Segment Reporting

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Accounting Standards for the Public Sector

The objective of this Standard is to establish principles for reporting financial information by segments. The disclosure of this information will:
(a) help users of the financial statements to better understand the entity’s past performance and to identify the resources allocated to support the major activities of the entity; and
(b) enhance the transparency of financial reporting and enable the entity to better discharge its accountability obligations.

Definition of a Segment

A segment is a distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information for the purpose of evaluating the entity’s past performance in achieving its objectives and for making decisions about the future allocation of resources.

Reporting By Segments

Under this Standard, public sector entities will identify as separate segments each distinguishable activity or group of activities for which financial information should be reported for purposes of evaluating the past performance of the entity in achieving its objectives, and for making decisions about the allocation of resources by the entity. In addition to disclosure of the information required by paragraphs 51 to 75 of this Standard, entities are also encouraged to disclose additional information about reported segments as identified by this Standard or as considered necessary for accountability and decision making purposes.

I. Users and Uses of Segmental Reporting

A. Investors

1. Interested in cash flows and risk or uncertainty of the cash flows

2. Interested in corporation as a whole rather than specific segments; however, factors influencing industry or geographic segments influence cash flows as a whole

3. Need disaggregation of sales and profits of lines of business and geographic segments

4. Disaggregation is especially helpful for diversified corporations; easier to make comparisons with other similar lines of business

B. Employees and governments might have influence with different segments of a firm rather than the entire firm -- plant level, country level

II. The Benefits of Segmental Reporting

A. Survey tests -- users always want more information, even though they may inaccurately assess their value or assume that anything free is of value (gaming)

B. Predictive ability tests

1. Comparison of the accuracy of forecasts of future sales or earnings based upon consolidated data to that of forecasts based on disaggregated data

2. The assumption is that users will use disaggregated information to make forecasts, and that has not been proven

3. Forecasts based on LOB data are more accurate than those based on consolidated earnings

4. Forecast based on segment earnings are more accurate than those based on segment sales (U.S. but not U.K.)

5. Segments are more helpful for smaller than for larger MNEs

6. Similar results on more limited geographic segment studies

C. Stock market reaction tests

1. More valid than predictive ability tests since we are looking at the direct impact on stock prices of information

2. Results are mixed

III. The Costs of Segmental Reporting

A. Cost of compiling, processing and disseminating information

1. No real evidence that this is a material cost

2. Assume that MNEs use disaggregated information for internal purposes, so it should be available

B. Cost of competitive disadvantage

1. May apply at the corporate level, may not be a problem at the level of the entire economy.

2. May be an advantage -- depends on attitudes towards aiding competition and tends to be case specific

C. Benefit to competitors

1. May be helpful to society, even if it is not helpful to the disclosing firm

2. Problem would be at the global level where there are differences in disclosure requirements, not at the national level where disclosure requirements...
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