Segmental Reporting

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1Introduction to segmental reporting2
2Origin of segmental reporting2
2.1The fineness-theorem2
2.2Market efficiency theory2
2.3Agency theory2
2.4Accounting theory3
3The most important segmental reporting standards3
3.1International Accounting Standard 14 (IAS 14)3
3.1.1The International Accounting Standards Committee3
3.1.2The International Accounting Standards Board4
3.1.3IAS 14: Segment reporting4 of IAS 14 (revised)4 of IAS 14 (revised)4 of segments5 that has to be disclosed5
3.2SSAP 256
4Comparison with local GAAP's6
5Evaluation of segmental reporting6
5.2.1Costs of segmental reporting7 costs7 time of management7 in venture sense7
5.2.2Difficulties one can experience with the introduction of the reporting requirements7 concerning the identification of segments8 related to the information to be disclosed8
Segmental reporting

1Introduction to segmental reporting

Segmental reporting can be seen as "the analysis of the financial information of an enterprise or group between the different business activities and/or the different geographic areas in which it operates" . The reason for this reporting division into different business activities and geographic areas is that these have different profit potentials, growth opportunities, degrees and type of risk, rates of return and capital needs. Because of these differences, it is possible that consolidated financial statements are not sufficient (these financial statements summarize the results and financial position for the reporting entity as a whole). The disclosure of information about an enterprise's operation in different industries, its foreign operations and export sales, and its major customers, as an integral part of financial statements, may provide a solution to this problem (Thoen and Lefebvre, 2001).

2Origin of segmental reporting

Four theorems that are characterized by an accounting or a financial background can be considered as factors that created a need for the segmentation of information. In the following paragraphs, a brief description of these theorems will be given. 2.1The fineness-theorem

This theorem states that "given two sets containing the same information, if one is broken down more finely, it will be at least as valuable as the other set." Applied to segmental reporting, this means that the segmented information will always contain information that is as usual and valuable as the information provided by aggregated financial statements. 2.2Market efficiency theory

According to Fama (1970), three kinds of efficiency can be distinguished, depending on the available information: (1) weak form efficiency, (2) semi-strong form efficiency, and (3) strong form efficiency. A market is efficient in the ‘weak form' when all past prices are reflected in today's price. A market is efficient in the ‘semi-strong form' when prices reflect all public information. At last, a market is efficient in the ‘strong form' when all information in a market, whether public or private, is reflected in the price. The reporting of segmented information by companies may be useful to create more efficient markets. This is because this kind of information increases the transparency of the company which may help to make more accurate predictions about future gains. 2.3Agency theory

The agency theory concerns the relationship between a principal (e.g. users and shareholders of financial information) and an agent of the principal (e.g. company's managers)1. Because both the principal and the agent want to maximize their own utility and because these utilities are not equal, agency costs and suspicion of the shareholders towards management arise (Emmanuel & Garrod, 1992). As both...
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