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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

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Chapter 9

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  1. Chapter 9 International Segment Reporting

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. Dual Yardstick Approach International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black

  16. 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

  17. 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

  18. 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

  19. 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

  20. Dual Yardstick Approach International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black

  21. 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

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