1. International Segment Reporting
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
Do I need a citation for the fourth bullet?
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
Do I need a citation here?
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
Nichols, Street, and, Gray, 2000
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
Do I need the year in the first bullet?
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