Segmental reporting

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segmental reporting


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 Objective of IAS 14 (revised) 4 Applicability of IAS 14 (revised) 4 Identification of segments 5 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 Monetary costs 7 Lost time of management 7 Decrease in venture sense 7
5.2.2 Difficulties one can experience with the introduction of the reporting requirements 7 Difficulties concerning the identification of segments 8 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

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 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

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 IASC's
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 world's 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 condition that the IASC
would deliver more qualitative IASs. These two developments were very important to enhance
the status and the acceptability of the standards.

3.1.2 The International Accounting Standards Board

In April 2001, the IASC was replaced by a new body, the International Accounting Standards
Board (IASB). This body issues International Financial Reporting Standards (IFRSs) instead
of IASs. All International Accounting Standards (IASs) and Interpretations issued by the
former IASC continue to be applicable unless and until they are amended or withdrawn.

3.1.3 IAS 14: Segment reporting

The first direction for the treatment of segment reporting was proposed by the IASC in
1981. This standard, IAS 14: ‘Reporting Financial Information by Segments' was issued in
August 1981 and became van kracht (effective?) the first of January 1983. IAS 14 applied
to accounting periods beginning from January 1, 1983. This IAS 14 is revised in 1994 and
was implemented as the new IAS 14 (revised): ‘Segment reporting' in August 1997. This
revised standard applies to accounting periods beginning on or after July 1, 1998.

In the following paragraphs, IAS 14 (revised) will be discussed in more detail. Objective of IAS 14 (revised)
The objective of IAS 14 (revised) is to establish principles for reporting financial
information by line of business and by geographical area. It applies to enterprises whose
equity or debt securities are publicly traded and to enterprises in the process of issuing
securities to the public. In addition, any enterprise voluntarily providing segment
information should comply with the requirements of the Standard . Applicability of IAS 14 (revised)
IAS 14 must be applied by enterprises whose debt or equity securities are publicly traded
and those in the process of issuing such securities in public securities markets. If an
enterprise that is not publicly traded chooses to report segment information and claims
that its financial statements conform to IAS, then it must follow IAS 14 in full2.

Segment information need not be presented in the separate financial statements of a (a)
parent, (b) subsidiary, (c) equity method associate, or (d) equity method joint venture
that are presented in the same report as the consolidated statements. Identification of segments
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