reasonable basis for procedures for allocating nontraceable expenses to segments.
Methods that have been used by business enterprises to allocate nontraceable expenses to operating segments include allocation ratios based on segment revenues, payroll totals, average plant assets and inventories, or a combination thereof.
In Regulation S-K, the SEC set forth requirements for reporting segment information in filings with it.
In FASB Statement No 144, the Financial Accounting Standards Board provided standards for disclosure of the disposal of a component such as an operating segment. Income or loss from discontinued operations (net of applicable income taxes), including the gain or loss (net of taxes) from disposal of the segment, is displayed following income from continuing operations in the income statement. This amount is not an extraordinary item.
Interim financial reports are exemplified by the quarterly reports issued by publicly owned companies to their stockholders, the SEC, and the stock exchanges that list their securities. APB Opinion No. 28, "Interim Financial Reporting," provides guidelines on accounting and disclosure issues relating to interim financial reports.
Revenue from products sold or services rendered is recognized when realized during an interim accounting period on the same basis as followed for the full year. In addition, business enterprises having significant seasonal variations in revenue are to disclose the seasonal nature of their activities.
Costs and expenses associated directly with or allocated to products sold, such as material, direct labor, and factory overhead, are accounted for in interim reports as they are in fiscal year financial statements. However, four exceptions are provided in APB Opinion No. 28 for the measurement of cost of goods sold for interim financial reports. These exceptions cover the gross margin method of estimating cost of goods sold for interim accounting periods; temporary depletion of last-in, first-out inventories layers during interim periods; interim period lower-of-cost-or-market write-downs of inventories; and standard costs variances for interim periods.
All costs and expenses other than those associated with revenue are either recognized as expenses in interim accounting periods when incurred, or allocated among interim periods based on an estimate of time expired, benefit received, or activity associated with the period. The procedures adopted for allocating costs and expenses to interim periods should be consistent with allocation procedures for the costs and expenses in annual financial statements. APB Opinion No. 28 also required that expenses such as inventory shrinkage, doubtful accounts expense, and year-end bonuses be allocated to interim accounting periods in proportion to estimated annual amounts.
With respect to income tax provisions in interim reports, APB Opinion No. 28 required at the end of each interim accounting period an estimate of the expected effective income tax rate for the full year. Income taxes expense for each interim period is based on the estimated effective income tax rate on a year-to-date basis. Estimated effective income tax rates should reflect anticipated foreign tax rates and available tax-planning alternatives.
The following items are among the minimum data required by APB Opinion No. 28 to be reported in interim reports to stockholders: (a) sales or gross revenue, income taxes expense, extraordinary items, cumulative effect of an accounting change, and net income; (b) basic and diluted earnings per share; (c) seasonal revenue, costs, or expenses; (d) significant changes in income tax estimates or provisions; (e) contingent items; and (f) significant changes in financial position. FASB Statement No. 141, "Business Combinations," requires substantial disclosures regarding combinations completed in an interim period.
The Securities and Exchange Commission (SEC) is an agency of the United States government that oversees interstate issuances and trading of securities. The SEC administers several federal statutes, including the Securities Act of 1933 (the 1933 Act) and the Securities Exchange Act of 1934 (the 1934 Act). Throughout its existence, the SEC has had a significant influence on the development of generally accepted accounting principles.
With certain exceptions, a registration statement must be filed with the SEC, under the 1933 Act, for all issuances of securities interstate to the public. The purpose of the registration statement is to provide "full and fair" disclosure of all information required by prospective investors in the securities. Although the SEC reviews the registration statement for form and content, it neither approves nor disapproves the registration statement.
Under the provisions of the 1934 Act, companies whose securities are listed on national securities exchanges and many companies whose stock is traded over the counter must register the securities with the SEC and make periodic reports to it. The purpose of the registration and reporting requirements of the 1934 Act is to keep the SEC, and thus the public, informed as to the current affairs of the reporting companies.
The SEC has prescribed a series of Forms (actually formats) for registration statements under the 1933 Act. Among these are Form S-1, Form S-2, Form S-3, and Form F-1.
The principal form for registration of securities under the 1934 Act is Form 10, which resembles the registration statements under the 1933 Act. Periodic reports to the SEC by companies subject to the 1934 Act include Form 10-K, annual report; Form 10-Q, quarterly report; and Form 8-K, current report.
The 1934 Act also governs solicitation of proxies from stockholders. Under certain circumstances, a preliminary proxy statement must be filed with the SEC for review and comment before the definitive proxy statement is issued to stockholders prior to the meeting of stockholders.
The SEC is administered by five commissioners and has a headquarters in Washington, D.C., and 15 regional offices and branches.
The SEC generally has endorsed pronouncements on accounting principles issued by the FASB and its predecessors, while itself issuing periodic regulations on financial statement disclosures. The SEC's pronouncements are issued in Regulation S-X, Regulation S-K, Financial Reporting Releases, and Staff Accounting Bulletins.
Regulation S-X of the SEC provides guidance for the form and content of financial statements and schedules required to be filed with the SEC. Regulation S-K provides guidance for the completion of nonfinancial statement disclosure requirements in the Forms filed with the SEC.
Financial Reporting Releases were initiated by the SEC staff in 1982 to state its views on financial reporting matters. Previously, the SEC's chief accountant had issued Accounting Series Releases on such matters.
Staff Accounting Bulletins are issued by the SEC staff to disseminate the administrative interpretations and practices used by the SEC's staff in reviewing financial statements filed by companies reporting to the SEC.
The Sarbanes-Oxley Act of 2002 gave the SEC authority to appoint members of the Public Company Oversight Board.
