Transcript Chapter 9
Chapter 9
International Segment Reporting
Users and Uses of Segment
Information
Diversification of operations leads to the need
for segment information
Segment data is typically provided for
geographical areas and lines of business
Segment information allows the following
Investor combination of company-specific
information with external information
More accurate assessment of risks
More accurate assessment of growth potential
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Users and Uses of Segment
Information
Segment information is also valuable to
employees, creditors, and host governments
Questions associated with segment reporting
Do the benefits exceed the costs?
Is regulation necessary?
If so, what form should regulation take?
How should segments be identified?
What should be the content of segment reports?
How should items disclosed be measured and
presented?
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Benefits of Segment
Reporting
Tested by two methods
Predictive ability tests
Compare accuracy of forecasts of future sales or earnings
based on consolidated data to those based on
disaggregated data
Assumes that useful information is any information that
helps predict earnings
Stock market reaction tests
Shows that if the stock market reacts to information, the
information must be useful
If the information has no effect, it is irrelevant or has already
been obtained through another source
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Benefits of Segment
Reporting
Predictions are more accurate if based on
line-of-business (LOB) segmental data
Forecasts based on segment earnings are
more accurate than those based on
segmental turnover in the U.S.
Segmental information for small companies
may be more accurate
Research finds similar findings for
geographical segment disclosures
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Benefits of Segment
Reporting
Inconclusive research exists on the effects of
LOB and geographical segment data on risk
assessment in relation to stock market
studies
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Costs of Segment
Reporting
Cost may be low because of the existing
information infrastructure of the company
Companies may provide competitors with
sensitive information
This kind of disclosure may benefit countries
operating in one industry or country rather
than multisegment MNEs
Interdependence of segments may limit
effectiveness of segment reporting
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
International Financial
Reporting Standards
IAS 14 “Segment Reporting” (1997)
Company’s organizational structure serves as the basis for
reporting segments
“Primary” segment reporting format has more disclosure than
“secondary” segment
If risks and returns are affected by LOB and geographical
segments, business segments should be used as the primary
format
“Matrix” presentation with disclosures on each basis is allowed
If neither approach is reflected in the organizational structure,
one should be chosen as the primary format
Reportable segments exist where a majority of revenue is earned
from external customers and segment revenue is 10% or more of
total revenue
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Regulations Around the World
U.S. requirements
SFAS 131 (replacing SFAS 14)
Similar to IAS 14
Reportable segments based on LOB, geographic location,
or a combination of both
Enterprise-wide disclosures (“second tier” reporting) include
Country of domicile
Any individually material country
All foreign countries in the aggregate
Aggregate information by continent or geographic area
groupings is no longer permitted
Profit disclosure is not required in “second tier” reporting
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Regulations Around the World
U.K. requirements
Companies Acts of 1981 and 1989
Requires disclosure of geographical segment turnover and
LOB disclosure of sales
Any market or class of business deemed “immaterial” may
be combined with another
A definition of a reporting segment is not given
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Regulations Around the World
U.K. requirements
SSAP 25, Segmental Reporting by the ASC
Requires disclosure of segment net assets for LOB and
geographical segments
Geographical segmentation of sales is required by source
and destination
Geographical and LOB segmental profit disclosure are
required
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Regulations Around the World
Requirements in Other Countries
Australia and Canada have requirements similar
to those in the U.S. and the U.K.
EU countries have minimum disclosure
requirements
Most European countries have a more secretive
approach
Japan has requirements consistent with IAS
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Segment Reporting Problems
Segment identification
Difficulties arise in auditing because there is no
clear-cut definition
Example – some companies define Europe, the
Middle East, and Africa as one segment
Comparability has been sacrificed for relevance
Management determination of segments implies
that what is useful to management is useful to
investors
Common costs are likely to be allocated, bringing
segment information into question
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Dual-Yardstick Approach
(Emmanuel and Gray, 1978)
Industry/geographical groupings are related
to an external standard industrial
classification
Requirements for an organizational unit
More than 50% of physical sales value is sold
externally
Revenue and profitability information is
accumulated regularly for this unit
Responsibility for the unit’s operating performance
resides with the immediate manager of the unit
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Dual Yardstick Approach
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Dual-Yardstick Approach
Other desirable information includes
Management responsibilities
Organization structure
Volume of internal transactions
Benefits of other desirable information
Facilitated auditor verification of the quality of
segmental disclosures
Indication of corporate strategy
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Dual-Yardstick Approach
Maintains a balance between the use of
managerial discretion and an inflexible
classification system
Provides meaningful segments for external
users
Realistic, material segments are identified
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
International Issues
Emmanuel and Gray suggest that organizational
structure should be the primary yardstick
Disclosure should be made consistent with
geographical areas considered significant by
management
Disclosure should be consistent with risk-return
perceptions
Geographical locations should not be mixed up with
markets served from such locations
Management is given a lot of discretion
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
International Issues
Application of the 50% rule can become more
complicated
An auditor’s task is important in this case
An auditor is responsible for evaluating
Meaningfulness of segmental disclosures
Risk factors involved
Organization of responsibilities to match international
activities
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Dual Yardstick Approach
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Matrix Presentation
Many companies provide LOB and
geographical segmental data separately
instead of in matrix form
Matrix form gives information on the
interrelationship of the two types of segments
Makes a more accurate assessment of
business prospects possible
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black