chapter iv review of literature -...
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CHAPTER –IV
REVIEW OF LITERATURE
The aim of this chapter is to identify, describe and analyse the features of
factors related to segment reporting disclosure through literature review. The
conceptual and empirical articles on segment reporting disclosure are reviewed,
analysed and summarized. The assessment on International and National articles on
segment reporting disclosure in various countries forms the base for the research
framework discussed in the next chapter.
Prof. (Dr.) Sanjay Bhayani (2012) in his article titled, “The Relationship
between Comprehensiveness of Corporate Disclosure and Company Characteristics in
India”, studied to examine company characteristics and their influence on corporate
disclosure. His study aimed to determine which of the factors such as age of the
company, listing status of the company, ownership structure of the company, leverage
of the company, size of the audit firm, residential status of the company, size of the
company and profitability of the company were significantly related to increased
corporate disclosure. The author used the disclosure index to measure corporate
disclosure on a sample of forty five listed non-financial Companies of India. To
measure the association between the variables of the study, the author used Pearson
Correlation Matrix was used. The findings of the author in his study show that the
companies with large assets size, higher profitability, higher leverage, listing in
foreign stock exchanges, lower holding of promoters share and audited by big audit
Companies have tendencies to be more transparent and hence disclose more
information. The author in his study further reveals that age of a company and
residential status do not significantly influence the level of corporate disclosure.
Dr. Martin Onsiro Ronald et.al., (2011) in their article titled, ”Segment
Reporting (IFRS-14 and AS-17) : A Study of Commercial Banks in Kenya and India”,
say that Segment reporting requires companies especially those which are multi-
product and multi-location to disclose their segment-wise operations in their annual
reports as well as in their quarterly reports. Their study therefore is based on
identification of annual reports of 26 Indian commercial banks as well as 25 Kenyan
commercial banks and shows that segment reporting practices of these units have
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taken a new turn after the implementation of the standards (IAS-14/Indian AS-17
respectively). There is no difference between the disclosure practices of Indian
commercial banks and Kenyan commercial banks though they are adopting different
accounting standards. There is a need for convergence to IFRS so that global
understanding in the banking sector world over may develop.
Their findings represent that after the implementation of IAS-14 and Indian
AS-17, segment reporting practices of commercial banks working in India as well as
Kenya have increasingly taken a new turn, and are responding to the requirements of
the standard.
Mishari M. Alfaraih and Faisal S. Alanezi (2011) in their article titled,
“What Explains Variation in Segment Reporting? Evidence from Kuwait” evaluates
both the segment disclosure practice of Companies listed on the Kuwait Stock
Exchange (KSE) and the factors that influence their level of segment disclosures. The
results of this research paper show that the average level of segment disclosure in a
sample of 123 KSE-listed Companies in 2008 was 56 per cent, ranging from 18 per
cent to 94 per cent. The authors say that the Users of KSE-listed Companies’ financial
statements might reasonably expect greater segment disclosures from larger, older,
highly leveraged, and profitable KSE-listed Companies, as well as from Companies
audited by a Big Four Audit Firm. The findings provide feedback to the regulatory
and enforcement bodies in Kuwait on current segment disclosure practice among
KSE-listed companies and the factors that influence the level of segment disclosures.
Vakhrushina M A (2011) in his article titled, “Segment Reporting Analysis
Content and its Informative Value” say that the modern unstable economic
environment, the competitiveness arising in the individual economy branches and the
financial crisis make the commercial organisations to approach new management
technologies. Satisfaction of information inquires both of internal, and external users
– potential investors first of all, has become the purpose of drawing up and analysis of
the segment reporting. The author after considering requirement of the Accounting
Regulations 12/2000, has given the methodical aspects of the segment reporting
formation and the main stages of its analysis as well. The author concludes that the
accounting information analysis prepared by business segments, contributes to
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accepting investment decisions adequate to the current situation by a potential
investor.
Dana Hollie et.al., (2011) in their article titled, “A Forensic Accounting
Examination of Financial Reporting Fraud at the Segment Level” studied to assess
various financial reporting frauds that occurred at the segment-level. From a fraud
perspective, segment reporting has been an overlooked topic in both practice and
academia. The authors provide an analysis of fraud at the segment level at nine major
corporations. The primary goal of the Securities Exchange and Commission (SEC) is
to ensure that company-level earnings are truthfully reported, therefore segment-level
reporting, although compliant with Generally Accepted Accounting Principles
(GAAP), may be a secondary goal in SEC investigations since segment fraud rolls up
into company-level fraud.
The study describes company characteristics, types of fraudulent, and some of
the financial effects the fraud had on these Companies. The authors further provided
the details of various types of manipulations employed to perpetrate these frauds. The
study focuses only on segment financial reporting fraud that has led to the issuance of
an Accounting and Auditing Enforcement Release (AAER) that specifically
referenced fraud at the segment level.
Cho, Joong-Seok (2010) in his article titled, “Information Content Change
under SFAS No. 131’s Interim Segment Reporting Requirements”, empirically
investigates the effect of implementation of SFAS No. 131 on companies’ information
environments by assessing the effect of interim period financial reports. Using
Beaver’s information content measures, the author investigate the market’s reaction to
interim period financial reporting under SFAS No. 131. The empirical results of the
information content test show that the adoption of SFAS No. 131 does not affect the
market’s reaction. For the price test, the author found no difference in the reaction to
the interim financial statement filing for both voluntary and non-voluntary
disclosures. This result gives evidence that the information content of the new
requirements of interim financial reporting is not significantly different from that
under the previous requirements.
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Louise Crawford, Heather Extance, Christine Helliar and David Power
(2010) in their article titled, “Slicing up the data” discuss that as part of its
convergence process with the Financial Accounting Standards Board (FASB), the
International Accounting Standards Board (IASB) issued IFRS 8 Operating Segments
to replace IAS 14 (Revised) segment reporting in 2006. IFRS converges with its US
counterpart, Statement of Financial Accounting Standard (SFAS) 131, except for
minor differences and terminology changes necessary to conform to other IFRSs.
The core principle of IFRS 8 requires an entity to “...disclose information to
enable users of its financial statements to evaluate the nature and financial effects of
the business activities in which it engages and the economic environments in which it
operates”. To implement this principle, IFRS 8 specifies that Companies only publish
information about those segments that management use internally when making
operating decisions. This “management approach” requires identification of
“operating segments” based on internal reports and permits non-IFRS measures of
segmental items to be used; this approach differs from IAS 14 (Revised), which
required that primary and secondary segments be identified on a risks and returns
basis, using IFRS-compliant measures, as either business or geographic activities.
According to the current findings, the management approach of IFRS 8 has
been associated with an increase in the average number of both business and
geographic segments for which information has been disclosed.
Pontus Troberg et.al., (2010) in their article titled, “What drives cross-
segment diversity in returns and risks? Evidences from Japanese and US Companies”
say that the usefulness of segment reporting is grounded all the presumption of
diversity of returns and risks across reported segments. They examined the effect of
country specific factors reporting incentives, and choices on ANOVA-based measure
of cross-segment diversities (CSD) in risk and returns for a sample of Japanese and
US multi-segment Companies. The Authors found that Japanese Companies exhibit
greater CSD then US Companies. They also found that in both countries CSD is
driven especially by reporting incentives associated with profitability and foreign
sales, but not by proprietary costs. Further, the authors propound that the manager’s
choice of the number of reported segments is an important factor affecting CSD.
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Samuel Jebaraj Benjamin et.al., (2010) in the article titled “A Study of
Segment Reporting Practices: A Malaysian Perspective” revealed that the increasing
complexity of business enterprises and the growing popularity of conglomerate type
businesses, it has become clear that consolidated financial statement reporting, while
obviously necessary, may not necessarily provide users with sufficient insights for the
making of informed decisions. They further say that Segment Reporting is
fundamentally indispensable and integral to investment analysis process (AIMR,
1993, pg 39; Berg 1990). Their study highlights the evidence on a fraction of
Malaysian companies that do not provide any segment reports at all in contrast to their
direct competitors who comply. The study also found that the proprietary costs motive
theory seem to hold true for the selected companies, where companies which
experience high profit margin are the ones who choose not to disclose segment
information. The consequences of non-disclosure of FRS 114 by Malaysian
Companies has far reaching impacts, right from valuation of shares, to corporate
governance and control mechanism (Burger and Hann, 2003: 2007). The adoption of
suggestions recommended by this study is expected to solve this reporting problem to
a certain extent, if not completely. The eventual outcomes of the effectiveness of the
new FRS 8 in solving this problem mentioned above would be of great interest to
financial analysts and general users.
Barry Epstein and Eva Jermakowicz (2009) in their article titled, “IFRS
Converges to US GAAP on Segment Reporting”, says that IFRS 8 applies to the
individual financial statements of an entity and the consolidated financial statements
of a group with a parent (a) whose debt or equity instruments are traded in a public
market or (b) that files, or is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any
class of instruments in a public market. Reportable segments are operating segments,
or aggregations of operating segments, that meet or exceed one of several quantitative
thresholds; similar segments may be optionally disclosed.
The authors further discuss that IAS 14, dual segment classifications were
required – by both business and geographic area – with the primary typology
determined by the predominant driver of the reporting entity’s risks and returns.
Under IFRS 8, operating segments may be defined by product, geography or other
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attributes – consistent with management’s decision-making processes. IFRS 8 allows
for the discrete reporting of a component of an entity that sells primarily or
exclusively to other operating segments of the entity so long as the entity is actually
being managed consistent with that strategy. This means that vertically integrated
operations may be composed of several segments for the purpose of IFRS 8.
Derarca Dennis (2009) in his article, “Operating Segments Through
Management’s Eyes”, says that IFRS 8 Operating Segments, (‘the standard’) aligns
the identification and reporting of operating segments with internal management
reporting. The author further states that Segment Reporting under IFRS 8 should
highlight the information and measures that management believes are important and
are used to make key decisions. It should also provide a better link between the
financial statements and the information reported in management commentaries such
as the Operating and Financial Review. The standard converges IFRS with US
Accounting Standard SFAS 131 ‘Disclosure about Segments of an Enterprise and
Related Information’.
Mohammed Talha et.al., (2009) in their article titled, “Segmental Reporting
and Competitive Disadvantage: A Study of Malaysian Companies”, aimed to
investigate whether competitive disadvantage is experienced by Malaysian
Companies as they disclose segmental information under the new accounting standard
known as FRS 114, Segment Reporting. Four hypothesis were developed to examine
the relationship between segmental reporting disclosure and competitive
disadvantage. The logistic regression model was employed to test the formulated
hypothesis. The results revealed four main points: (a) smaller companies experience
greater competitive disadvantage than larger companies as they disclose segment
information; (b) disclosing the business segment as the primary segment does not lead
to greater competitive disadvantage; (c) companies which are highly leveraged do not
experience greater competitive disadvantage as they disclose segmental information;
(d) there is no significant association of competitive disadvantage with industrial
membership. The insights of the study benefits various interested stakeholders, as
Malaysian Companies adopt the new FRS 114.
Ole-Kristian Hope et.al., (2009) in their article titled, “Geographic Earnings
Disclosure and Trading Volume” say that beginning with Statement of Financial
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Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an
“Enterprise and Revised Information, most US multinational Companies no longer
disclose geographic earnings in their annual reports. Given the recent growth in
foreign operations of US Companies and the varying operating environments around
the world, information (or lack thereof) related to geographical performance can
affect investors’ information set. Specifically, using a sample of Companies with
substantial foreign operations, they found evidence of a decrease in event period
private information following adoption of SFAS 131 for Companies that no longer
disclose geographic earnings. These results suggest that decreased public information
(i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilise
or generate private information in conjunction with the public announcement of
quarterly earnings, which dampens trading. The authors also found evidence of a
decrease in pre-announcement private information following SFAS 131. This is
consistent with an overall improvement in public disclosures that has the effect of
reducing differences in the precision of private information across investors in the
period prior to the earnings announcement. However, the authors defend that such an
effect is observed for both Companies which no longer disclose geographic earnings
and for Companies that continue to disclose geographic earnings.
Kanogporn Narktabtee and Manatip Chankitisakul (2007) in their article
titled, “Segment Reporting Compliance of The Listed Companies in Thailand”,
examines segment reporting practices of the listed company during 1994-2005 by
using the TAS No. 24 segment reporting as a benchmark. The study focuses on
segment determinations and the segment information disclosed in the notes to
financial statements. The results show that the number of Companies presenting
information by multi-segments is growing and most companies report operating
segments by industry lines more than by geographical areas. The results also show
that problems of compliance with the existing accounting standard exist. Thai
Companies define their segments broadly and more than 50 per cent of sample
Companies do not fully disclose accounting information required by the TAS No.24.
The authors in their study, discuss the possible explanations of these practices and
reflects on implications to parties, listed companies and related regulators.
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Nancy B Nicohols and Donna L Street (2007) in their article titled “the
relationship between Competition and Business Segment Reporting decisions under
the Management Approach of IAS 14 Revised”, addresses the relationship between
industry competition and managers’ choice regarding whether to separately disclose a
business segment following the adoption of International Accountant Standard 14
Revised (IAS 14R) and the management approach to segment determination. Logistic
regression reveals a significant negative relationship between disclosure and company
returns in excess of the industry average. Their results provide evidence that this
flexibility persists as managers maintained that they ability to aggregate segment to
protect excess returns under IAS 14R and management approach. Their finds are
timely as the IASB plans to modify its segment reporting requirements as part of the
Board’s convergence agenda and as thousands of companies worldwide, effective
from 2005 onward have started preparing financial statements using IFRS.
Paul Robins (2007) in his article titled, “IFRS 8, Operating Segment”, stated
that IFRS 8 defines an operating segment as a component of an entity : (a) that
engages in revenue earning business activities, (b) Whose operating results are
regularly reviewed by the chief operating decision maker and (c) for which discrete
financial information is available. Once an operating segment has been identified, the
entity needs to report segment information if the segment meets any of the following
quantitative thresholds:
Its reported revenue (external and inter-segment) is 10 per cent or more of the
combined revenue, internal and external, of all operating segments; Its reported profit
or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined
profit of all operating segments that did not report a loss and (ii) the combined loss of
all operating segments that reported a loss or its assets are 10 per cent or more of the
combined assets of all operating segments.
Sanjiv Agarwal (2007) in his article “Segment Reporting by Banks”
specifically indicates that the most of the public sector banks have been following the
RBI directions on clarification of business segments while a few private sector banks
have been reporting as per the AS-17. He further says that when it comes to segment
reporting by banking companies, there is a clash of norms- that is between
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Accounting Standard (AS-17) stipulated by the Institute of Chartered Accounts of
India and those issued by the Reserve Bank of India.
AS-17 on segment reporting is mandatory, and is specified in the accounting
standard itself. A business segment is a distinguishable component of an enterprise
that is engaged in providing an individual product, service or a group of related
products or services and that is subject to risks and returns that are different from
those of other business segments. The factors which should be considered in
determining whether products and services are related include: (i) the nature of the
products or services, (ii) the nature of the production process, (iii) the type or class of
customer for the products or services, and (iv) the methods used to distribute the
products or provide the services.
Allen I Schiff et.al., (2006) in their article titled, “Segment Reporting
(Portfolio 5119)”, explains and analyses the disclosure and reporting requirements of
FASB Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures
About Segments of an Enterprise and Related Information, and discusses other
applicable pronouncements and the related accounting and reporting requirements of
the US Securities and Exchange Commission (SEC).
The portfolio illustrates and analyses key issues in segment reporting,
including analysing segment ratio using the accrual and cash flow ratio, utilising
segment and equity data to analyse the purchase and subsequent performance of an
acquired segment, and reporting segments in the management disclosure and analysis
section of the annual report. This portfolio summarizes the history of segment
reporting and compares SFAS 131 with international accounting guidance on segment
reporting.
David Harper (2006) in his article titled, “The Importance of Segment Data”,
say that Large-cap companies are thought to be safer while it comes to segment
disclosures than less-capitalized companies, because they are more diversified and
liquid than smaller companies. The average large-cap company is a multi-dimensional
amalgamation of dizzying complexity and breadth. If a large-cap company is to be
evaluated, in most cases the key financials (e.g. revenues, margins, returns) are just a
starting point. For most large caps, corporate-level metrics are aggregates that
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combine the performance of several different units. The authors insist that the best
companies are the ones that are incubating high-growth units within the overall
organization. The author finally suggests that every company should start to prepare
the financial statements by disclosing the segment information to understand the
business better.
George T Tsakumis et.al., (2006) in their article titled, “Competitive Harm
and Geographic Area Disclosure under SFAS 131”, say that the potential competitive
harm associated with country specific disclosure provides an incentive for
management to avoid making these disclosures. Specifically, the authors hypothesis
that Companies with higher potential competitive harm costs will provide less
detailed geographic area disclosures. Their results show that, company exposed to
greater competitive harm costs provide less detailed country specific revenue
disclosures. The study helped to explain the diversity in practice with respect to the
level of detail provided by companies in their geographic area disclosures under
SFAS 131. In addition it adds to the literature examining the impact of potential
competitive harm on disclosures made by US Companies, by extending the line of
research through geographic area disclosures.
Ole-Kristian Hope et.al., (2006) in their article titled, “The Impact of Non-
Disclosure of Geographic Segment Earnings on Earnings Predictability”, address
whether nondisclosure of geographic segment earnings after implementation of
Statement of Financial Accounting Standards No. 131 (SFAS 131) has an impact on
the earnings predictability of multinational companies. An understanding of how
nondisclosure of accounting information affects the predictability of a company’s
earnings will be of importance to financial statement users, managers, auditors, and
standard setters. The quality of geographic disclosures is especially important as
foreign operations represent a growing portion of many U.S. multinational companies
and these operations can vary considerably on risk and return characteristics.
Companies that define their operating segments on any basis other than geographic
area are no longer required to disclose geographic earnings. The authors find that
nondisclosure of geographic earnings has no effect on analysts’ forecast accuracy or
dispersion. The authors conclude that the Financial Accounting Standards Board’s
decision to no longer require disclosure of geographic earnings for secondary
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segments has not hampered users’ ability to predict earnings of U.S multinational
companies.
Botosan, Christine A, et.at., (2005), in their article titled, “Managers motives
to withhold segments disclosures and the effect of SFAS No.131 and SFAS No.14 on
analysts’ information environment(Statement of Financial Accounting Standard)” say
using retroactive disclosures required by Statement of Financial Accounting
Standards (SFAS) No.131, managers’ incentives for withholding segments
information under SFAS No.14 and impact of SFAS No.131 on analysts’ information
environment for a sample of Companies that previously reported as single-segment
Companies initialed segment disclosure with SFAS No.131. the author examined this
set of Companies because they likely had the strongest incentives to withhold segment
information and analyst potentially had the most to gain when these Companies were
forced to begin providing segment disclosure under SFAS No.131. the authors found
that these Companies used the latitude in SFAS No.14 to hide profitable segments
operating in less competitive industries then their primary operations. However, they
found no evidences to suggest that these company used the latitude in SFAS No.14 to
mask poor performance. In contract, their results suggest that by withholding segment
information, these Companies allowed themselves to appear as if they were under
performing their competition when this were not the case. Thus their discussion to
withhold segment disclosure under SFAS No.14 appears to be motivated by a desire
to protect profit in less competitive industries. The terms of the impact of the SFAS
No.131 on analysts’ information environment, their evidence suggest that SFAS
No.131 increased analysts’ on public data, but they provide weak evidence to suggest
that this shift may have come at the cost a marginal increase in overall uncertainty and
squared error in the mean forecast.
Ettredge, Michael L et.al., (2005) in their article titled “ The impact of SFAS
No.131 business segment data on the market’s ability to anticipate future earnings”
investigates the effect of Companies’ adoption of SFAS No.131 segment disclosure
rules on the stock markets’ ability to predict the Companies’ earnings, as captured by
the Forward Earnings Response Coefficient (FERC). The FERC is the association
between current-year returns and next-year earnings. SFAS No.131, effective for
fiscal years beginning after December 15, 1997, arguably increased both the quantity
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and quality of segment disclosure. Consistent with standards’ intended qualitative
effects, pre-131 multi-segment Companies experience a significant increase in FERC
after adopting SFAS No.131. Consistent with the standards’ intended quantitative
effects, many pre-131 single-segment Companies begin disclosing multiple segment
and those that did experienced an increase in FERC. However, pre-131 single-
segment Companies that remained single-segment (i.e., were unaffected by SFAS
No.131) had no change in FERC, indicating that the increase in FERC for 131-
affected Companies is not due to some other event concurrent to the adoption of
SFAS No.131. These results are robust under numerous procedures that control for
the characteristic of the sample Companies and their earnings, providing strong
evidence that SFAS No.131 resulted in increase in stock price informativeness for
affected Companies. Thus, the authors provide the first empirical price-based
evidence that SFAS No.131 provided more information (about future earnings) to the
market, as the standard’s proponents have suggested.
Jack W Paul and James A Largay (2005) in their article titled, “Does the
‘Management Approach’ contribute to Segment Reporting Transparency?”, discuss
on how segment reporting creates an opportunity for companies to add value to the
information they disseminate about their industry and geographic operations. The
authors examine the ‘Management Approach’ to segment reporting from a user
perspective that should be of great interest to corporate financial executives. The
management approach to segment reporting requires companies to report segment
financial information consistent with the way they manage their businesses. The
authors conclude that, despite more segment data being reported, the potential of the
new management approach to significantly benefit users is compromised by uneven
compliance among reporting companies. The complicity of external auditors in
compliance shortcomings should concern all stakeholders in the financial reporting
process. Noting two high profile examples of accounting fraud, the authors comment
on how the management approach sheds light on Enron’s operations, while
WorldCom concealed important segment information due to probable auditor
malfeasance.
Winston Chee Chiu Kwok and David Sharp (2005) in their article titled,
“Power and International Accounting Standard Setting: Evidence from Segment
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Reporting and Intangible Assets Projects”, provides significant empirical data and
analysis on the international standard-setting process as conducted by the forerunner
of the International Accounting Standards Board (IASB). It reveals the influences
from four key stakeholder groups (Users, Preparers, Accountants and Regulators) in
order to ascertain why International Accounting Standards (IAS) turn out the way
they do. The authors conducted in-depth interviews with board representatives and
content analysis of documents were used to provide triangulating perspectives The
concept of power from the sociological and political science literature provides the
theoretical lens. The standard setting projects on segment reporting and intangible
assets were studied in detail. The results show that the process can be best
characterised as a mixed power system where no party is accorded the absolute power
potential to dictate IAS. Nonetheless, while the user group is the target beneficiaries
of IAS, the preparer group has significant influence, as inferred from the changes
made to the IAS in line with the preparers’ preferences. After this study, the IASB’s
meetings became open to public, providing new opportunities for future research. The
study contributes to understanding accounting standard setting for international
harmonization.
Annalisa Prencipe (2004) in her Research article titled, “Proprietary costs
and determinants of voluntary segment disclosure: evidence from Italian listed
companies” aims to identify new determinants of the extent of voluntary disclosure by
using the theoretical framework of the proprietary costs theory, which states that
companies limit voluntary disclosure because of proprietary costs, such as preparation
and competitive costs. She further says that on the basis of the existing literature on
this theory and on segment reporting, three hypotheses are theoretically derived, each
correlating the level of segment disclosure to a new determinant, specifically the
correspondence between the segments and legally identifiable sub-groups of
companies, the growth rate and the listing status age.
The paper also provides further evidence to test the impact of some
‘traditional’ determinants, introduced in the study as control variables. The
hypotheses formulated are empirically verified. The author has carried out her
analysis with reference to Italy, because of its limited legal and professional
provisions on the topic. For the empirical test, the author has selected a sample of
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sixty-four Italian listed companies and a multiple regression model is used. Results
from the study show that , except for the growth rate, the two other new determinants
are significantly related to the extent of segment disclosure. According to the author,
these findings confirm that proprietary costs are particularly relevant and limit the
incentive for companies to provide segment information to the market.
Jenice J Prather and Gary K Meek (2004) in their article titled, “The Effect
of Revised IAS 14 on Segment Reporting by IAS Companies”, conducted a study to
determine how IAS 14R affected the segment disclosure practices of companies
claiming to comply with IAS. They examined the following questions : (1) What
items of information are disclosed under IAS 14 and IAS 14R? Was there a gain or a
loss of information disclosed for business and geographic segments with the
implementation of IAS 14R? (2) Has the number of business and geographic
segments reported by companies changed with the implementation of IAS 14R? (3)
Are companies disclosing the items required by IAS 14R? (4) Are companies’
segment reporting practices related to size, country of domicile, industry, international
listing status and having a then-Big 5 auditor? They found that the impact of IAS 14R
is mixed. Companies are responding to IAS 14R, but not wholly embracing it. Their
findings suggest that companies audited by a Big 5 (now Big 4) company and, to a
lesser extent, companies that are larger, listed on multiple stock exchanges, and from
Switzerland have greater compliance with IAS 14R than other companies.
Palanisamy Saravanan et.al (2004) in their article titled, “Are Recent
Segment Disclosures of Indian Companies Useful? An Empirical Investigation” states
that the ultimate objective of the financial statement is to give reliable information,,
which is to be relevant and therefore useful in economic decision making. Thus a
company which operates in different industrial sectors and geographical areas need to
provide information about its various segments and the relative importance of each in
order to understand the company, the economic environment in which it operates and
the development of the situation of the company. The authors claim that their study
contributes to the existing literature by providing some of the first evidence on the
usefulness of segment disclosures in developing countries especially in the Indian
context. The authors state that since 01.04.2001 the Securities and Exchange Board of
India (SEBI) required the Indian Companies to disclose segment data in their annual
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financial statements. ICAI have come out with AS-17 that deals with Segment
Reporting.
The authors used a survey instrument to examine whether the Indian Investors
find these segment disclosures useful. In their study they found that Indian Investors
perceive that segment data aid them in forecasting consolidated sales and net income.
However, the results also show that investors are concerned that Indian Companies do
not define segments meaningfully and consistently and are arbitrary in the allocation
of common cost. These results have implications in Indian Stocks. Financial Analysts
and other regulatory bodies such as Institute of Chartered Accountants of India
(ICAI), Securities and Exchange Board of India (SEBI), Ministry of Finance (MoF)
and Department of Company Affairs (DCA).
Larry P Seese and Timothy S Doupnik (2003) in their article titled “ The
materiality of country-specific geographic segment disclosures” discussed that SFAS
131 (1997) substantially changed geographic segment reporting in the US by required
disclosures to be made by individual foreign country when operations in an individual
country are material. Although SFAS 14 (1976) provided a quantitative threshold for
determine separately reportable segments, SFAS 131 provides no guidance for
determining when operations in an individual country are material. In SAB 99 (1999),
the SEC reminds Companies that exclusive reliance on quantitative benchmarks to
assess materiality in appropriate; qualitative factors also should be considered.
Susanne Homolle (2003) in her article titled, “From the Theory of Financial
Intermediation to Segment Reporting : The Case of German Banks”, say that a
growing number of German Banks have disclosed segmental data according to IAS 14
(revised 1997), which, however, does not consider any specific features of banks. The
author has derived demands for banks’ segment reporting from the microeconomic
theory of financial intermediation and give some advice how banks could improve
their segment reporting. The new German Accounting Standard GAS3-10, Segment
Reporting of Banks, does not fully meet their requirements. The author suggests that
the standard should be reformed with respect to various deficiencies to become a
guideline of segment reporting not only for German, but for international banks as
well.
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Behn, Bruce K et.al., (2002) in their article titled, “the predictive ability of
geographic segment disclosures by U.S companies: SFAS No.131 vs. SFAS No.14.” ,
considers whether recent modifications to segment reporting adequately address
analysts’ concerns regarding the usefulness of geographic data. Forecast errors for
models utilizing SFAS No.131 geographic sales data are compared to forecast error
for models utilizing SFAS No. 14 geographic sales data. The results indicate a
significant improvement in the predictive accuracy of geographic sales disclosures
provided under SFAS No.131. Additional analysts such as this enhanced
predictability may be associated with revised requirements that companies report sales
for the country of domicile and each individually material country. The findings of the
authors appear to support the FASB’s argument that segment information by country
is more informative and useful. Based on their findings, recommendations were
presented regarding possible amendments to a SFAS No.131 that may further enhance
the predictive ability of geographic segment data.
Donna L Street and Nancy B Nichols (2002) in their article titled, “LOB and
Geographic Segment Disclosures : An Analysis of the Impact of IAS 14 Revised”, say
that to better satisfy important information needs of users of financial statements, as
set forth in the IASC Framework, the IASC issued IAS 14 revised (IAS 14R),
Segment Reporting in 1997. IAS 14R became effective for fiscal years beginning on
or after July 1, 1998. The authors examine the pre-IAS 14R and post-IAS 14R line of
business (LOB) and geographic disclosures of a global sample of companies that refer
to IAS to ascertain the impact and effectiveness of IAS 14R in practice. Specifically,
the authors consider whether the new requirements resulted in (1) a greater number of
LOB segments for some enterprises, particularly those that previously claimed to
operate in one LOB, (2) more meaningful, transparent geographic groupings, as
operated to the vague groupings associated with the original version of IAS 14, (3)
companies reporting more items of information about each LOB and/or geographic
segment, and (4) improved consistency of primary segment information with other
parts of the annual report. Additionally, the authors examine the extent to which IAS
companies provided voluntary segment disclosures and suggests some problems
associated with compliance.
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Nichols, Dave L et.al.,(2002) in their article titled, “Geographical segment
disclosures for the petroleum industry under SFAS 131”, say the general standard
SFAS 131 specifically requires companies to define operating segments on a basis
that is used internally for decision making (i.e., “the management approach”). The
authors further specify that in addition to the management approach, SFAS 131 also
requires more detailed information for each reported segment, including significant
non cash items other then depreciation depletion and amortization. Finally, SFAS 131
requires companies to disclose limited segment information in interim financial
statements. When adopting SFAS 131,companies must restate prior period SFAS 14
geographic segment data.
The author propound that regarding geographic segment information, SFAS
14 did not specify a single method of grouping regions. FASB identified factors that
were to be considered in determine the geographic areas. Those factors included
proximity, economic affinity, similarity in business environments and the nature,
scale and degree of inter relationship of the enterprise’s operations in various
countries.
Steve Lawrence (2002), in this article titled, “convergences on the UK GAAP
to IAS – GROUP ACCOUNTING” has discussed the need for convergences in :
the format of financial statement (eg., balance sheet and profit and lost account), the
disclosure of cash flow information; segmental data reporting; the need to expose
related party transaction; and the calculation of one of the most important
performance indicators, Earning Per Share(EPS).
Earning Per Share(EPS) is a vital performance indicator and effects have been
made to harmonies the rule governing the computation of the two main EPS ratio,
basic and diluted.
The author in his article opines that the segmental reporting is one that related
to the presentation and disclosed or information, by reference to distinguishable
components of the reporting entitle. This form of reporting requires the determination
of what is a reportable component (segment) and what information is to be disclosed
by each segment.
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81
Vivek Mande and Richard Ortman (2002) in their article titled, “The effect
of Japanese Business Segment Reporting on Analysts’ Forecasts: Implications for US
Investors and the SEC”, say that Japan has required that business segment data be
disclosed in annual financial statements since 1990. The study examines the
information content of business segment disclosures of multi-segmented Japanese
Companies on the Nikkei 225 index. Specifically, the authors test whether Japanese
analysts’ forecast accuracy of consolidated sales and net income improves following
the disclosure of segment data. The study finds that the introduction of the segment
reporting standard aids analysts in forecasting sales of well-diversified Companies,
but there is no improvement in the forecast accuracy of earnings. The authors
conclude from the results that financial analysts do not generally find Japanese
segment disclosures to be useful in their equity analysis. These results have
implications for US investors and the US Securities and Exchange Commission which
allows Japanese Companies to list on US exchanges using Japanese segment reporting
standards.
Chikako Ozu and Sidney J Gray (2001) in their article titled, “The
Development of Segment Reporting in Japan: Achieving International Harmonization
through a process of National Consensus” explored the process by which Japanese
accounting has moved towards international harmonization in respect of its segment
reporting requirements. The segment reporting issue offers an interesting case
because, despite the strong opposition of companies in Japan, the new legislation
came into existence relatively quickly and was sequentially developed by the
regulators through a consensus building process. The most important influence in this
process was the Ministry of Finance (MOF) which directed the sequence of events
leading to the introduction of segments disclosure standards, with the Business
Accounting Deliberation Council (BADC) serving as a channel of communication
with various non-governmental parties involved. The authors further observed it is
also noteworthy that segment reporting appears to have been seen as an essential
element in the completion of the group accounting legislation in Japan which has been
the subject of growing international pressure.
Jordan, Charles E el.al., (2001) in their article titled “ SFAS No.131 results
in increased segment reporting for banks” say that effective in 1998, Statement of
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82
Financial Accounting Standards (SFAS No.131) ‘Disclosures about Segment of
Enterprise and Related Information’, dramatically altered the reporting requirements
for business segments. A company could easily define a line of business so broadly as
to encompass its entire operations under one segment result in no segment reporting
under SFAS No.14.
In SFAS No.131, the FASB attempted to address this concern by changing the
definition of the segment. Segment are now delineated for financial statement
disclosure consistent with how management organises a company for purposes of
making internal resource allocation decisions and performance evaluations the
authors’ proponent that the result should be an increase both in number of companies
reporting segments and in the diversity of the types of segment reported. The authors
examined how SFAS No.131 changed the segment reporting in the banking industry
related to SFAS No.14, based on an examination of several banks providing segment
disclosures under SFAS No.131.
Thimothy S Doupink and Larry P Seese (2001) in their article titled,
“Geographic Area Disclosures under SFAS 131: Materiality and Fineness”, describes
and evaluates certain aspects of the enterprise-wide geographic area disclosures
provided by fortune 500 companies in the implementation of SFAS 131, “Disclosures
about Segments of an Enterprise and Related Information”. The first objective of the
study was to determine how companies are complying with the materiality criterion of
SFAS 131 for determining when an individual country is reportable. The second
objective was to evaluate whether foreign operation disclosures provided by
companies in accordance with SFAS 131 result in a finer set of information than was
provided under SFAS 14. The results suggest that there is considerable diversity
among companies in the way that materiality is defined, with a majority of companies
that provide country-level disclosures using quantitative thresholds less than 10 per
cent. For a large percentage of companies, the information provided under SFAS 131
appears to be finer than the information provided under SFAS 14. However, a
significant minority of companies has taken a step backward in this regard.
Don Herrmann and Wayne Thomas (2000) in their article titled, “A Model
of Forecast Precision using Segment Disclosures: Implications for SFAS No.131”,
models the use of segment information in forecasting earnings. The Model derives
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83
four conditions under which segment information is expected to increase earnings
forecast precision. Forecast precision should increase with (1) greater differentiation
across segment forecast factors (i.e., expected segment growth, expected inflation,
political risk), (2) greater disaggregation of earnings, (3) greater predictive accuracy
of segment forecast factors, and (4) greater accuracy in measuring the segment
weights. The analysts’ of each condition includes an important implication regarding
the potential contribution of the new standard for segment disclosures, SFAS No.131,
in improving the usefulness of segment information from a forecasting perspective.
Nancy B Nichols et. al., (2000) in their article titled, “ Geographic Segment
Disclosures in the United States: reporting practices enter a new era”, say that the
promulgation by the FASB of SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, in 1997 (FASB, 1997) (effective 1998) heralded
a new era of segment reporting in the United States. The authors were keen to assess
the impact and effectiveness of the new standard with reference to geographic
segment disclosures. Given the criticisms of its predecessor, SFAS 14, relating
segment identification and the consistency of internal and external reporting, the key
issue is the extent to which companies have responded to the changes in geographic
information disclosures required by SFAS 131. And empirical study of the 1997 and
1998 annual reports of US Global 1000 companies reveals mixed results. While more
countries specific data is disclosed and the consistency of disclosures with other parts
of the annual report is increased, the problem of reporting highly aggregated
geographic areas remains for a significant group of companies.
Neil Garrod (2000) in his working paper titled, “Competitive Disadvantage
and Segmental Disclosure”, say that multinational and multi-activity companies have
come under increasing pressure over the last decade to disclose segmental information
in their financial statements. Many companies have resisted increased disclosure for
several reasons. However, the most important perceived problem is that a competitive
disadvantage arises from disclosure. In this paper, the author establishes empirically
whether such a competitive disadvantage can be identified. The results suggest that
any competitive disadvantage suffered by companies from disclosing segmental data
is extremely limited. Any effect appears to be restricted only to geographic segmental
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84
disclosure. There is no evidence that the size of companies nor the jurisdiction under
which companies report influences this relationship.
Sudipta Basu et.al., (2000) in their article titled, “The Usefulness of Industry
Segment Information”, identifies segment characteristics that make industry segment
reporting more useful in equity valuation. Those characteristics are the difference in
segments’ growth potential, the relative size of segments and the magnitude of
correlation in segment earnings. The authors specify that usefulness is measured by
examining the percentage increase in R2 and the incremental coefficient of earnings in
regressions of stock returns on disaggregate segment earnings relative to aggregate
earnings.
Stan Clark, Joe Sanders and Sherman Alexander (1999) in the article titled
“New Segment Reporting. Is it Working?” say that broader disclosure rules have not
been adopted uniformly by all. And suppliers, buyers and competitors seem to be
benefiting as much as investors, creditors, and security Analysts.
The new segment reporting rules were supposed to quell cries from investors,
creditors, and security analysts that the company’s were not disclosing enough
segment information. They complained that segments were defined too broadly and
subjectively, resulting in too few industry segments. So, the Financial Accounting
Standards Board (FASB) introduced the new Statement of Financial Accounting
Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related
Information”. Its intent was to make the companies more transparent to outsiders.
That’s why SFAS No. 131 is called a “management approach” to segment reporting.
It enables outsiders to see the enterprise through insiders’ eyes, helping them better
predict the company’s future cash flows. It does this by aligning internal with external
financial reporting at least as far as segment accounting is concerned.
Dan Givoly et.al., (1999) in their article titled, “Measurement Errors and
Information Content of Segment Reporting”, assess the quality of segment reporting
using a measure based on the correlation between the performance of the segment and
its industry. Their findings show that the quality of segment information particularly
earnings is lower than that of standalone Companies. The difference is attributed both
to measurement errors as well as to the operational structure of multi-segment
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85
Companies. The result also suggest that stock market considerations and political
costs play a role in segment reporting. Market tests indicate that the information
content of segment information is inversely related to its quality.
Albrecht, W David et.al., (1998) in their article titled, “New segment
reporting”, say because many companies were not providing expected segment
information, the FASB has to be replaced SFAS No.14 with SFAS No.131. Under this
new standard, segments are defined from a management perspective- how
management organizes segments within the enterprise for making decisions and
assessing performance. The authors believe that although the two standards go in
different direction both accounting groups have made right decisions.
Charalambos T Spathis (1997) in his article titled, “Segment Reporting:
Theoretical Analysis and Empirical Approach in Greek Enterprises”, examines the
usefulness of segment reporting for a company’s internal information and for
providing information to external users. The principal problem, the method used to
prepare and issue segment reporting by the larger Greek enterprises, is identified and
clarified. There are two main areas of concern that the author tries to proclaim while
framing the objectives. The first refers to the proposed method of preparation and
issue of segment reporting, scientifically acceptable according to the Generally
Accepted Accounting Principles, principal national and international accounting
standards, given the particular financial, legal and taxation characteristics and the
Greek General Accounting Plan holding for Greek enterprises. The second,
concerning research into the practices applied by Greek Companies, refers to the
preparation of segment reporting for internal use, based on their particular
characteristics.
Laureen A Maines et.al., (1997) in their article titled, “Implications of
Proposed Segment Reporting Standards for Financial Analysts’ Investment
Judgments”, reports results from an experiment which provide evidence on how
certain provisions of current and revised segment reporting standards affect financial
analysts’ judgments. Specifically, the authors examine the effect of two alternative
approaches to segment definition : Segments defined by grouping similar products
(similarity approach) and Segments defined by a company’s internal reporting
classification (management approach). The first approach is used currently under
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86
SFAS No. 14 as the basis for determining externally-reported segments, while the
second approach is used after December 15, 1997, the effective date of the FASB’s
new segment reporting standard, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Results show that analysts perceived segment
reporting to be more reliable when similar products were combined in a segment
(SFAS No. 14) than when dissimilar products were combined, and when external
segments were the same as those used internally (SFAS No. 131) than when external
and internal segments differed. Analysts’ confidence in their earnings forecasts and
stock valuation judgments was affected by the interaction of the similarity and
management approaches. As long as external segments were the same as internal
segments, analysts’ confidence was not affected by whether products combined in a
segment were similar or dissimilar. In contrast, if external and internal segments
differed, analysts had greater confidence in their judgments when similar products
were combined in a segment than when dissimilar products were combined. These
results support the FASB’s position that the management approach will positively
affect analysts’ perceptions of the reliability of segment data. The authors further
insists that their results suggest that, in certain cases, the management approach will
enhance analysts’ confidence in reported segment data.
Don Herrmann and Wayne Thomas (1996) in their article titled, “Segment
Reporting in the European Union: Analysing the effects of Country, Size, Industry,
and Exchange Listing”, provides an analysis of segment reporting practices of
Companies in the European Union and to identifies factors which potentially
influence the quality of disclosure. The quality of segment reporting is defined as the
number of financial statement items (e.g., sales, profits, assets) disclosed per segment.
Segment reporting by line of business and by geographic area are analysed separately.
The four variables hypothesised to influence the quality of segment reporting are
country, company size, industry and exchange listing. The multiple regression
analysis measures the marginal effect of each variable while holding the effects of all
other variables constant. The result indicate that the quality of segment reporting is
significantly affected by country, company size and exchange listing. No evidence is
found for an industry effect.
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87
Stephen B Salter et.al., (1996) in their article titled, “Reporting Financial
Information by Segment : A Comment of the American Accounting Association on
the IASC Draft Statement of Principles”, summarises the views of the American
Accounting Association on the IASC’s initial proposed amendments to IAS 14,
Reporting Financial Information by Segment. The authors found that extant academic
literature views current IAS and US rules on geographic segment disclosure,
relatively ineffective. The report analyses the two proposed solutions for designing
segments, the risk and return approach (advocated by IASC) and the Management
approach (of the FASB). The authors found it in favour of the former. The report
makes specific recommendations for tightening of thresholds for reporting and
simplification of segment disclosure requirements.
Dave Nichols et.al., (1995) in their article titled, “Earnings Forecast Accuracy
and Geographic Segment Disclosures”, say that Statement of Financial Accounting
Standards (SFAS) No. 14 requires US Companies with significant foreign operations
to disaggregate certain disclosures into geographic segments. The study investigates
whether or not financial analysts’ earnings forecasts for multinational Companies
improved after SFAS 14. The results indicate that after adjustment for differences in
earnings variability, financial analysts’ forecasts of the earnings of multinational
Companies did become significantly more accurate (relative to that of a group of
control Companies) after the disclosure of geographic segment information.
Gary J Kelly (1994) in their article titled, “Unregulated Segment Reporting :
Australian Evidence”, say that segment performance disclosures analysed in
conjunction with consolidated financial information, enhance investment and credit
decision analysis. Given the benefits of a finer (disaggregated) information set, the
authors address the need to investigate and model the cost aspects associated with
unregulated segment reporting. More specifically, the study provides empirical
evidence about the structure of proprietary costs and agency costs arising from
discretionary segment disclosures and non-disclosures. It is hypothesized that
proprietary costs associated with disclosure and agency costs arising from non-
disclosure are related to the reporting decision of a multi-segment corporation’s
management. Specifically, the results show a positive correlation between return on
investment (ROI) and voluntary segment disclosure which may be the result of
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88
proprietary cost considerations. These findings have important policy implications
regarding the formulation and subsequent refinement of accounting standards.
Nasrollah Ahadiat (1993) in his article titled, “Geographic Segment
Disclosure and the Predictive Ability of the Earnings Data” say that the Standards of
segment reporting disclosure of the enterprise’s foreign operations by geographic area
[FASB 1976, Statement No.14] is believed to be useful in predicting the future
prospects of the enterprise as a whole. In his paper, he examines the predictive value
of geographic earnings vis-à-vis consolidated earnings figures. Time-series
methodology is used for this analysis. Forecasting models were developed for both
segmental and consolidated income series. To test the predictive ability of each set of
data, earnings forecasts were made. Bothe the enterprise’s segmental and consolidated
models were used for these predictions. The result indicate that, although consolidated
income series provide a reasonably adequate forecast of income, geographically
segmented earnings improve the accuracy of predictions. Further, the findings suggest
that the predictive ability of foreign earning is slightly improved (in eleven out of
fifteen cases) with more data disaggregation.
Daisun Lee (1987) in his article titled, “Information Content and Economic
Consequences of Interim Segment Reporting: An Empirical Test” say that the
Securities Exchange Commission proposed, but has not adopted a regulation to
require the listed companies to disclose a segment information in Form 10-Q filings to
enhance the usefulness of Management’s Discussion and Analysis. The author’s main
purpose was to examine interim segment reporting’s’ market consequences that may
be useful to the accounting profession in understanding the issues relevant to that
reporting practice. In a multi-period setting, an earnings announcement functions as a
source of both predictive and confirmatory information. Therefore, an increase in
market reactions around earnings announcement caused by predictive value may be
totally offset by a decrease associated with confirmatory information. However, the
ongoing shift can be observable if the magnitude of increase in market reactions
associated with the first use of interim segment information is more than that
associated with predictive value of each subsequent earnings announcement. In his
study, the author compares market reactions measured by standard deviation of the
market model residual around earnings announcements for consecutive four paired
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89
quarters distinguished by disclosure of interim segment information. Reduction in
market reactions is observed only around the second quarter earnings announcement;
thus, it provides partial evidence of the ongoing shift. This ongoing shift can be fully
supported if the corresponding increase in market reactions is detected at some point
early in the transition period. The author further states that because interim segment
information represents a finer set of information, its economic consequence is
examined in terms of changes in Companies’ costs of capital, as measured by their
respective Beta values. Although disclosure of interim segment information is
associated with changes in Beta values of reporting Companies, no statistical
conclusion can be made as to the direction of change in their respective costs of
capital.
David L Sayers (1985) in the article titled, “The Impact of Segment
Reporting on Analysts’ Earnings Forecasts: The case of FASB Statement No. 14” say
that in 1969 and 1970, the Securities and Exchange Commission adopted rules
mandating the disclosure of segment revenues and profits. Empirical tests of the
usefulness of segment data have yielded mixed results. Capital market studies of
segment disclosures have been inconclusive. Earnings forecast studies seem to be the
most promising means of examining the usefulness of segment data. In 1976, the
Financial Accounting Standards Board issued Statement No. 14 which required
extensive segment disclosures in the annual reports of publicly-owned companies. His
study examines the impact of FASB 14 segment disclosures on security analysts’
earnings forecasts. The earnings forecasts used in his study are the composite
forecasts published by the Institutional Brokers Estimate Service (IBES). Actual
earnings figures were taken from IBES and from the annual reports of sample
Companies. A measure of forecast accuracy was computed for two groups of
Companies for the period 1976-1979. The multi-segment treatment group consisted of
Companies that disclosed segment revenues and profits for the first time after FASB
14 became effective. The single-segment control group consisted of Companies that
reported only consolidated earnings for the entire test period.
Regression Analysis was used to analyze changes in forecast accuracy during
the test period. The independent variables were “reporting method” and “economic
conditions”. After controlling for multi co-linearity between the independent
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90
variables, the results supported the hypothesis that earnings forecasts did improve for
the single-segment control group. The primary conclusion is that there was a
significant association between improved earnings forecasts and the disclosure of
FASB 14 segment data. Because forecasts did not improve for the control group, this
association cannot be attributed only to overall improvements in forecasting
techniques.
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