Chapter 9
International Segment Reporting
Users and Uses of Segment
Information
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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
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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
Users and Uses of Segment
Information
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Segment information is also valuable to
employees, creditors, and host governments
Questions associated with segment reporting
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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
The Benefits of Segment
Reporting
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Tested by two methods
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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
The Benefits of Segment
Reporting
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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, Gray, Black
The Benefits of Segment
Reporting
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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, Gray, Black
The Costs of Segment
Reporting
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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
International Financial
Reporting Standards
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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
Regulations Around the World
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U.S. requirements
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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
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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, Gray, Black
Regulations Around the World
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U.K. requirements
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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
Regulations Around the World
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U.K. requirements
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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
Regulations Around the World
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Requirements in Other Countries
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Australia and Canada have requirements similar
to those in the U.S. and the U.K.
EU countries have minimum disclosure
requirements
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Most European countries have a more secretive
approach
Japan has requirements consistent with IAS
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Segment Reporting Problems
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Segment identification
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Difficulties arise in auditing because there is no
clear-cut definition
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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
The Dual-Yardstick Approach
(Emmanuel and Gray, 1978)
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Industry/geographical groupings are related
to an external standard industrial
classification
Requirements for an organizational unit
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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
Dual Yardstick Approach
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Dual-Yardstick Approach
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Other desirable information includes
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Management responsibilities
Organization structure
Volume of internal transactions
Benefits of other desirable information
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Facilitated auditor verification of the quality of
segmental disclosures
Indication of corporate strategy
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
The Dual-Yardstick Approach
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Maintains a balance between the use of
managerial discretion and an inflexible
classification system
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Provides meaningful segments for external
users
Realistic, material segments are identified
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International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
International Issues
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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, Gray, Black
International Issues
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Application of the 50% rule can become more
complicated
An auditor’s task is important in this case
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An auditor is responsible for evaluating
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Meaningfulness of segmental disclosures
Risk factors involved
Organization of responsibilities to match international
activities
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Dual Yardstick Approach
International Accounting and Multinational Enterprises – Chapter 9 – Radebaugh, Gray, Black
Matrix Presentation
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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