Chapter 9 International Segment Reporting
Nov 22, 2014
Chapter 9International Segment Reporting
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
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