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Intermediate Accounting (Kieso)
Found in: Page 1445

Short Answer

What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?

The company chooses the fragments for conceivable disclosure; a quantitative test is made to decide whether the fragment is critical enough to warrant genuine disclosure.

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Step by Step Solution

Meaning of Disclosure

A disclosure is a supplemental information that has been added to an entity's financial statements, often in order to clarify the operations within which the entity's money-related performance occurs, unusual rarities that would have been cleared for the most part in initiating an investigation.

Explaining the accounting problems related to diversified companies.   

After a company has selected parts for perceivable disclosure, a quantitative test is performed to determine whether the part is important enough to warrant genuine disclosure. A part is distinguished as a reportable piece when it completes one or more tests after tests.

(a) Its income (counting both sales to uninfluenced customers and intersegment sales or exchanges) is 10% or more of the combined income (deals to uninfluenced customers and intersegment deals or exchanges) of all the enterprise’s industry sections

(b) a lump sum of 10% or more of its operating profit or operating loss principal, in full amount, of

  1. Combined operating profit of all industry segments that do not result in an operating loss, or
  2. Combined operating loss of all industry segments does not bring an operating loss.
  3. Its identifiable assets account for 10% or more of the total identifiable assets of all the components.

In applying these tests, two additional components must be considered. To begin with, segment data should describe a significant parcel of a company's business. Specifically, joint transactions for unrelated customers must be equal to or greater than 75% for the fractured entire enterprise. This test prevents one company from providing limited information because it was multiple pieces and tying everyone else into one category.

Second, the profession recognized that reporting, as well as multiple segments, could overwhelm customers with point-by-point information. Despite the fact that the FASB has not set a clear rule as to how many shares are equivalent, this point is examined when a corporation has 10 or more reportable divisions.

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