FAR · Financial reporting · 7 practice questions
ASC 280: Identify Operating and Reportable Segments
Under ASC 280, identify operating segments first, apply any one of the 10% tests, then check 75% external revenue coverage. Below: a step-by-step sequence from the CODM's review level to the final reportable segments.
Try one first
Hint
Remember ASC 280's 'management approach', start with the internal reporting level the CODM routinely uses for reviewing performance and allocating resources.
Answer A. ASC 280 adopts the management approach: operating segments are identified based on the internal reporting level that the CODM routinely uses to review results and allocate resources. Occasional or ad hoc reviews (such as quarterly product analysis for one region) do not change the initial identification; the regular regional reporting governs. Legal entities or product groupings only control segment identification if they are the regular internal reporting basis used by the CODM.
Why not B: Tempting because separate legal entities often keep their own books and have distinct legal identities, but ASC 280 anchors segment identification to the CODM's internal reporting, not legal form alone. Separate subsidiaries become segments only if the CODM regularly reviews their results and allocates resources to them.
Why not C: Tempting since product lines are a common way to present external information and the CODM occasionally reviews product profit for Region East, but ASC 280 requires the CODM's regular reporting level to determine initial segments. An occasional product-level review for one region does not make product families the governing basis companywide.
Why not D: Tempting because investor usefulness is important for disclosures, but ASC 280 directs initial segment identification to follow management's internal (CODM) reporting structure. Investor-oriented presentations may influence disclosure format later but do not override the CODM-based identification.
Step by step
- Identify operating segments
Identify components with business activities, discrete financial information, and results regularly reviewed by the chief operating decision maker (CODM) to allocate resources and assess performance. Occasional product reviews do not override the regular reporting level.
- Set the segment comparison group
Use operating-segment totals, not consolidated totals, for the 10% comparisons. Exclude corporate or reconciling items that are not operating segments, and aggregate only when ASC 280's criteria are met.
- Test total revenue
Compare each segment's external plus intersegment revenue with 10% of all operating segments' combined external plus intersegment revenue.
- Test absolute profit or loss
Sum profits of profitable segments and absolute losses of loss-making segments separately. Compare each segment's absolute profit or loss with 10% of the larger total.
- Test segment assets
Compare each segment's assets with 10% of the combined assets of all operating segments.
- Keep every qualifying segment
Mark a segment as reportable if it meets any one of the three 10% tests. Passing the 75% check without that segment does not excuse reporting it.
- Check external revenue coverage
Divide the reportable segments' external revenue by consolidated external revenue. Revenue of $74 out of $100 gives 74% coverage, which fails the 75% minimum.
- Add segments until coverage passes
Add operating segments until external revenue coverage reaches at least 75%, even if those segments fail all 10% tests. Adding $11 of external revenue to the $74 example raises coverage to 85%.
Key points
- Remember: A 10% test gets a segment in; the 75% test can only add more.
- Separate asset information is not required to identify an operating segment.
- Exactly 10% qualifies. Exactly 75% satisfies the external revenue coverage requirement.
- Legal subsidiaries and product families do not govern identification unless they match the CODM's regular reporting level.
How the exam traps you
- Using only external revenue for the 10% revenue test. Include external and intersegment revenue in both the segment amount and the combined segment total.
- Netting segment profits and losses before calculating the threshold. Compare total profitable-segment profits with absolute total loss-making-segment losses; use 10% of the larger amount.
- Stopping once the 10% qualifiers are identified. Check 75% external revenue coverage and add operating segments if coverage falls short.
Question 2
| Measure | All Segments Combined | Segment Delta |
|---|---|---|
| Total revenue (external + intersegment) | $500 million | $52 million |
| Total assets | $900 million | $80 million |
| Combined reported profit of profitable segments | $60 million | , |
| Combined reported loss of loss segments | $20 million | $5 million |
Delta: external revenue $38 million, intersegment revenue $14 million.
Which conclusion is best supported?Hint
Work each quantitative test separately, and pay close attention to what counts in the revenue denominator and numerator.
Answer D. A segment is reportable if it meets any one of the quantitative thresholds. The revenue test uses the segment's total revenue (external plus intersegment) compared to total revenue of all operating segments. Delta's total revenue is $52 million ($38M + $14M), which is 10.4% of $500 million, so it meets the 10% revenue threshold even though it does not meet the asset or profit-or-loss thresholds.
Why not A: This overstates the standard. ASC 280 lists three separate quantitative tests, and meeting any one of them is sufficient to be reportable. Delta qualifies by meeting the revenue test alone.
Why not B: This is tempting because external revenue is often emphasized, but the quantitative revenue test includes intersegment revenue. Including Delta's $14 million of intersegment revenue raises its total to $52 million, putting it over the 10% threshold.
Why not C: This reflects a common misread of the profit-or-loss test. The segment's absolute profit or loss is compared with 10% of the greater, in absolute amount, of (1) combined profit of profitable segments or (2) combined loss of loss segments. Here the greater amount is $60 million, so the profit-or-loss threshold is $6 million; Delta's $5 million loss does not meet that threshold.
Question 3
Hint
Separate the question into two stages: first identify operating segments, then decide which of those segments are separately reportable.
Answer A. Under U.S. GAAP segment-reporting guidance (ASC 280, management approach), an operating segment is identified based on how management organizes and reviews the business. The three key criteria are that the component engages in business activities, has discrete financial information, and is regularly reviewed by the chief operating decision maker for resource allocation and performance assessment. The 10% quantitative tests are applied later to decide which of the identified operating segments must be separately reported.
Why not B: This is tempting because the 10% tests are well known, but those thresholds determine whether an already-identified operating segment must be separately reported, not whether the component is an operating segment in the first place.
Why not C: Legal form does not govern segment identification; segment reporting follows the management approach, how management operates, reviews, and obtains financial information for the component.
Why not D: External sales patterns can affect disclosure detail, but a component can still be an operating segment even if it has significant intersegment sales; external-customer volume is not the primary test for identifying an operating segment.
Question 4
Hint
Work the segment analysis in order: determine which segments meet any 10% test first, then check whether those reportable segments cover enough external revenue.
Answer C. Apply ASC 280's tests in order. The 10% revenue test (based on total segment revenue = external + intersegment) and the 10% asset test each identify A, B, and E as reportable; the profit/loss test (10% of the greater of combined profits or combined losses) makes C reportable because its 20 loss exceeds the 5.7 threshold (10% of combined profitable-segment profit of 57). D meets none of the 10% tests, but the external revenue of A, B, C, and E totals 560, which is less than 75% of consolidated external revenue (560/750 < 75%); therefore D must also be included to satisfy the 75% external-revenue requirement, making all five segments reportable.
Why not A: This is tempting because A, B, and E clearly pass revenue and asset tests and C passes the profit/loss test. It is wrong because the reportable segments' external revenue (560) is below the 75% backstop, so ASC 280 requires adding the next-largest segment (D) to reach the 75% threshold.
Why not B: This distractor lures candidates who focus on D's external revenue while overlooking that revenue testing uses total segment revenue (external plus intersegment) and that C qualifies under the profit/loss test. D fails all three 10% tests, so it cannot displace C as reportable unless the 75% backstop requires D to be added in addition to C.
Why not D: This reflects the common shortcut of checking only the most obvious revenue and asset thresholds. It is wrong because C qualifies under the profit/loss test and, even after including C, the 75% external-revenue backstop still requires adding D.
Question 5
Hint
Separate the issue of identification (operating segment) from the separate reportability tests; recall the three 10% quantitative thresholds.
Answer B. Under ASC 280, once operating segments are identified and cannot be aggregated, a segment is reportable if it meets any one of the 10% quantitative thresholds (revenue; profit or loss; assets). Harbor meets the profit-or-loss threshold (11% of the greater absolute amount), so it must be disclosed as a reportable segment.
Why not A: This is tempting because some candidates assume multiple thresholds must be satisfied; it is incorrect because ASC 280 requires only that a segment meet any one of the 10% quantitative tests to be reportable.
Why not C: This distractor confuses operating-segment identification (which relies on separate management and discrete financial information) with reportable-segment disclosure, which is determined by the quantitative 10% tests once segments are identified.
Why not D: This misstates the revenue test denominator: the 10% revenue test compares a segment's revenue to combined segment revenue, not to consolidated external revenue. Moreover, Harbor already satisfies the profit-or-loss threshold.
Question 6
Hint
Apply ASC 280 stepwise: first determine whether the component qualifies as an operating segment under the identification criteria; only then apply the quantitative 10% tests for reportability.
Answer B. ASC 280 defines an operating segment by three identification criteria: the component engages in business activities, discrete financial information is available, and the CODM regularly reviews the component's results for resource-allocation and performance-assessment purposes (ASC 280). Those identification criteria are applied first; only after a component is identified as an operating segment are the quantitative 10% tests used to decide whether it must be reported separately. Separate asset data is not required to identify an operating segment.
Why not A: This choice tempts because the 10% tests are familiar and determine reportability. It fails because those thresholds are applied only after a component has been identified as an operating segment under ASC 280; they do not govern the initial identification.
Why not C: This is attractive since asset measures often appear in segment disclosures. It is incorrect because ASC 280 does not require separate asset information to identify an operating segment, discrete financial information such as revenue and profit schedules plus CODM review are the controlling factors.
Why not D: Independence sounds intuitive and can affect how operations are evaluated, which makes this tempting. It is wrong because shared functions or centralized oversight do not automatically prevent a component from being an operating segment if it meets the ASC 280 identification criteria (business activities, discrete financial info, and CODM review).
Question 7
Hint
For the segment revenue threshold, focus on what goes into the numerator and denominator before deciding whether the 10% test is met.
Answer D. For the segment revenue test, reported segment revenue includes both external revenue and intersegment sales or transfers. East's total segment revenue is $110 million ($82 million + $28 million), and combined segment revenue is $1.0 billion ($900 million + $100 million). Because $110 million is 11% of $1.0 billion, East meets the 10% revenue threshold for a reportable segment.
Why not A: This is plausible because the guidance lists multiple 10% tests, which can make them sound cumulative. In fact, meeting any one of the quantitative tests can make an operating segment reportable. Since the stem says to evaluate only the revenue test, satisfying that test is enough for this question.
Why not B: This is tempting because candidates often focus only on sales to outside customers. But the revenue test uses total reported segment revenue, including intersegment amounts, compared with combined internal and external revenue of all operating segments. Also, East's $82 million of external revenue does not exceed 10% of combined external revenue of $900 million.
Why not C: This distractor targets the common mistake of treating segment reporting like a purely external-revenue disclosure rule. Under the reportable-segment revenue test, intersegment revenue is included in both the segment numerator and the combined revenue denominator. Excluding the $28 million intersegment amount would apply the wrong measurement basis.
Common questions
What is an operating segment under ASC 280?
It has business activities, discrete financial information, and results regularly reviewed by the CODM to allocate resources and assess performance. The 10% tests determine reportability later, not operating-segment status.
Does the ASC 280 revenue test include intersegment sales?
Yes. The 10% revenue test includes external and intersegment revenue in both the segment amount and the combined total; the 75% coverage test uses external revenue only.
Can a segment that fails all 10% tests be reportable?
Yes. Additional operating segments must be reported when needed to bring reportable segments' external revenue coverage to at least 75% of consolidated external revenue.
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