Evidence On The Benefits Of Segment Reporting

Topics: Balance sheet, Financial statements, International Financial Reporting Standards Pages: 28 (12843 words) Published: April 19, 2015





Page 427

Segment reporting
Clare B. Roberts1

19.1 What is segment reporting?
19.2 The need for segment information
19.3 Disclosure regulations
19.3.1 Introduction
19.3.2 Requirements in the United States
19.3.3 IAS 14
19.3.4 IFRS 8
19.4 Evidence on the benefits of segment reporting
19.4.1 Introduction
19.4.2 Studies of user decision making
19.4.3 Studies using researchers’ forecasts
19.4.4 Stock market reactions to segment disclosures

After reading this chapter, you should be able to:

explain the nature and purposes of segment reporting;


outline the development of segment reporting from the 1960s onwards;


describe the segment disclosure requirements of the IASB and the United States;


outline the major practical problems met when trying to identify segments or trying to write rules on this subject; and


explain the contributions of research to the understanding of the benefits and costs of segment reporting.

19.1 What is segment reporting?
It has long been recognized that users of financial statements need consolidated information. However, consolidated statements do not provide all the information needed, and the annual report of any large company will typically include much


This is a revised version of the chapter in previous editions by Clare Roberts and Sidney Gray.





Part V


Page 428

Major issues in the financial reporting of MNEs

Table 19.1 Caterpillar’s geographical disclosures

External Sales & Revenues

Net property, plant and

Information about geographic areas:





December 31,

Inside United States..............................
Outside United States...........................














Source: Adapted from Caterpillar Inc. (2007) Caterpillar Inc. General and Financial Information 2006, Caterpillar, Inc., Peoria, Illinois, p. A-36.

more information than this. For example, it will include non-financial or narrative disclosures describing the activities of each of its divisions or each major part of the company. This information may be broken down by different types of industry, different parts of the world, a combination of industry and geographical areas, or any other basis that the company thinks helpful for the reader. Also included, usually in the notes to the financial statements, will be disaggregated or segmented financial information, commonly referred to as segment reporting. Segment reporting involves breaking down the enterprise into its constituent parts or segments and reporting financial information for each of these. A company can segment its operations in a number of ways, but the most common are segmentation by industry or type of business (often called line of business, or LoB), by geographical area (either in terms of location of operations or location of customers) or by a combination of both of these. An example of a very simple set of geographical segment disclosures is given in Table 19.1, which reproduces some of the disclosures made by the US company Caterpillar (this shows the US requirements for secondary segments, as discussed below). As can be seen, Caterpillar disaggregates its sales or turnover and its net property, plant and equipment into two segments – Inside United States and Outside United States. Rather more information is provided by the Japanese company Honda Motor, as illustrated in Table 19.2. This company discloses external sales, internal sales, operating income and segment assets for its five geographic segments. If we instead look at the UK company,...

References: Balakrishnan, R., Harris, T.S. and Sen, P.K. (1990) ‘The predictive ability of geographic segment disclosures’, Journal of Accounting Research, Autumn.
Baldwin, B.A. (1984) ‘Segment earnings disclosure and the ability of security analysts to forecast earnings per share’, Accounting Review, July.
Behn, B.K., Nichols, N.B. and Street, D.L. (2002) ‘The predictive ability of geographic segment
disclosures by US companies: SFAS No 131 vs SFAS No 14’, Journal of International Accounting
Boatsman, J.R., Behn, B.K. and Patz, D.H. (1993) ‘A test of the use of geographical segment
disclosures’, Journal of Accounting Research, Supplement.
Collins, D.W. (1975) ‘SEC product line reporting and market efficiency’, Journal of Financial
Economics, June.
Collins, D.W. (1976) ‘Predicting earnings with sub-entity data: Some further evidence’,
Journal of Accounting Research, Spring.
Collins, D.W. and Simonds, R. (1979) ‘SEC line of business disclosure and market risk adjustments’, Journal of Accounting Research, Autumn.
Doupnik, T.S. and Rolfe, R.J. (1990) ‘Geographic area disclosures and the assessment of foreign investment risk for disclosure in accounting statement notes’, International Journal of
Accounting, No
Doupnik, T.S. and Seese, C.P. (2001) ‘Geographic area disclosures under SFAS 131: materiality
and fineness’, Journal of International Accounting, Auditing and Taxation, No
Edwards, P. and Smith, R.A. (1996) ‘Competitive disadvantage and voluntary disclosures: The
case of segmental reporting’, British Accounting Review, June.
Emmanuel, C.R. and Pick, R. (1980) ‘The predictive ability of UK segment reports’, Journal of
Business Finance and Accounting, Summer.
Emmanuel, C.R., Garrod, N.W. and Frost, C. (1989) ‘An experimental test of analysts’ forecasting behaviour’, British Accounting Review, June.
Financial Accounting Standards Board (1976) SFAS 14; Financial Reporting for Segments of a
Business Enterprise, December.
Garrod, N.W. and Emmanuel, C.R. (1987) ‘An empirical analysis of the usefulness of disaggregated accounting data for forecasts of corporate performance’, Omega, No. 5.
Garrod, N.W. and Rees, W. (1998) ‘International diversification and firm value’, Journal of
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Herrmann, D. (1996) ‘The predictive ability of geographic segment information at the country, continent and consolidated levels’, Journal of International Financial Management and
Accounting, Spring.
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and SFAS 14’, Accounting Horizons, September.
Hope, O-K, Kang, T., Thomas, W.B. and Vasvari, F. (2004) ‘The effect of SFAS 131 geographic
segment disclosure on the valuation of foreign earnings’, Working paper, December.
Johnson, C.B. (1996) ‘The effect of exchange rate changes on geographic segment earnings
of US-based multinationals’, Journal of International Financial Management and Accounting,
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