Geographic Segment Disclosure and the Predictive Ability of the Earnings Data

Abstract

Standards of segment reporting disclosure of the enterprise's foreign operations by geographic area [FASB 1976, Statement No. 14]. This information is believed to be useful in predicting the future prospects of the enterprise as a whole. This paper examines the predictive value of geographic earnings vis-a-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. Both 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.