Determining Industry and Geographic Segments A major producer of cereal breakfast...

Determining Industry and Geographic Segments

A major producer of cereal breakfast foods had been reporting in its annual reports just one dominant product line (cereals) in only the U.S. domestic geographic area. The company had no other separately reportable segments. For several years, the U.S. company has had a Canadian subsidiary that produces a variety of pasta. In 20X5, one brand of pasta, “Healthcare,” suddenly became very popular with the health-conscious public in both the United States and Canada, and the Canadian subsidiary more than tripled its sales and profits within the year.

The management of the U.S. parent company did not want to disclose to its competitors how profitable the Canadian subsidiary was because the company wanted to maintain its strong economic position without additional competition.

You have been able to determine the following (in millions):

All cereal product operations are located in the United States, and all pasta product operations are located in Canada. The Standard Industrial Classification (SIC) number is 2043 for cereal products and 2098 for the Canadian subsidiary’s pasta products. (The Standard Industrial Classification Index is prepared by the U.S. Office of Management and Budget and is used widely to define a company’s major industrial groups.)

Required

a. Why would management be reluctant to disclose information about very successful—and very unsuccessful—operations in the segmental disclosure footnote in the annual report?

b. Present both theoretical and applied arguments for including the pasta products segment with the cereal products segment as one internal operating segment, thus not requiring separate disclosure under ASC 280. How does the fact that the pasta products have suddenly become popular affect the disclosure requirements under ASC 280?

c. Present the ASC 280 requirements for reporting the cereal products and pasta products by geographic area. Must the Canadian operations be disclosed separately in a geographic disclosure footnote?