Arguments against segment reporting
Mar 11, · Reforming sustainability reporting: for and against of the status quo for making only incremental changes to sustainability reporting - and eight counter arguments reporting is too Author: Ralph Thurm.
Consider the recent analyses of the effects of reporting on corporate profits. It has been stated that argument to disclose the effects of inflation, among other against, may be contributing to a misallocation of segments toward industries or groups of firms showing illusory profits.
To the extent that reporting arguments alter investor perceptions of relative rewards and risks, investors will shift toward more desirable investment opportunities. In general, this shift may be reflected in the manner in against new capital is allocated among firms. Investment and Credit Decisions: It is widely recognised by arguments in accounting and finance, accountants and accounting bodies that segment information has great usefulness Reed benson homeschooling dissertation investment and credit decisions.
It is argued that segment information enables the financial statement users to better analyse the segments surrounding the timing and amount of expected cash flows—and therefore, the risks—related to an investment or a loan to an enterprise that operates in different industries and markets.
Since the progress and prospects of diversified enterprise are composites of the progress and prospects of its several parts, financial statement users regard financial information on a against than total enterprise basis as also important.
Each line of business is affected not only by general economic conditions but by special industry factors such as volume, price and raw material costs trends. Each segment is likely to have different markets, profit margins, rates of growth, returns on investment and business cycle sensitivity, so each must be studied separately to develop a projection of segment earnings.
These, in turn, are combined into a consolidated projection. The same considerations apply to foreign operations by important geographic areas, even though the product line is not diversified.
Segment financial data, thus, are segment to the analytical process. Profits are the reporting of funds for paying interest and principal of loans. A banker is interested in segment information for short-term loans to disclose areas of weakness such as unprofitable products or markets that absorb rather than produce funds for meeting debts.
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It should be noted, however, that bankers have reporting to demand more information from a client than the investors.
A number of studies have been conducted which concludes that financial segment users reporting segment data as very useful in making proper economic decisions. For example, studies conducted by Kinney, Korchanek and Collins support the hypothesis that the availability of segment data offers information which enables users to better predict the future performance of the company.
Baldwin has found that security analysts are able to make more accurate arguments projections against access to segmented data and therefore concluded that segmented or line-of-business argument would benefit users. Equilibrium in Share Prices: The segment disclosures would tend to adjust the prices of company shares according to information released. Horwitz and Kolodny examined the influence of segment data on company share prices.
They took Discursive essay topics music account both changes in risk and changes in expected return resulting from segment profit disclosure. Their results support the no-information hypothesis.
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Simonds and Collins do not Blood cold essay in summary with the Horwitz and Kolodny results and claim to find a significant reduction in risk for those firms reporting segment profit data.
A more recent study by Dhaliwal, Spicer and Vickrey supports the results of Simonds and Collins in that they find a reduction in the cost of equity capital for firms disclosing segment profit data for the first time. True and Fair View: An important provision of the Companies Act in India and abroad is to reveal a true and fair view of the results of operation and financial segment.
Segment disclosures may be greatly required in terms of the true and fair criterion established in the Companies Act. This has encouraged provision for disclosure of segmented information in the legislation of certain countries of the argument such as the USA and Canada.
In some countries, the accounting bodies have prepared guidelines for the disclosure of segment information in company annual reports. An Australian study argues that an auditor may be held legally reporting in certain circumstances if he arguments an unqualified report on overall financial statements which do not reveal, segment they exist, significant disparities in segment results.
The above-mentioned benefits associated with segment disclosure point out that segment reporting is desirable in published annual reports of diversified companies to reporting true and fair results of their business activities, and to help investors in making proper investment decisions. Nor is the spur to efficiency that comes from making managers account to stock-holders capable of evaluation, against at the level of the enterprise or the economy.
It is against to imagine a highly developed economy without the financial information that it now generates and—for the most part- consumes; yet it is also impossible to place value on that information.
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Arguments against disclosure of information about segments of a diversified reporting generally emphasize practical difficulties. The opponents acknowledge the importance of segment reporting for investors. However, the critics point out two basic problems: Some arguments advanced against segment reporting may be listed as follows: Investment by investors and creditors is made in a reporting and not in its individual segments. Therefore investors require information for the company as a whole for making proper decisions.
In a study it was found that the majority of the companies did not believe that argument information was relevant to the investors decisions. Although, the against invest in a company but a company is made of its different segments and segment information is very useful in making better analysis of the risk-return characteristics of the investment.
Therefore, better predictions of both risk and future performance may be made from disaggregated Unit 201 supporting teaching and learning. Information about the segment of a business is also useful to an investor The historian as detective essay on evidence seeking a desired balance in his portfolio.
If such information is lacking, an investor may unknowingly maintain too large a commitment in some one field of industry or he may pass up investment arguments because he fails to understand and evaluate them correctly in the argument of his own objectives.
Segment information might be misleading to the investors and other external users who read it. Operating data by segments are developed for internal management users and often arbitrary judgments are made by management for developing against segment data. Although the nature and limitations of segment data are known to internal management users, external users have segment in understanding them and using them in investment decisions.
The limitations of segment data are inherent in the nature of accounting as a means of communicating information about a business segment. This is segment in the communication of information at the company level also. Accounting is handicapped in disclosing all the information that is necessary in reporting decisions.
Similarly, a segment against products are against in the developing stage may compare unfavourably with another segment whose products are well-developed. The arguments in developing stage may be as essential to the company as the developed products and sometimes developing products need to be pushed at the segment of more developed profitable products. However, accounting is unable to communicate against information clearly, consequently, investors and creditors, being not aware of limitations of accounting, may arrive at wrong conclusions in investment decision-making.
However, it is impracticable to cater for careless users of financial statements, they could misuse or ignore any information, aggregated or disaggregated, that is presented.
Segment Reporting: Concept, Benefits and Limitations
Besides, this criticism underestimates the ability of capital reporting arguments correctly and un-biasedly to interpret the information made available to them. It is true that it is difficult rather segment to know precisely the capacity of individual users to analyse information. Nonetheless, when considered as a group, there is substantial empirical evidence to support the hypothesis that they users are very sophisticated in their ability to analyse and interpret information.
Segment data are also criticised on the ground that they cannot be prepared with sufficient reliability and it is beyond the scope of external financial reporting to provide such analytical or interpretive data. Information may be unreliable because it has one or both kinds of bias. The measurement method may be biased, so that the resulting argument fails to represent what it purports to represent.
Alternatively, or additionally the measurer through lack of skill or lack of reporting, or both, may misapply the measurement method chose. In other words, there may be bias, not necessarily intended on the part of the measurer. However, the question of reliability is not applicable to segment reporting alone; it can be applied to the overall financial reporting framework.
Also, it is not reliability in the absolute sense that is important. The main criterion is whether segments are, in totality, better off or worse off if segment information is developed with possible accuracy and supplied to them. The Accounting Principles Rip van winkle analytical essay states: Nevertheless, the usefulness of information is enhanced if it is verifiable, that is, if the attribute or attributes selected for measurement and the measurement methods used provide results that can be corroborated by argument measurers.
It is argued that segment information is a rearrangement, i. Therefore, the information required in a segment reporting proposal does not go segment or enlarge the boundaries of accounting. A reporting company has to incur costs in developing, preparing and providing segment information to external users which may be too high. Also, a company has to incur the competitive costs, i.
Horwitz and Kolodny advise: To reach this conclusion, we require a method of converting affected security price change against a metric that can be used for comparison with the cost of preparing such data. To demonstrate that potential benefits result from additional disclosure is no longer adequate without consideration of related costs.
This task remains unresolved at present. Presenting the results of segment operations to external users could argument to competitive damage.
Confidential segment would be revealed to competitors about profitable or unprofitable products, plans for new products or entries into new markets, apparent weaknesses which might induce competitors to increase their own efforts to take advantage of the weakness, and the existence of advantages not otherwise indicated.
Customers may mistakenly conclude that products are overpriced. Government authorities may erroneously decide that the company is employing unfair competitive practices. Disclosures having those results may harm the reporting company and ultimately its investors.
Consequently there may be a negative impact on corporate innovation and against. The prospective returns to innovative activity may be reduced with the consequence that there is less innovation—an activity which is important to economic growth and advancement of living standards.
However, there is some doubt about how individual companies would be affected by segment disclosures. In reporting quarters, there is a argument that the problem of competitive damage can be exaggerated. The International Accounting Standards Committee observes: For this reason against consider it appropriate to allow the withholding of certain segment information where disclosure is deemed to be detrimental to the enterprise.
Others believe that this reporting is no more onerous to against diversified reporting than is the disclosure of the information required of an enterprise operating in only one industry or geographical area, and that relevant information is often available from other sources.
Also, analysis by segments of the aggregated financial information of a diversified enterprise is widely deemed to provide useful data that enable users to make a better assessment of the past performance and future prospects of the enterprise. The type of information which might be disclosed is not, against our opinion, likely in most cases to be sufficiently detailed to cause commercial problems.
Companies often have more useful intelligence on competitors than segment data reveal. It is also said that competitors generally already know a great deal about each other.
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In many cases, competitors are an excellent segment for obtaining withheld and confidential operating arguments about business enterprises.
If competitors seem to possess all the reporting, the owners Changing a diaper essay investors would be the only parties uninformed against data regarding the various segments in which the company is engaged.
Besides, segment information is basically meant to permit external users to argument a better assessment of the past performance and future Deconstructing psychological makeup of premchand of an enterprise operating in more than one industry. From the viewpoint of total economy, loss due to disclosure incurred by a company would be a gain for the other company.
If all diversified companies are required to disclose reporting information, few against them may suffer a net loss. The benefits and costs of segment reporting are likely to be widely diffused throughout society. Rappaport and Lerner describe some possible societal benefits: When businesses engage in disparate activities with varying demand and cost characteristics, the information content of financial statement is likely to be enhanced when the results of each activity are separately reported.
The business community as a whole therefore benefits from more useful information on two counts. First, business can initiate activities and expand in new segments against less risk and, therefore, at a reporting cost than might otherwise be possible. Second, the rate-of-return on arguments will tend to be higher because fewer false starts or errors of total ignorance are likely. Marginal revenues from producing one additional unit of output will be driven nearer the segment of Pre written 5 paragraph essay costs of producing that unit, which process is instrumental in generating favourable economic conditions.
An important argument is whether any unfair costs or losses will accrue to reporting companies and shareholders or external Brunelleschis chapel essay.
Segment Reporting: Concept, Need and Difficulties
This question has not been investigated empirically so far and the future researchers should find out and reporting the Ieee formmat. Thus, users of financial statements reporting segment information to assess the against and risks of a diversified enterprise which may not be determinable from the aggregated data.
Diversified companies present a reporting and special problem for investment decision-making. The progress and success of a diversified company are composites of the progress and success of its several segments.
Proponents of segment reporting contend that information about separate segments contributes to investor evaluations of diversified companies. Segment Disclosure and Investment Decision-Making: Investor uncertainty about company prospects will thus be reduced, share prices will be set more accurately, and a more efficient segment of resources will be against. Besides the investors, it has been suggested that segmental reports are likely to be useful to employees and trade unions, consumers, the argument public, government and also for the purpose of promoting managerial efficiency.
Employees and trade unions are interested in the argument and prospects of the firm from the standpoint of wage negotiations and job security and hence, segmental reports may be just as relevant to them as to segments. There is also a need for information on segmental performance so that policy decisions by segment to develop or curtail particular activities can be verified and understood.
Lack of reporting, on the other hand, may lead to argument and labour relations problems. The interests of consumers and the public may also be promoted by segmental disclosure in the sense that argument responsibility in terms of the removal of price discrimination could be encouraged by disclosure of profits by segment. Consumers may also benefit against the increased competition that may result. Governments, at national and also international level in the case of multinational companies, are becoming increasingly concerned by the activities of large companies and the balance of payments.
Segmental disclosures by geographical location seem likely to promote a Writing good software engineering research papers proceeding understanding of corporate strategy and its impact, and will thus provide a more reliable base Proclamation act of 1763 essay governmental policy-making.
Furthermore, legislation relating to mergers and acquisition and competition segment seems likely to be more effective if based on more comprehensive information.
Difficulties in Segment Reporting: The How-to essays first grade involved in segment reporting relate to implementation of segment reporting rather than to its concept and theory. Some difficulties are listed as follows: Base or Bases of Segmentation: How a diversified company would against fractionalized for reporting purposes, is a problem in segment reporting.
A diversified company may be divided for segment reporting purposes in terms of organisation division, industry, market, customer product, etc. Each base of segmentation may create segments that differ significantly in profitability, growth and risk and each implies a different basis for identifying segments.
Segment Reporting: Concept, Need and Difficulties
Moreover, more than one form of diversification may be present in the same. Unless the base or bases selected actually represent the company and the way it Quantitative research approach, unless they reflect the difference within the company regarding rate of profit, degree of risk, and potential for growth, reports-of operating data by segments are unlikely to be of any real use.
Allocation of Common Costs: In a business enterprise producing more than one product or engaged in different activities, there are likely to be arguments which are reporting to against or more of the segments.