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Segmental Reporting

Essay by   •  September 24, 2010  •  2,501 Words (11 Pages)  •  2,388 Views

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Index

1 Introduction to segmental reporting 2

2 Origin of segmental reporting 2

2.1 The fineness-theorem 2

2.2 Market efficiency theory 2

2.3 Agency theory 2

2.4 Accounting theory 3

3 The most important segmental reporting standards 3

3.1 International Accounting Standard 14 (IAS 14) 3

3.1.1 The International Accounting Standards Committee 3

3.1.2 The International Accounting Standards Board 4

3.1.3 IAS 14: Segment reporting 4

3.1.3.1 Objective of IAS 14 (revised) 4

3.1.3.2 Applicability of IAS 14 (revised) 4

3.1.3.3 Identification of segments 5

3.1.3.4 Information that has to be disclosed 5

3.2 SSAP 25 6

4 Comparison with local GAAP's 6

5 Evaluation of segmental reporting 6

5.1 Advantages 6

5.2 Disadvantages 7

5.2.1 Costs of segmental reporting 7

5.2.1.1 Monetary costs 7

5.2.1.2 Lost time of management 7

5.2.1.3 Decrease in venture sense 7

5.2.2 Difficulties one can experience with the introduction of the reporting requirements 7

5.2.2.1 Difficulties concerning the identification of segments 8

5.2.2.2 Difficulties related to the information to be disclosed 8

Segmental reporting

1 Introduction 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).

2 Origin 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.

2.1 The 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.

2.2 Market 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.

2.3 Agency 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 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 advantage 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.

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2.4 Accounting theory

This theory states that the provision of segmented information is necessary in order to be able to judge uncertainty and to better value the company's 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.

3 The most important segmental reporting standards

3.1 International Accounting Standard 14 (IAS 14)

3.1.1 The International Accounting Standards Committee

The IASC was formed

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