A study on the use of segment reporting


Segment reporting is introduced to provide users of the financial report a better view of the performance and prospects of particular parts of the company instead of those of the entire group. According to the para.1 of the IFRS8, the core principle of segment reporting is that "An entity shall 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."

Since the old standard, IAS 14 Segment Reporting, has been pointed out with significant drawbacks, it has been replaced by the more acceptable new standard, IFRS 8 Operating Segment. However, although there is revised standard, some debates over the benefits and costs of segment reporting still take place. The following is going to prove benefits of segment reporting outweighed the costs of it.

One disadvantage of segment reporting is that there is lack of clear guideline and regulations for specific reporting matters. Since there is no clear standard, companies may prepare the information report according to the internal decision which may be different from other companies. Companies may also be inconsistent with regard to the identification of segments and they may chose what information can be shown in the report and in what way the information would be disclosed. This harms the transparency and comparability of financial reporting that users may not be able to compare information over time and with other companies.

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However, by using management approach, information provided from segment reporting would be more relevant to the investors or other stakeholders. This is because this approach provides useful information which is material to the users and permits users to take a look at the whole picture of the entity. Also users are able to look at the performance in the same way as the management, so they can understand the companies better and thus make more appropriate economic decision.

Secondly, there is a problem that there have been huge costs for preparing the segment information. All listed companies have to disclose segmented profit and loss with extra data and information that seems to be relevant, such as, external and internal revenues, material non-cash items, and material items of income and expense. This may already generate high costs. Besides, companies are also required to provide reconciliation for users to understand the difference between consolidated information and the information provided under segment reporting.

However, although this incurred high costs, providing segment information is valuable for the company itself and also the users of financial report. For the company, it can enhance image by providing better presentation of the entity's general economic performance. This better performance presentation would prove there are better coordination and organization of the business activities. Therefore such information is useful for users that it reduces uncertainty about the company. The users can see how management level makes decision and how the business is going to develop. In other words, it shows result of stewardship of management and avoids losses of investors who rely on the financial information.

Another criticism is that segment reporting provides little protection to the small listed companies. Segment reporting requires companies to disclose important internal information which may be confidential to a business. If commercially sensitive information is provided to other competitors, this would damage the outcome of the business project and harm the economic growth of such company.

However, it is claimed that the segment reporting standards provide appropriate reporting requirements for the small listed company simply because many of the important internal information would be essential to stakeholders. No matter it is a small company or a large company, information required by the users seem the same. Also it would be fair only when all competing companies to disclose same information with the same quantity and quality.

Lastly, segment reporting may not be suitable in case the business activities are highly inter-related to each other. It may be improper to view the segments individually if the success of a segment is relevant and dependent to other business activities. If users only view the segments individually they may miss some important interrelationship of the business and make wrong economic decisions towards the company.

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However, segment information enables users to identify which segment is performing better by comparing results of each segment. For example, it shows investors which parts of the company outperform and which parts would be valuable for investing. When reading the financial report, looking at individual segment would help users to identify the over-performed or under-performed sectors, so they would clearly and readily understand which business activities in fact lead to the group's success.

By the way, from the European Union report, other supporting is that segment reporting does not create problems relating to corporate governance. It is believed that management information enhances the transparency of the companies. Also the chief operating decision maker (CODM) is seen as a useful function for achieving different corporate governance issues. Segment reporting on the other hand is still encouraging company board of directors to act and report for the best interest of the shareholders.

The above shows that although there is some argument against segment reporting, it can be sure that segment information would be better maintained since its benefits both the companies and the stakeholders. Since there are deep value supporting segment reporting and its disadvantages are only of little influence, it is proved that benefits of segment reporting outweighed the costs of it.