Segment Disclosures Research Articles

The impact of IFRS 8 on financial analysts’ earnings forecast errors: EU evidence

While the IASB has eliminated virtually all differences between US GAAP and IFRS with respect to segment reporting, the quality of segment disclosure after IFRS 8 remains questionable, with the European Parliament only endorsing IFRS 8 after considerable scrutiny and debate. We investigate the impact of segment information quality and quantity on analysts’ earnings forecasts after the adoption of IFRS 8. We further address how country-level enforcement influences this relationship using a sample from EU countries. Findings reveal that the quality and quantity of segment information are associated with more accurate earnings forecasts following IFRS 8. Furthermore, the results suggest that enforcement plays a pivotal role in shaping the impact of the principles-based IFRS 8. These findings contribute to the ongoing debate on the quality of segment information under the management approach and the role of accounting regulation enforcement. They also provide early evidence on the usefulness of country-by-country reporting.

Relationship of Earnings Quality and Segment Disclosure in Decreasing Cost of Equity

Investors would analyze the reporting of segments disclosure in the notes to the financial statements, addition to the main reporting that presents earnings and cash flows. We investigated the relationship between the segment disclosure level and the earning quality that could decrease the cost of equity. Sample of this research were 242 firms-years of manufacture industry firms. This research used simultaneous test; the first stage was a regression of segment disclosure level on earning quality and the second stage was a regression on the cost of equity. Segment disclosure level was measured from PSAK 5 Operating Segment (2009); the cost of equity measured using industry-adjusted E/P Ratio; earning quality measured using absolute of accrual quality and absolute of abnormal accrual. We found that earnings quality positively influences on segment disclosure level. We proved that there was a complementary effect between them. The second result showed that the segment disclosure level decreases the cost of equity, but marginally. The third result proved that in the second order condition, the segment disclosure level was stronger in decreasing the cost of equity. We proved that there was endogeneity of segment disclosure level in decreasing cost of equity. JEL Classification : C34, D23, M14 DOI: https://doi.org/10.26905/jkdp.v22i3.2304

Analisis Penerapan PSAK 5 (Revisi 2009) terhadap Pengungkapan Segmen Operasi pada Perusahaan Manufaktur yang Terdaftar di Bursa Efek Indonesia (BEI)

The International Accounting Standards Board (IASB) is committed to improve their standards’ quality, which is the global accounting standards that reflect information in financial statements as transparent and comparable for public purposes. The International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) provide guidelines in creating and interpreting companies’ financial statements (Iatridis & Dalla, 2011). The purpose of this research was to assess the impact of the application of PSAK 5 (revised 2009). PSAK 5 (revised 2009) requires segment disclosure based on the internal reporting reviewed by the operation decision maker. PSAK 5 (revised 2000) requires companies to disclose segments information based on the format of the primary and secondary segments as identified per products / services that generate the same level of risk and return. The six analytical frameworks developed for this research, namely: (1) analysis of the presentation of segment information based on PSAK 5 (revised 2000) versus PSAK 5 (revised 2009), (2) analysis of the determination and identification of operational decision-making, (3) the analysis of the definition and identification operating segments between industry sectors, (4) analysis of segment aggregation, (5) analysis of determination of the reportable segments, and (6) analysis of reported segment disclosures. In conclusion, generally, the disclosure of segment information based on PSAK 5 (revised 2009) by using the management approach yields a more complete segment report, by conveying more relevant segmental information from the standpoint of management's internal performance than the previous standard, which was PSAK 5 (revised 2000). 
 This research found significant changes related to an increase in the disclosure of segment disclosure in business segments, segment aggregation, and basic information on company's segmental performance measurement in Indonesia.

Corporate Diversification, Managerial Expansion, Firm Liquidity and Operating Performance: The Role of Segment Disclosure

We investigate the association between corporate international diversification and operating and market performance and firm spread (liquidity). We find, as expected, that foreign fixed assets of US firms are significantly and positively related to firm performance as measured by operating income, cash from operations, and liquidity. This evidence suggests that corporate international diversification reflects a unique dimension that is incremental to operating and market performance. Foreign fixed assets also are significantly and positively related to prices and returns, suggesting that foreign investments are wealth changing corporate decision. This finding not only complements our operating performance results and price regressions findings, but also suggests that a portion of US firms’ investment abroad is timely. Our inferences are robust to change specifications and controlling for previously identified determinants of spread, operating and market performance. Our price and return results suggest that investors incorporate geographic segmental assets data in their valuation model. Extending the analysis on partition sample — high versus low leverage firms, we document that both foreign assets of high and low leverage firms are significantly positively associated with share price and the coefficient on high leverage firms is significantly larger than the coefficient on low leverage firms.

Does Reporting Transparency Affect Industry Coordination? Evidence from the Duration of International Cartels

ABSTRACTFirms coordinate their actions with industry peers, thereby affecting product market competition. Using the cartel setting, we investigate how financial reporting transparency affects industry coordination. Economic theory predicts that transparency might either prolong cartel duration through increased contracting efficiency, or destabilize cartels due to earlier detection of deviating members. We test these predictions on firms indicted by the European Commission for anticompetitive behavior between 1980 and 2010. Using reporting under internationally recognized accounting standards (IFRS or U.S. GAAP) as our measure of reporting transparency, we find that following a transparent accounting framework decreases cartel duration. We show this finding is partly explained by transparent segment disclosure, which provides a means for the verification of agreed-upon sales for a product or region. Consistent with the view that transparent reporting leads to earlier detection of deviating members, we further show that transparency lowers cartel duration when the likelihood of cheating is high.

Segment Reporting Level And Analyst Forecast Accuracy

In a setting where the primary financial statements have been converted from individual financial statements to consolidated financial statements in Korea, we examine the effect of segment information disclosed by the firm on analysts’ consolidated-base earnings forecast accuracy. Since Korean firms have prepared the primary financial statements on a non-consolidated basis in the pre-IFRS regime, the adoption of International Financial Reporting Standards (IFRS) leads to a great deal of difficulties and complexities in making accurate consolidated forecasts for users of financial statements, even for financial analysts who are sophisticated users of financial statements. In this situation, we conjecture that the amount of details and types of information in segment disclosure will influence analysts’ forecast accuracy. Consistent with the prediction, we find that financial analysts are able to make more accurate earnings projections when firms provide more disaggregated accounting figures by each segment. Moreover, we find that analysts can make forecasts more accurately when firms disclose more persistent earnings component (i.e., segment operating income). Furthermore, we find that the effect of the segment disclosure levels on analysts’ forecast accuracy is more pronounced for firms with multi-segments. Our results indicate that disaggregated segment information is a useful source for financial analysts to have better understanding about complete picture of firms’ consolidated earnings and improve their forecasting performance.

Los factores explicativos de la divulgación por segmentos en entidades no financieras cotizadas en los mercados europeos

<p><span lang="EN-US">Segment reporting (external) is a relevant tool for investors and other stakeholders, as the information is presented in a divisional way, enabling more accurate analysis to be made for decision making. Howe­ver, reporting entities do not always assure the inherent potential of segment reporting. This research aims to identify the explanatory factors that may influence the level of segment disclosure. For this purpose, we have investigated the segment disclosures presented in accordance with the International Financial Reporting Standards (IFRS) 8 of the International Accounting Standards Board (IASB), as adopted by the European Union, based on consolidated reports and accounts (for the year 2015) of a sample of 91 entities from the Portuguese Stock Index (PSI-20), <em>Cotation Assistée en Continu </em>(CAC-40), <em>Deutscher Aktie­nindex </em>(DAX-30) and OMX Nordic 40 (OMX-N40). The findings indicate that size is directly related to both the number of operating segments disclosed and the level of disclosure required for each segment. Further, the latter seems to be also influenced by the existence of barriers to entry (directly) and the degree of internationalisation (inversely).</span></p>

Determinants of segment reporting quality: evidence from EU

PurposeThis study aims to provide some empirical evidence on the determinants of segment reporting quality, and to propose a new measurement tool of segment reporting quality – segment reporting quality index (SRQI).Design/methodology/approachOn the basis of hand-collected segment data for a sample of 171 European Union publicly listed companies from the 2006-2012 annual reports, the study uses multiple regression model to investigate the determinants of segment reporting quality. A new measurement of segment reporting quality is constructed. It aggregates different segment reporting practices indicators, including the number of segments, the extent of information disclosed and the geographic fineness. Additional estimations are conducted to test the robustness of the results.FindingsThe results suggest that there is a substantial variation in the quality of segment reporting among the sampled European Union firms. Large corporations, audited by Big 4 auditors and more internationally oriented, tend to provide a higher quality of segment reporting. In contrast, debt leverage negatively impacts the quality of segment reporting. However, the quality is not significantly related to profitability. The findings are fairly robust to a number of econometric models that control, for year fixed effects and pre- and post-International Financial Reporting Standards 8 adoption. Overall, the findings are generally consistent with the predictions of agency theory.Research limitations/implicationsThe results imply that considerable managerial discretion exists. Despite the IFRS commitment to enhance comparability of the financial statements, segment information remains very disparate. It enables investors to get a better understanding of a firm’s activities, but it does not allow for a better assessment of a firm as compared to the other firms of the same sector. As compared with other IFRS standards, the segment reporting has more relation with corporate governance structure and specific institutions that regulate a sector or a country. Furthermore, the results show that firm characteristics are associated with the study’s aggregated measure of segment reporting quality (SRQI) consistently with theoretical and empirical evidence. SRQI can, thus, be used by researchers for replication or to study new questions on firms’ segment disclosure behavior on a much wider set of firms in the economy. While this research makes several noteworthy contributions, the authors acknowledge that SRQI considers only multisegments firms that disaggregate their primary/operating segments by line-of-business and disclose secondary/entity-wide level geographic information.Originality/valueThis study offers new evidence on the determinants of segment reporting quality following IFRS adoption, in the European Union context. This study contributes to the existing literature by proposing an aggregated measure of segment reporting quality (SRQI). Unlike previous measures, which were usually limited to researcher self-constructed indexes, SRQI captures different facets of segment information in terms of disaggregation and disclosure extent.

International Diversification, SFAS 131, and Debt Maturity Structure

This study examines the impact of geographic segment disclosures under the Statement of Financial Accounting Standards No. 131 (SFAS 131) on the debt maturity structure of internationally diversified firms. I find that the proportion of short-maturity debt increases with a firm’s international diversification. Moreover, the implementation of SFAS 131 attenuates the positive relation between international diversification and short-maturity debt. This attenuation effect is more pronounced for firms that continue to disclose geographic segment earnings in the post-SFAS 131 period than firms that do not. As short-maturity debt subjects firms to refinancing and potential costly liquidation risks, these results suggest a beneficial role of SFAS 131 in reducing firms’ reliance on short-maturity debt to address information asymmetry and agency costs of debt arising from international diversification. Furthermore, this study suggests that enhanced mandatory disclosure has a real effect on firms’ financing activities and capital structure.

International Diversification, SFAS 131 and Post‐Earnings‐Announcement Drift

AbstractUsing 1990 through 2013 data of U.S. firms with foreign operations, we show that (i) the serial correlation of analyst forecast errors increases in the extent of international diversification, (ii) post‐earnings‐announcement drift (PEAD) based on analyst forecast errors increases in the extent of international diversification, and (iii) the impact of international diversification on the serial correlation of analyst forecast errors and its associated drift is significantly reduced after the implementation of SFAS 131 on segment disclosures. When we replicate our tests using seasonally differenced earnings, we fail to observe similar patterns. Overall, our results suggest that investors’ underreaction to announced earnings is a likely explanation for PEAD. Our findings also indicate that disclosures required under SFAS 131 are useful to analysts in forming efficient earnings expectations, thereby helping capital market participants in the pricing of internationally diversified firms’ earnings.

The Informational Value of Disaggregated Segment Data: Evidence from the Textual Features of Business Descriptions

I examine a fundamental determinant of disclosure quality: how underlying data are disaggregated. For this, I create a measure of industry disaggregation, which is the extent to which segment disclosures are disaggregated based on underlying industries. To identify underlying industries, I apply a deep learning algorithm that extracts textual features from Item 1 business descriptions, in which firms are required to accurately describe their products and services. Industry disaggregation captures the disclosure of underlying industries and the adherence to industry-based disaggregation criteria. Consistent with capital markets being informationally segmented by industry, I find that industry disaggregation is negatively associated with analyst forecast error and dispersion, and positively associated with analyst following and information transfers among analysts and investors. These findings indicate that financial information is more informative, and thus of higher quality, when disaggregated by standardized criteria that achieve comparability and match the information-processing strategies of capital market participants.

Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies

This study examines how the adoption of International Financial Reporting Standard (IFRS) 8, Operating Segments, changed the entity-wide geographic segment reporting by European, Australian and New Zealand blue chip companies. The focus is on the revised requirements that companies disclose revenues for the country of domicile and other material countries. Specifically, it investigates the materiality level companies use to determine material countries and whether the revised requirements result in a finer set of geographic information than previously disclosed under International Accounting Standard (IAS) 14R.The study finds a significant decrease in the number of companies reporting only broad geographic regions and a significant increase in the number of companies reporting country specific segments and a mix of countries and regions after the adoption of IFRS 8. The increase in companies reporting country specific and mixed segments indicates that the requirement to disclose material countries under IFRS 8 resulted in a significant number of companies reporting disaggregated revenues at the individual country level. To the extent country specific information is more useful, financial analysts and the International Accounting Standards Board (IASB) should welcome this result.All three fineness measures increase significantly with the adoption of IFRS 8. These results indicate that the adoption of IFRS 8 did improve the fineness of the geographic disclosures provided by companies and suggests that the geographic data provided under IFRS 8 is less aggregated than the disclosures under IAS 14R.

Segment Disclosure Quantity and Quality under IFRS 8: Determinants and the Effect on Financial Analysts’ Earnings Forecast Errors

Segment Disclosure Quantity and Quality under IFRS 8: Determinants and the Effect on Financial Analysts’ Earnings Forecast Errors

Corporate governance and segmental disclosure: evidence from Canada

The purpose of this study is to examine the association between a segmental disclosure policy and corporate governance structure within Canadian companies reporting under the Canadian accounting standard Section 1701, Segment Disclosure. Canadian firms subject to this standard are found to be reluctant to provide detailed disclosures of their activities and thus are complying with the minimum requirements using the grouping provision offered by the standard. We also found that except for the duality effect, the structure of the board of directors does not have a large effect on the chosen level of segmental disclosure. Furthermore, the ownership structure was found to influence the choice of the level of disclosure regarding the line of businesses data. This study is primarily motivated by the lack of Canadian evidence on the quality of segment disclosure. Moreover, this research is timely because of IASB's current re-evaluation of segment reporting requirements. Therefore, the expected findings of this study may be of interest to standard-setting bodies in countries lacking effective regulation on segmental reporting, to accounting practitioners, and to users of financial statements.

Corporate governance and segmental disclosure: evidence from Canada

Corporate governance and segmental disclosure: evidence from Canada

Post-implementation of MFRS 8 “Operating Segment” among listed firms in Malaysia

This study examined the level of disclosure among Malaysian listed firms with respect to segment reporting under new accounting standard MFRS 8 (IFRS 8). It also aimed to determine how these firms defined the chief operating decision maker (CODM) during the disclosure of segment information. Study results showed that the way firms disclosed segment information tended to vary between companies, since disclosure was dependent on company management purposes and business activities. The results also showed that only a few Malaysian firms supply information about their CODM. In summary, this study provides a fairly up-to-date description of the status of segment disclosure post-implementation of MFRS 8.

Earnings Announcement Disclosures and Changes in Analysts' Information

AbstractThis study examines how financial disclosures with earnings announcements affect sell‐side analysts' information about future earnings, focusing on disclosures of financial statements and management earnings forecasts. We find that disclosures of balance sheets and segment data are associated with an increase in the degree to which analysts' forecasts of upcoming quarterly earnings are based on private information. Further analyses show that balance sheet disclosures are associated with an increase in the precision of both analysts' common and private information, segment disclosures are associated with an increase in analysts' private information, and management earnings forecast disclosures are associated with an increase in analysts' common information. These results are consistent with analysts processing balance sheet and segment disclosures into new private information regarding near‐term earnings. Additional analysis of conference calls shows that balance sheet, segment, and management earnings forecast disclosures are all associated with more discussion related to these items in the questions‐and‐answers section of conference calls, consistent with analysts playing an information interpretation role with respect to these disclosures.

The Impact of AASB 8 Operating Segments on Analysts’ Earnings Forecasts: Australian Evidence

This paper evaluates the impact of firms’ adoption of AASB 8 segment disclosure rules on analysts’ earnings forecasts. It examines whether providing more disaggregated segment information following the adoption of AASB 8 is associated with an increase in analysts’ ability to forecast earnings. We find that analysts’ earnings forecasts have not improved significantly after adopting AASB 8 in Australia, regardless of whether firms disclosed more disaggregated segment information. Our use of control firms provides assurance that the results are due to AASB 8 and not to some other events concurrent with the adoption of AASB 8. Overall, our results imply that the benefits associated with the management approach as experienced by financial analysts in the United States have not been realised by financial analysts in Australia. This suggests that the successful adoption of an accounting standard in one country should not be the justification for recommending adoption in other countries. Further, our results raise questions about whether the enhanced disclosures required in the new standard are more for the other users of financial statements, such as investors, rather than analysts.

Segment Disclosure Quantity and Quality under IFRS 8: Determinants and the Effect on Financial Analysts' Earnings Forecast Errors

Focusing on segment disclosures under the management approach, we investigate managers' choices with respect to both segment reporting quantity and quality and the usefulness of these two characteristics for financial analysts. We measure quantity as the number of segment-level line items and quality as the cross-segment variation in profitability—arguing that more managerial discretion can be exercised over quality than over quantity. We find that managers solve proprietary concerns either by deviating from the suggested line-item disclosure in the standard, or, if following standard guidance, by decreasing segment reporting quality. Moreover, financial analysts do not always understand the quality of segment disclosures, suggesting that a business-model type of standard creates difficulties even for sophisticated users. Our results inform standard setters as they start working on a disclosure framework and as they consider the business model approach to financial reporting.

Discussion of Segment Disclosure Quantity and Quality under IFRS 8: Determinants and the Effect of Financial Analysts' Earnings Forecast Errors

Andre, Filip, and Modovan (2016) explores the characteristics—quality and quantity—of segment disclosures under IFRS 8 and their usefulness to financial analysts in accurately estimating earnings per share (EPS). The authors measure quantity of disclosures as the number of segment-level line items disclosed in financial statements and quality as the cross-segment variation in profitability. The results provide evidence that managers solve the issue of proprietary costs by decreasing either the quantity of disclosure below the level of standards' guidance or the quality of disclosures on operating segments, thus reducing the overall information included in disclosures. Results also show that it is difficult even for a sophisticated group of financial statement users such as financial analysts to fully understand the quality of segment disclosures and that too much disclosure quantity might create a “foggy” environment, where even sophisticated investors can have troubles using disclosed information to forecast earnings.