Welcome to Public Company Reporting!

Hi there! If you are preparing for the FAR section of the CPA exam, you’ve likely noticed that accounting can sometimes feel like it's all about small details. In this chapter, we step back and look at the Big Picture for companies that trade on the stock market (Public Companies). Because these companies have thousands of investors, they have extra rules to ensure everyone gets a clear, honest view of how the business is doing. We will cover Segment Reporting, Earnings Per Share (EPS), and Interim Reporting. Don't worry if this seems like a lot—we’ll break it down piece by piece!

1. Segment Reporting (ASC 280)

Imagine you own a massive company like Disney. If you just tell investors, "We made \$1 billion," they won't know if that money came from movies, theme parks, or toys. Segment Reporting is designed to pull back the curtain so investors can see which parts of a business are thriving and which are struggling.

The Management Approach

An operating segment engages in activities from which it may earn revenue and incur expenses, has results regularly reviewed by the chief operating decision maker and has discrete financial information. A startup can qualify before earning revenue. ASC 280 also requires significant segment expenses regularly provided to the CODM and included in the reported profit/loss measure, plus other required disclosures, annually and at interim dates. The amended disclosures also apply to a public entity with one reportable segment.

The "10% Test" – Which Segments Must Be Reported?

Not every tiny kiosk needs its own report. A segment is reportable if it meets ANY ONE of these three tests:

  1. Revenue Test: Its revenue (including sales to outside customers AND internal transfers) is 10% or more of the combined revenue of all operating segments.
  2. Profit/Loss Test: Its absolute profit or loss is 10% or more of the greater of: (a) the combined profit of all segments that didn't lose money, or (b) the combined loss of all segments that did lose money.
  3. Asset Test: Its assets are 10% or more of the combined assets of all operating segments.

The "75% Rule"

Once you’ve picked your 10% segments, you have to do a "sanity check." The total external revenue of all your reportable segments must equal at least 75% of the company's total consolidated revenue. If it doesn't, you have to keep adding more segments until you hit that 75% mark.

Quick Review:
- Reportable Segment: Meets 10% of Revenue, Profit, or Assets.
- External Revenue Check: Must account for 75% of total sales.
- All Other Segments: Anything that doesn't fit gets lumped into a "All Other" category.

2. Earnings Per Share (EPS)

If you tell an investor a company earned \$1 million, they’ll ask, "How much of that belongs to my share of stock?" Earnings Per Share (EPS) is the "Golden Metric" on Wall Street. It tells you how much profit is allocated to each individual share of common stock.

Basic EPS

This is the simple version. We only care about Common Shareholders. Since Preferred Shareholders get paid first, we have to take their "cut" out of the Net Income.

The Formula:
\( \text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{WACSO}} \)

What is WACSO?
WACSO stands for Weighted Average Common Shares Outstanding. Because the number of shares changes during the year (buying back shares or issuing new ones), we can't just use the year-end number. We have to weight them by how long they were in the hands of the public.

Important Trick: Stock Splits and Stock Dividends
When a company does a stock split (e.g., 2-for-1), you must treat it as if it happened at the beginning of the very first period presented. It is retroactive! If you see a split in a CPA exam question, apply it to all shares outstanding prior to that date.

Diluted EPS (The "Worst-Case Scenario")

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

3. Interim Financial Reporting (ASC 270)

Domestic SEC reporting companies generally file Form 10-K annually and Form 10-Q for each of the first three fiscal quarters; the fourth quarter is included in the annual filing. Foreign private issuers generally use different forms, such as 20-F and 6-K. Filing deadlines depend on filer status.

Matching Expenses to Revenue

If a company pays a huge property tax bill in Q1 that covers the whole year, they shouldn't show a massive loss in Q1 and huge profits in Q2, Q3, and Q4. Instead, they allocate (spread out) that expense across all four quarters.

The Income Tax Exception

U.S. GAAP interim reporting treats each period as part of the annual period, while recognizing discrete events in the proper interim period. Apply the estimated annual effective tax rate to year-to-date ordinary income and recognize discrete tax items separately. Allocate costs only when the applicable accounting rules and benefits across periods justify allocation; do not smooth all annual expenses or defer losses merely to equalize quarters.

Inventory: The "LIFO Liquidation" Rule

If a company uses LIFO and expects to replace a temporary drop in inventory by year-end, they don't recognize the gain from the "liquidation" in their interim report. They keep it based on the expected replacement cost.

Did you know?
Permanent losses in inventory (like market value drops) must be recognized in the quarter they happen. But, if that value goes back up later in the year, you can reverse that loss (but only up to the amount of the original loss!).

Chapter Summary & Key Points

Basic EPS uses income available to common shareholders and weighted-average common shares. Diluted EPS includes only dilutive potential shares, using income from continuing operations available to common shareholders as the control number. If-converted assumes conversion at the beginning of the period or later issuance date; add back relevant preferred dividends or after-tax interest and weight the additional shares consistently. The treasury-stock method uses the period’s average market price and applicable assumed proceeds, including relevant unrecognized compensation cost. Do not include antidilutive instruments.

Keep going! You're doing great. These reporting topics are some of the most "points-heavy" areas on the FAR exam because they are unique to public companies. Master the 10% tests and the EPS formula, and you’ll be well on your way to passing!

Exam scope: In the 2026 FAR blueprint, Public Company Reporting Topics focus on the purpose and specified contents of SEC Forms 10-Q, 10-K and 8-K, and basic/diluted EPS. Detailed segment-reporting tests and disclosures are BAR content. Segment discussion here is supplementary background, not an additional FAR exam objective.