Segmental reporting Essay Example For Students

Segmental reporting Essay Index1Introduction to segmental reporting22Origin of segmental reporting22.1The fineness-theorem22.2Market efficiency theory22.3Agency theory22.4Accounting theory33The most important segmental reporting standards33.1International Accounting Standard 14 (IAS 14)33.1.1The International Accounting Standards Committee33.1.2The International Accounting Standards Board43.1.3IAS 14: Segment reporting43.1.3.1Objective of IAS 14 (revised)43.1.3.2Applicability of IAS 14 (revised)43.1.3.3Identification of segments53.1.3.4Information that has to be disclosed53.2SSAP 2564Comparison with local GAAPs65Evaluation of segmental reporting65.1Advantages65.2Disadvantages75.2.1Costs of segmental reporting75.2.1.1Monetary costs75.2.1.2Lost time of management75.2.1.3Decrease in venture sense75.2.2Difficulties one can experience with the introduction of the reporting requirements75.2.2.1Difficulties concerning the identification of segments85.2.2.2Difficulties related to the information to be disclosed8Segme ntal reporting1Introduction to segmental reportingSegmental 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 enterprises 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 reportingFour 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-theoremThis 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 theoryAccording 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 todays 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 theoryThe agency theory concerns the relationship between a principal (e.g. users and shareholders of financial information) and an agent of the principal (e.g. companys 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 parties have different utilities that they want to maximize, they also have a different opinion on the quantity, the level of detail and by what means the information regarding the company should be made public. Agents, for example, have the tendency to withhold information because they are afraid that competitors will take ad vantage of this information or because they do not want trade unions or employees to use the information to compare earning figures from different segments (Thoen ; Lefebvre, 2001). Nowadays, financial analysts look very negative toward companies that do not supply segmental information. Their bad evaluation of such companies entails a negative influence on the share values of those companies which on their turn forces the company to provide more information. Deze tekst zeker nog veranderen2.4Accounting theoryThis theory states that the provision of segmented information is necessary in order to be able to judge uncertainty and to better value the companys activities. The reason here fore, is that such information makes it possible to make profound judgments of risks and to predict future earnings in a more accurate way. 3The most important segmental reporting standards3.1International Accounting Standard 14 (IAS 14)3.1.1The International Accounting Standards CommitteeThe IASC was f ormed in 1973 at the initiative of Henry Benson, a British chartered accountant, who was at that time head of the company that would later become PricewaterhouseCoopers. The objectives of this committee were (Flower and Ebbers, 2004):To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance. To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. Between 1974 and 2000, the IASC issued some forty standards, but these were so vague and permitted so many alternative accounting treatments that they did little to reduce the diversity of financial reporting practice throughout the world. However by the end of the 90s, two developments made it more probable that the IASCs standards would become applied and accepted worldwide. The first concerned the decision of the EU to ally itself with the IASC with the ultimate aim of permitting European MNEs to use the IAS standards for their accounts. Secondly, an important agreement was made in order to improve the acceptability of the IASs by the worlds stock exchanges. More exactly, the IASC agreed with the International Organisation of Securities Commissions (IOSCO), which represents the national stock exchange regulatory bodies at the international level, that the latter would recommend the national regulatory bodies to permit foreign multinational corporations to use the IASs on the condi tion that the IASC would deliver more qualitative IASs. These two developments were very important to enhance the status and the acceptability of the standards. Personality Disorders Essay Paper5.2.1Costs of segmental reportingAccording to Mautz (1968), the increasing costs of segmental reporting can be divided into three groups, (1) monetary costs, (2) costs resulting from the lost time of management, and (3) the cost resulting from the decrease in venture sense. 5.2.1.1Monetary costsThese costs are costs for additional personnel, for the extension of the system that gathers information and for the additional audit of the segmented information. However, Radebaugh and Gray (1993) mean that, in general, these additional costs are not material when you realize that management has a lot of freedom to choose the different segments. Thus, management has the possibility to let these segments correspond as good as possible to the structure of the company. Moreover, companies already collect information for internal purposes, so the extra costs for external reporting are minimized. 5.2.1.2Lost time of managementThis type of cost has to do with the time management loses when it has to answer questions related to the additional information. 5.2.1.3Decrease in venture senseThis type of costs rises from the short-term thinking of investors and other users of financial information. Management has to think about the cost-effectiveness of their company both on the long and the short run. Just because it also has to look at the long run cost-effectiveness, it is possible that it will make losses in the short run. If the users of the additional information will only evaluate management on their short run results, big chances exists that these managers will not look at the long run anymore and just focus on short term gains. Of course, this is disadvantageous for the company. 5.2.2Difficulties one can experience with the introduction of the reporting requirementsHere, at least two kinds of problems can be distinguished. First of all, difficulties concerning the identification of segments can arise. Questions here can be on which basis the segments have to be distinguished, what size the different segments need to have and how many segments have to be disclosed. A second difficulty is related to the identification of information to be disclosed. 5.2.2.1Difficulties concerning the identification of segmentsA first difficulty is to determine the right basis on which the different segments have to be distinguished. An important point that has to be kept in mind is that the activities who belong to one segment have to be similar (homogeneous) to each other and that the activities who belong to different segments have to be heterogeneous to each other. A second difficulty concerns the decision of a segmentation dimension. Companies have the choice between four methods that are available for the identification of segments: (1) segmentation based on line-of-business, (2) segmentation based on geographical areas of activities, (3) segmentation based on the internal corporate structure, and (4) segments for each individual market in which the company is operating. Corporations may obviously also make a combination of these dimensions. The choice of the segmentation base depends on the type of company and on should be made with the in tention to optimise the entitys financial reporting. 5.2.2.2Difficulties related to the information to be disclosed6ReferencesEmmanuel, C. ; N. Garrod (1992). Segment reporting: International issues and evidence. Prentice Hall, ICAEWFama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of finance, Vol. 25, pp. 383-417. Flower J. ; G. Ebbers (2004). Global Financial Reporting. Palgrave Basingstoke. Mautz R.K. (1968). Financial Reporting by Diversified Companies. Financial ExecutivesResearch Foundation, New York. Radebaugh L.H. ; S.J. Gray (1993). International Accounting and Multinational Enterprises. John Wiley ; Sons (USA), 3rd edition. Thoen V. ; C. Lefebvre (2001). A critical analysis of segmental reporting based on an international perspective: a ground for better regulation. DTEW Research Report 0152, K.U.Leuven, 34 pp.