As the disclosure requirements of SFAS 131 and IAS 14R are relatively new, ac-
ademic researchers have not yet had an opportunity to comprehensively examine the
predictive ability and value relevance of these new standards. However, as prior re-
search has provided evidence that segment data is useful, it is logical to anticipate
that future research will support analysts’ view that the segmental data provided by
SFAS 131 and IAS 14R is indeed highly useful. For example, prior research indicates
that earnings forecasts based on line of business data are more accurate than those
based on consolidated earnings.^24 While results have been mixed, recent research
also indicates segment based forecasts outperform consolidated based forecasts. Ad-
ditionally, there is some evidence that disclosure of both line of business and geo-
graphic segment data result in a decrease in market assessments of risk of the dis-
closing company. Research also supports a significant relationship between
geographic disclosures and market risk assessments.
(b) Costs of Segmental Disclosures. Although well-defined segmental disclosures
might help potential investors better understand the firm and thus make better in-
vestment decisions, there are costs associated with providing these disclosures exter-
nally. A major cost that must always be considered in relation to requiring added dis-
closure is the cost of compiling, processing, and disseminating the information.
However, in regard to SFAS 131 and IAS 14R, most of the required disclosures are
already collected internally. As operating/primary segments are based on the com-
pany’s organizational structure, management already receives considerable informa-
tion on these segments. Hence, it is easy for management to disclose a subset of that
information in the annual report.
A second and more persuasive argument is the cost of competitive disadvantage,
especially in the disclosure of profit information. This argument is posed more by
MNCs than any other argument. The reason for the concern is based on the wide dis-
parity of standards and practices across and within countries. Another competitive
problem exists for firms that are single-industry firms operating in different geo-
graphic regions. By providing sales and profit information for different geographic
regions, they might be allowing more diversified competitors to learn a great deal
about them.
22.7 VOLUNTARY DISCLOSURES. In addition to the disclosures currently required
by FASB Statement No. 131 and/or IAS 14R, other pieces of segmental data may be
useful to financial statement users. Yet, research^25 indicates that voluntary disclosures
provided by companies applying SFAS 131 and IAS 14R, respectively, are very limited.
As noted previously, IAS 14R requires the disclosure of segment liabilities. In the
Exposure Draft preceding SFAS 131, the FASB (1996) stated that disclosure of seg-
ment assets and liabilities together with interest revenue and interest expense in-
cluded in segment profit/loss would provide information about the financing activi-
ties of the segment, but SFAS 131 does not require U.S. companies to report segment
liabilities. A study^26 found that very few of the U.S. based Global 1000 companies
voluntarily disclosed segment liabilities. Hence, in regard to segment liabilities, with
22.7 VOLUNTARY DISCLOSURES 22 • 21(^24) See Radebaugh and Gray, 2002 for a review of this literature.
(^25) Street, Nichols, and Gray, 2000 and Street and Nichols, 2002.
(^26) Street, Nichols, and Gray, 2000.