SFAS No. 131 (ASC 280) allows companies to report segment information by line of business, geographic location, or a combination of the two. Which of these does Pepsi do? What does Coca-Cola do?
Pepsi reports segment information by a combination of line of business and geographic location, and so does Coca-Cola. The company has identified six reportable segments, which are Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), Latin America Foods (LAF), PepsiCo Americas Beverages (PAB), Europe, and Asia, Middle East & Africa (AMEA). Its best-known competitor, Coca-Cola, identified seven reportable segments: Eurasia and Africa; Europe; Latin America; North America; Pacific; ...view middle of the document...
From the information provided by PepsiCo, we learn that most of its revenue comes from North America, especially the United States which earned 53% of the company’s total revenue. This explains why most of the company’s long-lived assets are located in Northern America. The book value of these assets increased by approximately 136% in the United States, 60% in Mexico, and 355% in Canada from 2009 to 2010 after PepsiCo acquired two of its largest bottling affiliates (PBG and PAS). One of the reasons why most of PepsiCo’s revenue was earned in North America is because the company’s major customers are based in North America.
Why does FASB require companies to disclose major customer information? In other words, how is this information valuable to financial statement users? What major customer information must be disclosed, and what information need not be disclosed? What major customer information did PepsiCo report in 2010?
FASB requires companies to disclose major customer information for the same reason it requires them to disclose information by geographic area: because they represent a significant concentration of risk. An enterprise should provide information about the extent of its reliance on its major customers; it should disclose the fact that revenues from transactions with a single external customer is equal to 10% or more of the enterprise’s total consolidated revenue, it should disclose the amount of revenue from each major customer, and the identity of the segments reporting the revenues. Interestingly enough, the enterprise need not disclose the identity of the major customers, or the amount of revenues that each segment reports from these major customers. PepsiCo chose to reveal the identity of its major customer in its report. It disclosed the fact that sales to Wal-Mart, their major customer, were 12% of the company’s total net revenue, and 18% of North American net revenue.
Why did FASB allow segment information to be prepared and disclosed on a non-GAAP basis? In other words, what is the justification for allowing departures from GAAP?
FASB ruled that the information to be reported about each segment should be measured on the same basis as the information used by the chief operating decision maker for purposes of allocating resources to segments and assessing segments' performance. There are several justifications for allowing departures from generally accepted accounting principles. First, reporting segment information in accordance with the generally accepted accounting principles used at the consolidated level would be very difficult since some of those principles are not intended to be applied at the segment level; one example being accounting for cost of enterprise-wide employee benefit plans. Another justification is the fact that there are no generally accepted principles for allocating joint costs, jointly used assets, or jointly incurred liabilities to segments or for pricing intersegment transfers. In...