Chapter 9: International Segment Reporting
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Chapter 9: International Segment Reporting

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Chapter 9: International Segment Reporting Chapter 9: International Segment Reporting Presentation Transcript

  • 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
  • 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?
  • 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
  • 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
  • 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
  • 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 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Dual Yardstick Approach
  • 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
  • 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 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 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
  • Dual Yardstick Approach
  • 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