In the 1960s and 1970s, there was criticism of the accounting practices in developed countries such as the United Kingdom and the United States for not keeping abreast with business activities, which have moved from one business and one geographical segment operations producing single products for local consumption to multinational operations with more than one business segment. Aggregate information in consolidated financial statements could no longer satisfy the information needs of some users especially with regards to the evaluation of different rates of risks, returns and growth in a diversified multinational corporation.
Empirical studies subsequently seem to suggest that segment information do have some benefits especially with regard to the analysis of user decision making (Nobes and Parker, 2000; Baldwin, 1984; Nichols, Tunnell and Seipal, 1995; Emmanuel, Garrod and Frost, 1989), comparisons with the predictive ability of different types of forecasts (Nobes and Parker, 2000; Kinney, 1971; Collins, 1976; Silhan, 1983; Emmanuel and Pick, 1980) and stock market reaction test (Nobes and Parker,2000; Simmonds and Collins, 1978; Mohr, 1983, 1985; Prodhan and Harris, 1989) as compared with consolidated information.
The Financial Accounting Standards Board of the United States, the Accounting Standards Committee (now replaced by the Accounting Standards Board) of the United Kingdom and the International Accounting Standards Committee (IASC) responded to this need by requiring the disclosure of segmental information in their regulations and standards. The original International Accounting Standard (IAS) 14 was issued in Malaysia in 1985. However that standard was criticized for several reasons including the following: •It provided only general guidance for identifying industry segments and geographical segments; •Too many companies claimed to operate in only one business segment; •Companies used broad, vague geographic groupings;
•Lack of consistency of primary segment information with other parts of the annual report; •Too few items of information disclosed for each segment.
To better satisfy the information needs of users of financial statements, the Malaysian Accounting Standards Board (MASB) issued MASB 22 Segmental Reporting. MASB 22 has replaced IAS 14 Reporting Financial Information by Segment (hereafter referred to as ‘the original IAS 14) and becomes operative for financial statements covering periods beginning on or after 1 January 2002.
The objective of MASB 22 is to establish principles for reporting financial information by segment – information about different types of products and services an enterprise produces and the different geographical areas in which it operates – to help users of financial statements:
•Better understand the enterprise’s past performance;
•Better assess the enterprise’s risks and returns; and
•Make more informed judgements about the enterprise as a whole.
Some of the changes brought about by MASB 22 in comparison with the original IAS 14 in order to achieve the above objectives are as follows:
•MASB 22 requires that if total revenue from external customers for all reportable segments combined is less than 75% of total enterprise revenue, then additional reportable segments should be identified until the 75% level is reached (hereafter referred to as ‘the 75% ruling’). The original IAS 14 did not have such a requirement.
•The original IAS 14 required 4 principal items of information for both industry and geographical segments i.e. sales or other operating revenue, segment result, segment assets employed and the basis of inter-segment pricing. For an enterprise’s primary basis of segment reporting, MASB 22 requires the above 4 items of information plus another 5 items of information i.e. segment liabilities, additions of property, plant and equipment and intangible assets, depreciation and amortisation expense, other...