Segment Reporting
DOES THE “MANAGEMENT APPROACH” CONTRIBUTE TO SEGMENT REPORTING TRANSPARENCY?
Advanced Accounting
ACC 610
January 4TH, 2010
1. INTRODUCTION:
An operating Segment is a component of an entity that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (COMD) and for which discrete financial information is available.
Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.
So, segment reporting creates an opportunity for companies to add value to the information they disseminate about their industry and geographic operations.
A major change occurred when FASB Statement No. 131 (SFAS 131) has replaced FASB Statement No. 14 (SFAS 14), as a result there was an important move from “standardized approach” to” management approach”.
As it is not feasible to provide all of that information in every set of financial statements. The SFAS 131 requires that general-purpose financial statements include selected information reported on a single basis of segmentation. The method the statement chose for determining what information to report is referred to as the “management approach”.
The “management approach” is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance.
The new statement is more clearly based on the “management approach” and the company’s internal reporting to the entity’s chief operating decision maker (CODM). As a result, the new statement will enable investors to assess the company’s business performance from the same perspective used by the management in making decisions about operating matters.
Consequently, the segments are evident from the structure of the enterprise’s internal organization, and financial statement preparers should be able to provide
Advanced Accounting
ACC 610
January 4TH, 2010
1. INTRODUCTION:
An operating Segment is a component of an entity that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (COMD) and for which discrete financial information is available.
Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.
So, segment reporting creates an opportunity for companies to add value to the information they disseminate about their industry and geographic operations.
A major change occurred when FASB Statement No. 131 (SFAS 131) has replaced FASB Statement No. 14 (SFAS 14), as a result there was an important move from “standardized approach” to” management approach”.
As it is not feasible to provide all of that information in every set of financial statements. The SFAS 131 requires that general-purpose financial statements include selected information reported on a single basis of segmentation. The method the statement chose for determining what information to report is referred to as the “management approach”.
The “management approach” is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance.
The new statement is more clearly based on the “management approach” and the company’s internal reporting to the entity’s chief operating decision maker (CODM). As a result, the new statement will enable investors to assess the company’s business performance from the same perspective used by the management in making decisions about operating matters.
Consequently, the segments are evident from the structure of the enterprise’s internal organization, and financial statement preparers should be able to provide
References: 1. Jack W. Paul, James A. Largay III (2005). Does the “management approach” contribute to segment reporting transparency?, Business Horizons , 48, 303—310. 2. Ole-Kristian Hope, Tony Kang, Wayne B Thomas, and Florin Vasvari (2009). The effects of SFAS 131 geographic segment disclosures by US multinational companies on the valuation of foreign earnings, Journal of International Business Studies, 40, 421–443. 3. Financial Accounting Standards Board (1997). Disclosures about segments of an enterprise and related information. Statement of Financial Accounting Standards No. 131. Norwalk, CT7 FASB.