Chapter 20: Segment Reporting

Perspective and Issues

Segment reporting is the disclosure of information about an entity's operations in different industries, its foreign operations and export sales, and its major customers. The requirement for such disclosure is a relatively recent development in the history of financial reporting. It was necessitated by the continued growth of complex entities operating in various disparate industries or geographical markets, making entity-level financial statements less useful for purposes of predicting future earnings and cash flows unless further detailed information is provided.

Proposals to require segment financial information were met with opposition from preparers which objected to the additional effort required of them, and particularly to the feared disclosure of sensitive competitive data. These concerns paled, however, in comparison to the important needs of users of financial information. It became clear that, without the ability to understand which of an entity's major operations were making the most positive contributions to its results, users would be hindered in their ability to make intelligent investment decisions. Ultimately, this need was seen as being more important than the perceived competitive risks to the reporting entity.

The US Securities and Exchange Commission began requiring line-of-business information in registrants' annual filings in 1970, but in many instances this data was not included in the annual reports issued to stockholders. By 1974, the SEC required registrants to include some of this line-of-business information in their reports to stockholders. Finally, SFAS 14 was issued (in 1976), which established specific requirements under US GAAP for the disclosure of segment information in financial reports issued to stockholders. These requirements were later deleted for interim reports and for non-publicly-held companies. Under this standard, there was a rather wide range of acceptable definitions of industry segments.

The first international standard, IAS 14, issued in 1981, was closely modeled on the US standard, and thus the range of acceptable definitions of industry segments was also fairly wide. Subsequently, the IASC significantly revised this standard, effective in mid-1998, by changing the method of determining reportable segments to conform more closely to how the reporting entity is internally managed. Later, standard setters in the US and elsewhere essentially conformed their standards to this new reporting philosophy pioneered by IAS, as well.

Under the current approach, the burden of preparing segment disclosures is lessened if the segment data captured by the entity's managerial reporting system corresponds with the standard's definitions of industry and/or geographical segments. In other cases, it will still be necessary to disaggregate and reaggregate data from the management information system in order to develop needed financial statement disclosures. Segment information, while recommended for all issuers of financial statements, is required only for those which have publicly traded debt or equity issues or are in the process of preparing a public offering.

IAS 14 offers detailed guidance on identifying business and geographical segments. The standard requires that entities refer to their organizational structure and internal reporting systems in order to identify these segments. If entities' internal segments are not geographical or products/service-based, then the entities are required to make reference to the next lower level of internal segmentation to identify reportable segments.

The standard sets forth detailed guidance for a dual presentation of segment data. One basis of segmentation is primary and the other secondary. Segment information should be prepared on the basis of the same accounting policies as are the financial statements of the consolidated group or entity. Disclosure requirements for the secondary segments are considerably less detailed than for the primary ones.

Sources of IAS

IAS 14