chapter 9: international segment reporting

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


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

chapter 9: international segment reporting

Documents

segment revenue

segment earnings

secondary segment

segment comparability

effectiveness of segment

geographical segment

segmental information

useful information