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Chapter 9 International Segment Reporting
Users and Uses of Segment Information <ul><li>Diversification of operations leads to the need for segment information </li...
Users and Uses of Segment Information <ul><li>Segment information is also valuable to employees, creditors, and host gover...
The Benefits of Segment Reporting <ul><li>Tested by two methods </li></ul><ul><ul><li>Predictive ability tests </li></ul><...
The Benefits of Segment Reporting <ul><li>Predictions are more accurate if based on line-of-business (LOB) segmental data ...
The Benefits of Segment Reporting <ul><li>Inconclusive research exists on the effects of LOB and geographical segment data...
The Costs of Segment Reporting <ul><li>Cost may be low because of the existing information infrastructure of the company <...
International Financial Reporting Standards <ul><li>IAS 14 “Segment Reporting” (1997) </li></ul><ul><ul><li>Company’s orga...
Regulations Around the World <ul><li>U.S. requirements </li></ul><ul><ul><li>SFAS 131 (replacing SFAS 14) </li></ul></ul><...
Regulations Around the World <ul><li>U.K. requirements </li></ul><ul><ul><li>Companies Acts of 1981 and 1989 </li></ul></u...
Regulations Around the World <ul><li>U.K. requirements </li></ul><ul><ul><li>SSAP 25, Segmental Reporting by the ASC </li>...
Regulations Around the World <ul><li>Requirements in Other Countries </li></ul><ul><ul><li>Australia and Canada have requi...
Segment Reporting Problems <ul><li>Segment identification </li></ul><ul><ul><li>Difficulties arise in auditing because the...
The Dual-Yardstick Approach (Emmanuel and Gray, 1978) <ul><li>Industry/geographical groupings are related to an external s...
Dual Yardstick Approach
The Dual-Yardstick Approach <ul><li>Other desirable information includes </li></ul><ul><ul><li>Management responsibilities...
The Dual-Yardstick Approach <ul><li>Maintains a balance between the use of managerial discretion and an inflexible classif...
International Issues <ul><li>Emmanuel and Gray suggest that organizational structure should be the primary yardstick </li>...
International Issues <ul><li>Application of the 50% rule can become more complicated </li></ul><ul><li>An auditor’s task i...
Dual Yardstick Approach
Matrix Presentation <ul><li>Many companies provide LOB and geographical segmental data separately instead of in matrix for...
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Chapter 9: International Segment Reporting

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  • Nichols, Street, and, Gray, 2000
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  • Transcript of "Chapter 9: International Segment Reporting"

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