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

International Accounting and Multinational Enterprises Chapter 9 Radebaugh,

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,

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,

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,

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,

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,

International Financial
Reporting Standards

IAS 14 Segment Reporting (1997)

Companys 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,

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,

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,

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,

Regulations Around the World

Requirements

Australia and Canada have requirements similar

to those in the U.S. and the U.K.
EU countries have minimum disclosure
requirements

in Other Countries

Most European countries have a more secretive

approach

Japan has requirements consistent with IAS

International Accounting and Multinational Enterprises Chapter 9 Radebaugh,

Segment Reporting Problems

Segment

Difficulties arise in auditing because there is no

clear-cut definition

identification

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,

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 units operating performance
resides with the immediate manager of the unit

International Accounting and Multinational Enterprises Chapter 9 Radebaugh,

Dual Yardstick Approach

International Accounting and Multinational Enterprises Chapter 9 Radebaugh,

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,

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,

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,

International Issues
Application

of the 50% rule can become more

complicated
An auditors 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,

Dual Yardstick Approach

International Accounting and Multinational Enterprises Chapter 9 Radebaugh,

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,