Abstract
Both IFRS (IFRS 8) and the United States (U.S.) GAAP (SFAS 131) use similar approach for reporting segment information as a part of annual financial statements. Large and multinational firms that operate in more than one operating segment are required by IFRS and the U.S. GAAP to provide financial information about their operating segments in the notes to the annual financial statements using the “management approach.” However, the primary difference between these two pronouncements is how the management approach is implemented. Using a sample of foreign companies cross listed on the U.S. stock exchanges, we test for differences in segment financial reporting under the two sets of financial standards and how this information is valued by the market. We find significant differences in the quality and quantity of segment disclosure made by our sample firms during the fiscal year 2017 under the two sets of accounting standards. We also find that market values the choice of accounting standards as well as the overall quality/quantity of the segment disclosures. Specifically, we find that the decrease in the informativeness of earnings with IFRS as the choice of accounting standards for our sample firms. Additionally, we also find that the predictability and informativeness of earnings is increasing in the quality/quantity of the segment disclosure of the sample firm.
Highlights
Introduction and MotivationInternational Accounting Standards BoardWe compare the segment disclosures of (IASB) and the Financial Accounting foreign firms listed in the United States Standards Board (FASB)
The “management approach” argues that firms organize and provide segment information in their financial reports based on the approach management organizes the firm internally for the purpose of decision making and performance evaluation
Segment reporting standards under IFRS 8 and SFAS 131 of U.S.GAAP are similar in approach but argument is that the two are different in application of the management approach
Summary
We compare the segment disclosures of (IASB) and the Financial Accounting foreign firms listed in the United States Standards Board (FASB). The “management approach” argues that firms organize and provide segment information in their financial reports based on the approach management organizes the firm internally for the purpose of decision making and performance evaluation. Kobbi-Fakhfakh, Shabou, and Pige (2018) test the segment disclosures for a sample of 171 EU companies from the 2006-2012 annual reports and report that there are significant differences in the quality of segment reporting among the sampled firms They construct a new measure of segment reporting quality (SRQI) that aggregate different segment reporting practices indicators, including the number of segments, the extent of information disclosed and the geographic disclosures. IFRS 8, issued in 2006, adopted the “pure management approach”, which is mostly similar to SFAS 131, requires some segment disclosures, only if, they are included in the measure of segment profit/loss reviewed by CODM. Another difference is that IFRS 8, unlike SFAS 131 requires disclosure of segment liabilities if those amounts are regularly reviewed by the CODM (Nichols et al, 2013)
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