c. What options, if any, does Chemax Inc. have with the disclosure of its new antihistamine product line? Explain your answer
Business & ManagementGeneralWorked Solution
Chemax Inc. manufactures a wide variety of pharmaceuticals, medical instruments, and other medical supplies. Eighteen months ago the company developed and began to market a new product line of antihistamine drugs under various trade names. Sales and profitability of this product line during the current fiscal year greatly exceeded management's expectations. The new product line will account for 10 percent of the company's total sales and 12 percent of the company's operating income for the fiscal year ending June 30, 20X0. Management believes sales and profits will be significant for several years. Chemax is concerned that its market share and competitive position could suffer if it discloses the volume and profitability of its new product line in its annual financial statements. Management is not sure how ASC 280 applies in this case.
Required
a. What is the purpose of requiring segment information in financial statements?
b. Identify and explain the factors that should be considered when attempting to decide how products should be grouped to determine a single business segment.
c. What options, if any, does Chemax Inc. have with the disclosure of its new antihistamine product line? Explain your answer.
🔒
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
$9.99 USD
Secure checkout is completed by Stripe.
SOLUTION
a. The purpose for requiring segment information to be disclosed in financial statements is to assist financial statement users in analyzing and understanding the enterprise's financial statements by permitting better assessment of the enterprise's past performances and future prospects.
b. The determination of the segments appropriate for an enterprise is the responsibility of management; that is, management should use its judgment in deciding how to report its segment information. Specific characteristics or sets of characteristics management can use in determining how to group its products into segments include the following:
1. Use of existing profit centers.
2. A segment shall be regarded as significant and identified as a reportable segment if one or more of the following are satisfied:
i.
10% or more of the total revenue is derived from one segment.
ii.
10% or more of the greater in absolute amount of the aggregate profits or aggregate losses is contributed by the segment.
iii.
10% of the combined assets can be associated with the segment.
3.
Management has the ability to define the breakdown of the segments, but the segment definitions used for external purposes must be the same as used for internal decision making purposes.
c.
The options available to Chemax Industries are as follows:
1.
Segment by product line — antihistamines. This single product meets the 10 percent test and can be anticipated as a significant product line in the future.
2.
Segment by product group — pharmaceutical, medical instruments, and medical supplies. Antihistamines can be carried as a part of the pharmaceutical group.
3.
Disaggregate pharmaceutical into ethical and proprietary drugs and carry antihistamines under whichever industry segment is appropriate (probably proprietary drugs, in this case).