International Accounting and Multinational Enterprises 5e By Lee

International Accounting and Multinational Enterprises 5/e By Lee H. Radebaugh and Sidney J. Gray 11/27/2020 Power. Point Presentation by Kent W. Meyer, Ph. D

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INTERNATIONAL SEGMENT REPORTING Chapter Eight

International Segment Reporting u u Segment Reporting is the counter point to Consolidated Financial Statements. Trend is in recent response to diversification by MNE’s, especially with regard to geographical activity. 1

Trend toward Segment Reporting u u Issues: Whether consolidated financial statements are adequate, considering: u Diverse activities in diverse locations; u Different profitability, risk, growth characteristics. Different methods of consolidation have a different effect on the income statement and balance sheet. 2

Users and Uses of Segment Information u Investors u u Allow comparisons of company-specific information with external information for better risk assessment and potential for future growth. Employees u Allow comparisons of intra-company compensation and benefits. Creditors u Allow a more accurate assessment of risk. Host Governments u Allow comparisons of compensation, working conditions, and tax base. 3

Benefits of Segment Reporting u u Gaming - Perception that segment reporting is “costless” Tests: u Predictive Ability Test - Tests accuracy of future sales/ earnings forecasts between consolidated data and disaggregated data. u Stock Market Reaction Test - If information has effect on the stock market, then the information is assumed used. If the information has no effect, then information assumed not used. 4

Predictive Ability Test u u More accurate if based on line-of-business (LOB) segmental data than on consolidated earnings; U. S. data-based forecasts more accurate if based on segment earnings rather than segmental turnover. 5

Stock Market Reaction Test u u Some evidence that LOB and geographical segment data disclosure reduce assessments of risk. u Significant relationship between disclosure and risk in U. S. and U. K. However, some evidence is inconclusive or even conflicting. 6

Cost of Segment Reporting u Whether costs of compiling, processing, and disseminating information exceeds benefits. u Internal costs, u Benefits competition, u Investor evaluation. 7

International Accounting Standards u IAS 14 u 1981 - Closely followed U. S. requirements. u Internal u and external sales shown separately. 1997 - Looks to organizational structure and internal reporting systems to determine “segments. ” u Limits scope of managerial discretion. 8

Regulations Around the World u United States - Most extensive accounting requirements in the world. u u SEC - Allow LOB reporting. FASB - Issued SFAS 14, requiring disclosure of revenues from: u Unaffiliated customers, u Intragroup transfers, u Operating income, u Profitability measures, and u Assets. u SFAS 131 - Similar to IAS 14, limits managerial discretion. 9

Regulations Around the World (Cont. ) u United Kingdom - Influenced by: u EU Fourth and Seventh Directives, u Revised Companies Act - Requires geographical segment turnover and LOB sales and pre-tax profit disclosure. u Greater managerial discretion in determining segment information, u Emmanuel and Gray (1977) - Showed inadequate and inconsistent disclosures. u SSAP 25 - Requires segment net assets for LOB and geographical segments. 10

Regulations Around the World (Cont. ) u Other Countries: u Australian and Canada very similar disclosure requirements to United States and United Kingdom. u European Union - Fourth and Seventh Directives. u Japan - Similar to IAS. u Brazil and India - No requirements. 11

Segment Reporting Problems u u Difficult to verify disclosed information, specifically: u Common cost allocations, u Intragroup transfers, u Transfer pricing. Difficult to identify a “segment”: u Regulations not specific, u U. S. and U. K. practice tends to be continent-based. 12

The Dual-Yardstick Approach u Emmanuel and Gray (1978): u Similar to IASC and U. S. organizational approach; u Bring consistency between disclosures and MNE organizational structure. u A unit is a “segment” if: u More than 50% of its physical sales volume sold externally, u Revenue and profitability information is accumulated regularly for the unit, and u Responsibility for the unit’s operation performance resides with unit manager. 13

Matrix Presentation u u u Presentation of information regarding the interrelationships between segment information. Lack of matrix presentation can lead to inaccuracy of risk and expected return assessments. Changes in political, economic, or social conditions tied to LOB carried on by the unit in the host country. 14