3(b). Basis of Disaggregation
Most [equity sell-side analysts] reports contain both historical and forecast quarterly and annual income statements or summary information. The most common approach to estimating future EPS is to disaggregate the company into its constituent LOB's and/or geographic regions (both of which are frequently more detailed than GAAP requires), and to then develop forecasts of the performance of individual units which are reaggregated for a company EPS estimate. [Also included in 1(b), 1(c), and 11(e)] [PREVITS, p. 15]
__________
[Context] The following brief summary of the topic "Disaggregated Financial Statements," is from the "Executive Summary" of the report the AIMR's Financial Accounting Policy Committee (FAPC):
Analysis of a complex economic entity requires information about the workings of each of its components. There is no disagreement among financial analysts that segment information is totally vital to their work. There also is general agreement among analysts that the current segment reporting standard, FAS 14, is inadequate. Recent work by a subcommittee of the FAPC has confirmed that a substantial majority of analysts seek and, when it is available, use quarterly segment data. [Also included in 3(a) and 3(c)] [AIMR/FAPC92, p. ix]
The FASB recently initiated a project on disaggregation for which AIMR is providing partial financial support in addition to its overall endorsement. We do not wish to prejudge the results of research now in its initial stage, but we do suggest an avenue for the FASB's researcher to explore. We believe that segment data are most useful when they depict the way in which the enterprise itself is organized and managed and we urge the FASB to seek ways to promulgate a standard that produces such a result, despite the several difficulties in doing so that we acknowledge and discuss in the report. [Also included in 3(a) and 3(c)] [AIMR/FAPC92, p. ix]
[Context] It indicates the scope of the discussion of the topic and lists the report's major recommendations, providing an introduction to the following excerpts from the report.
In our previous discussion of quarterly segment reporting we alluded to the needs of analysts for disaggregated financial data. It actually is more than necessary. It is vital, essential, fundamental, indispensable and integral to the investment analysis process. Analysts need to know and understand how the various components of a multifaceted enterprise behave economically. One weak member of the group is analogous to a section of blight on a piece of fruit; it has the potential to spread rot over the entirety. Even in the absence of weakness, different segments will generate dissimilar streams of cash flows to which are attached disparate risks and which bring about unique values. Thus, without disaggregation, there is no sensible way to predict the overall amounts, timing or risks of an complete enterprise's future cash flows. There is little dispute or controversy over the analytic usefulness of disaggregated financial data. [Also included in 3(c)] [AIMR/FAPC92, p. 39-40]
There is much controversy over how disaggregated data should be reported. How shall it be classified: by legal entity, by line of business, by geographic area, by type of customer served, by activity (manufacturing, marketing, etc.), by Standard Industrial Code (SIC) number, or any one of many other possibilities? In what degree of detail shall it be presented? How extensive can detailed disclosures be made before financial statement users are so overcome with minutia that they not only cannot comprehend them, but they also lose sight of the overall portrayal of the enterprise? [Also included in 3(c)] [AIMR/FAPC92, p. 40]
In an ideal world, an enterprise would report disaggregated data in a format that coincides with and reflects how it is organized and managed. It also would disclose the source and nature of risks that are expected to affect, either positively or negatively, the amounts and timing of its future cash flows. These risks may be associated with geography, product lines, markets, or a variety of other classifications. The enterprise would reveal the boundaries between its assorted legal-entity constituents, thus divulging restrictions on the claims of creditors and movements of cash within the entity. Finally, all of the disaggregated data disclosed would mirror the way the business is organized and managed, while at the same time providing comparability to the disaggregated data of other enterprises. [Also included in 3(c)] [AIMR/FAPC92, p. 40]
In the real world, obviously not all of these objectives can be achieved. They require trade-offs and choices. From the standpoint of financial analysis, we believe priority should be given to the production and dissemination of financial data that reflects and reports sensibly the operations of specific enterprises. If we could obtain reports showing the details of how an individual business firm is organized and managed, we would take more responsibility on ourselves to make meaningful comparisons of those data to the unlike data of other firms who conduct their business differently. We realize the extraordinary difficulty of mandating a disclosure standard while maintaining the flexibility of each enterprise to present its own circumstances and organization, but we believe it to be a commendable undertaking. [Also included in 2(c) and 3(c)] [AIMR/FAPC92, p. 40]
__________
[Context] Meeting of the Investor Discussion Group on October 16, 1992. During the preliminary discussion on the objectives and approaches of investors and the types of information they use, some investors made comments pertinent to the basis of disaggregated information.
Participant I-12
Segment reporting is something that is absolutely critical to an analyst. For example, for [a large, diverse financial institution], the cash flows generated by the credit card business have entirely different sources and uses than the cash flows generated by the securities business. It's very difficult from what we see to find that out and find a base from which we can forecast. [Also included in 1(a) and 3(a)] [TI 10/16, p. 4]
Participant I-5
More segment breakout is a critical thing (consistently presented). Also, as for information that you can get externally that could be provided in the financial statements, if you can get the aggregate statistics for an industry from the government or some statistical service or some trade organization, I think you're better served doing that than relying on the company's annual report, because you are going to some kind of an objective benchmark outside the company. [Also included in 1(b) and 13] [TI 10/16, p. 20]
Participant I-12
I head a subcommittee for the AIMR reporting on financial services. What I find interesting going through that exercise every year is that, if you have a diversified financial company like [names deleted], those companies do not report segment data that is comparable to the rest of that particular industry. It has started to get better but the companies are concerned with the cost of preparing that data. But yet, you know they already have the data, they just don't want to publish it. It's really important that when they publish segment data that it bears some resemblance to the industry data in which that segment is competing. [Also included in 3(a)] [TI 10/16, p. 21]
Participant I-7
We don't get good FAS 14 disclosure in the annual report and we get less from most of our companies in the quarterly reports. FAS 14 is just an abomination at least in my industry from a quarterly point of view. I also heard the argument about the expense of creating this information. There isn't a reasonable size company that doesn't have internal reporting and the people inside the company get a report card, if not monthly certainly quarterly, and that's the kind of information that is readily available that I would like to see. One of the things that should be discussed somewhere is: what the information that we as outside investors should not be permitted to get from a competitive point of view? They all know internally what their competitors are doing and yet they don't want to provide certain information to us for competitive reasons. It's vital that the accounting profession decide what kinds of information are competitively harmful and others that aren't. [Also included in 1(b), 2(d), 3(a), 3(d), and 11(c)] [TI 10/16, p. 21]
__________
Participant I-12
Basically, I've been viewing LDC as a separate segment because sometimes the market ignores the LDC for some period of time and then it may come back to haunt you. [Also included in 1(b)] [TI 10/16, p. 40]
__________
Participant I-6
In line with that, I adjust earnings in those situations too because what you really have done now is to set up a new segment of business which is a financial business, not an operating business. So some companies that deals in commodities really have two lines of business; one is making the product, the other one is the financial end of selling it to a financial market and using financial tools to lock in a given revenue stream. Completely two separate businesses that should be reported under segment accounting, completely outside the traditional revenue recognition cycle. [Also included in 1(b)] [TI 10/16, p. 43]
__________
Participant I-1
Coming back to segments. Even within an operating segment, you want to break that molecule down into its atoms. To estimate the ROA for that company, you have to make some guesses on mix; invariably, there are higher margin and lower margin products in there which become a critical "guesstimate" for that model. Anything you can do in that regard would be helpful. [TI 10/16, p. 56]
__________
Committee/Staff/Observer
I heard people say that they would like to have more segment information presented the way the company manages its business. But I also heard people say they'd like to have segment information comparable between companies. It seems to me that is contradictory. How do you reconcile that contradiction? [Also included in 2(c)] [TI 10/16, p. 60]
Participant I-7
When I talk about comparability, I'm talking about accounting elements, I'm not talking about segment information. At least in my industry, they're not producing a common product; you shouldn't force two companies to look at their segment reporting in the same way. [Also included in 2(c)] [TI 10/16, p. 60]
[Context] Meeting of the Investor Discussion Group on December 9, 1992. The first part of the meeting was devoted to the topic of disaggregated information.
Participant I-7
The guidelines have to be tightened up and there has to be additions to the guidelines. For example, where you have a series of businesses where 20% of the sales or earnings of the business comes from a specific unit within the total, that should be shown separately. You can then move on from that point to make FASB 14 more informational than it currently is. [Also included in 3(a)] [TI 12/9, p. 5]
Participant I-6
I would go further and lower the 20% to 15% because if a company has 10-15 units, it is hard to get a 20% unit; the 20% would only apply if you have a few dominant units. [Also included in 3(a)] [TI 12/9, p. 5]
Participant I-7
The answer is relatively easy. I want a company to report to me the way they report internally. I don't want to spend months or years trying to understand that. [Also included in 3(a)] [TI 12/9, p. 6]
Committee/Staff/Observer
The problem with that is that we hear obvious complaints about FASB 14; you want more segment reporting and you also want more uniformity so there can be comparability. There is a dichotomy there: how can different companies report in a way that gives you comparability and at the same time you want the companies the report the way they run their business. Those are two conflicting thoughts. Can we discuss that dichotomy? [Also included in 2(c)] [TI 12/9, p. 6]
Participant I-4
It's a conundrum. From our perspective, we would like to have everything we can get. From the perspective of most public companies, I'm not certain they would like to give us all the information for a myriad of reasons, competitive and others. I would tend to think that most companies believe that, while it's important to have Wall Street coverage, more information does not necessarily means higher valuations. [TI 12/9, p. 6]
Participant I-11
I think there are some managements that want a lot of Wall Street attention when their business is good and want to hide when it's bad. But to the question at hand, I agree with [participant I-7]. The idea of trying to force every company's financial statements into the same mold fails to recognize that every company is not the same; in fact, no two companies are the same. Our job is to understand the differences between two similar companies so as to be able to decide which is a superior investment and which is the inferior investment. I think we get into more trouble trying to force them all under these rigid molds than we do recognizing those differences. If management is truly the most important thing in evaluating a company, then we want to understand as clearly as we can how management thinks about its businesses. A good place to pursue that is the way management gets information about its businesses. [TI 12/9, p. 6-7]
Participant I-7
I accept differences, even in the same business, for the companies that I look at. The quality that I demand is information. I want the information so that I can understand those differences and make as clear an interpretation as I possibly can. On my side, I will tell the company that there is information that we, in the public eye, should not receive; union information, early pricing, product strategies, new products, and the like. But there isn't a medium to large size company that doesn't know what their competitor does within a very reasonable order of magnitude. And any analyst around this table will tell you that you tend over time to find out more about a company from the competition than from the company itself. [Also included in 2(c) and 3(c)] [TI 12/9, p. 7]
Committee/Staff/Observer
Those of you who follow public companies, are you also critical of the combination of FASB 14 plus the line of business disclosure required by the SEC? Do the two disclosures taken together get you closer to what you want? [TI 12/9, p. 7]
Participant I-7
FASB 14 is a good start; it just doesn't go far enough. Particularly for the large companies that I follow or the small and medium-sized companies that are reasonably diverse. [TI 12/9, p. 7]
Committee/Staff/Observer
Would I be correct in concluding that on the direct question as to whether you want more information based upon the way the company is managed or make all companies fit in into some kind of formula for comparability, you clearly choose how the company is managed. Anybody disagrees with that? [TI 12/9, p. 7]
Participant I-9
I don't disagree but I think we're trying to give a one-dimensional answer to something that is a fairly broad range. If you're looking at [one company] or [another company] where they move a drug from being prescribed by a doctor to the consumer sector where you can order it, what we want is really comparability, to have the statements recast. Or if they lump a major profit center like Japan with a loss operation in Korea or Thailand, we don't want them to understate the results of Japan and average it out. On the other hand, I remember looking at [a third company] years ago when I was an insider. We got consolidating statements; they had a sugar company, a movie company, a financial services company, a shoe company. They could report any number that they wanted on a segment basis for a period of a year or two and there was no way that anybody on the outside could lay a glove on that disclosure. But the information that was published was misleading; it was worse than if you didn't have it and I'm sure the company did it that way deliberately. On the other hand, if [a fourth company] has a huge wholesale business with low margins and big sales, I would hope that it would be segmented out as a different category to give a clearer picture. [TI 12/9, p. 8]
Participant I-8
If you're looking for some models, there is a company that is a world leader in its business and year-in year-out gets the award in its category for the best annual report; it's a Long Island company called [name deleted]. They abide by the spirit of FASB 14; they break the information down into three major market segments and, within the text of the report, each of those segments is further broken down in the way they are organized. I would recommend that annual report to you as a model; clearly the best annual report I have ever seen by any company. [TI 12/9, p. 8]
Participant I-11
I second [participant I-8] on that one. [TI 12/9, p. 8]
Participant I-8
They also mention their major competitors, what they do well, what they do poorly, what the company does well, etc. It's everything you would want. [TI 12/9, p. 9]
Participant I-6
As a bare minimum, when management is talking about its businesses in the shareholders' letter, you should be able to reconcile those comments to the financial statements. To talk about your business as you see it in the letter and then not have any detail behind it in the financial statements is absolutely wrong. Second, I wish the FASB would take away the option of reporting segment information quarterly; if it's worth doing annually, it's worth doing quarterly. [TI 12/9, p. 9]
Participant I-7
Information about area or market line are also important. About 3 or 4 years ago, there was a big flap over a company called [name deleted]. There was a major surprise that so much of the offshore profits came from Brasil. Of course, Brasil was having one of its usual currency problems. Most of the companies will break out North America, Europe, and ROW or other. With the currency problems today, I submit that it's not enough. [TI 12/9, p. 9]
Participant I-6
Another company that fits that same example is [name deleted]. It was a big surprise to the investment community in 1989-90 when earnings went down that something like 80% of their prior year earnings had come from alumina sales out of Australia. You need to break it out by country and by more segments. [Name deleted] is not just an aluminum company; very little of their profits actually come from making aluminum products. [TI 12/9, p. 9]
Committee/Staff/Observer
I would like to ask whether you agree with the following statement: "The purpose of segment reporting is to present disaggregated information about those portions of the business having significantly different opportunities and risks relative to other portions of the business, while grouping information about portions of the business with similar opportunities and risks." If you don't agree with the statement, please help us understand what we have missed. [TI 12/9, p. 9-10]
Participant I-6
It depends how you define opportunities and risks. I would hate to see gold and copper operations that have similar sales opportunities and risks lumped into one mining segment, instead of breaking down the information by different commodities and operations. Copper is a lot different than gold; what could happen is that gold would go to $800 an ounce, copper to 20 cents and on average, the company is doing OK. [TI 12/9, p. 10]
Participant I-11
Well, there are clearly different risks and opportunities there, aren't there? [TI 12/9, p. 10]
Committee/Staff/Observer
So that would meet the definition of different opportunities and risks? [TI 12/9, p. 10]
Participant I-6
I think management would define them as the same opportunities and risks. They are all mining and the risk is the commodity price. [TI 12/9, p. 10]
Committee/Staff/Observer
I would like to ask whether you would define those commodities as having the same opportunities and risks? [TI 12/9, p. 10]
Participant I-6
No. [TI 12/9, p. 10]
Committee/Staff/Observer
Is it fair to say that you would agree with the concept of our definition but your point is not to let a rule this vague because management will interpret that rule as they deem fit? [TI 12/9, p. 10]
Participant I-6
Exactly. [TI 12/9, p. 11]
Participant I-7
There are generic terms in any industry, especially electrical equipment. For motors, you can go from fractional on the AC side to 50,000 horse power for drag lines on the DC side and you get a category called motors. You can do the same thing for transformers; the kind outside your house as opposed to the kind that is outside the power station and the demands are totally different and the served markets are also different. [TI 12/9, p. 11]
Participant I-12
The notion of opportunities and risks makes a lot of sense, but I would also focus on the different characteristics that affect profits. For example, processing transactions has an entirely different nature than lending money. Ultimately, I guess it comes back to opportunities and risks but I want to get that notion of fundamental characteristics out on the table. [TI 12/9, p. 11]
Participant I-5
Opportunities and risks is such a broad definition. What are you really saying by getting that far? [TI 12/9, p. 11]
Committee/Staff/Observer
On page 7 [of the meeting materials], we talk about bases of disaggregation other than by industry segment. We understand that disaggregated information by industry segment is critical to your analysis but we are also aware that, in certain cases, in addition to industry segments, investors may require disaggregated information based on other bases. These bases may be important drivers of the opportunities and risks faced by the business. On page 7, under question 4, we list several bases for disaggregation. For each case, we would like to know under what circumstances is the information critical and, if it is, how often do you encounter these circumstances? [TI 12/9, p. 11]
Let's take them on one at a time. Geographic information by location of operations? [TI 12/9, p. 12]
Participant I-13
Yes. For example, a gold mining company with operations worldwide; in North America, where political risk is nonexistent or very low, versus operations in Papua New Guinea or South Africa, where political risk might be higher. That's important for investors to know. [TI 12/9, p. 12]
Participant I-12
I agree. It makes a big difference whether you're making a loan to Brasil or a loan in New England, although some would say that's the same. In the securities business, there is also a big difference on the spreads you get in Hong Kong from those in the New York Stock Exchange. So you do have very important differences by geographic location. [TI 12/9, p. 12]
Committee/Staff/Observer
How about locations by markets? Not where the physical plants of the company are located, but the location of its markets? [TI 12/9, p. 12]
Participant I-8
I think that's important too. Some companies give you US or North America, Europe, and the rest of the world, some will give you Asia Pacific, and others will go further and break that down into Japan and the rest of Asia Pacific. The more you get, the better it is. [TI 12/9, p. 12]
Participant I-7
To come back to foreign currencies, you better know where your major markets are. You better know what your transaction prices are. [TI 12/9, p. 12]
Participant I-5
The distinction between location of operations and location of markets depends on what piece of financial information you are looking for. If you're looking at revenues by area, you're talking about markets; if you're talking about assets by area, you're talking about locations. [TI 12/9, p. 12-13]
Participant I-6
I think information by markets is important. For example, a company as [name deleted], which is basically a metal and mining company, also has a big specialty chemical operation; they do give a segment breakdown on specialty chemicals but that's all you get. If you visit the specialty chemical group, they talk about their European operation which is major, their Asia Pacific operation which is major, and some in Mexico and Canada. They will give you Asia Pacific sales which include all the copper, zinc, specialty chemicals and everything; this is a meaningless number. [TI 12/9, p. 13]
Participant I-9
The geographic breakdown by markets is absolutely crucial for the health care industry because the pricing in the different markets is different. It's probably the most important information for a pharmaceutical company. In this case, you don't care where the product is produced, but you care where it's sold. [TI 12/9, p. 13]
Committee/Staff/Observer
How about regulated versus non-regulated? [TI 12/9, p. 13]
Participant I-11
Are there any non-regulated businesses? [TI 12/9, p. 13]
Participant I-7
That brings up an interesting point. Most people understand which industries are alleged to be regulated and which are not. However, most or a number of industries that are clearly not considered regulated have very stringent legal regulations. The best example of that is the media business which is very competitive; 12-15 years ago, the fencing rule promulgated by the FCC did not allow the major networks to get after syndication dollars which is a $5.5 billion a year pot. There is a lot of action going on in the courts now to overturn that regulation. [TI 12/9, p. 13]
Participant I-12
Most of the companies I cover are highly regulated and some are just ridiculously regulated. The interesting thing about this is that you have a single business which will have competitors, some of whom are regulated and others of whom are not regulated and abide by different rules. My favorite example goes back to bank and bad loans. When a bank has a bad loan, 100% of the loan has to be noted as not paying interest. Whereas [name deleted] had a loan for $60 million of which $15 million was classified as non-performing; under their reporting rules, that $15 million is their estimate of their potential ultimate loss. Whenever I see anything from them related to loans, I just multiply by 4! I don't know if it's an accounting profession problem but this is an issue, and I doubt that the financial services industry is the only industry with that kind of problem (differential accounting for the same kind of situation). It's very important in terms of line of business reporting. [Also included in 2(c)] [TI 12/9, p. 14]
Participant I-7
That's why I argue for the allowance of differences so long as there is disclosure. [Also included in 2(c)] [TI 12/9, p. 14]
Participant I-5
The distinction between regulated and non-regulated intertwines between borrowing unit and legal entity. If you take regulated to mean a business that is regulated at a financial level (like a casino precluded from upstreaming dividends, or insurance companies), they are different borrowing units and different legal entities. [TI 12/9, p. 14]
Committee/Staff/Observer
I don't think that that was what we meant by regulated versus non-regulated. It's more like a utility business where rates are fixed by public service commissions. [TI 12/9, p. 14]
Participant I-6
Could we include in that definition environmental regulations? And if so, then we got smelters that are built in Chile versus Nevada. [TI 12/9, p. 14]
Participant I-11
My earlier remark was not entirely facetious. The reality is every company faces some level of regulation and it's a continuum. You have to be real careful; you may be opening a can of worms if you're trying to require some disclosure based on regulated versus non-regulated. We as analysts probably have to be more scrupulous than I suspect most of us have been in being aware of these regulations that affect the companies we follow. [TI 12/9, p. 15]
Committee/Staff/Observer
I think what we had in our minds when we raised this issue is a company that would be perceived by the public to be regulated, like a bank or a public utility company or an insurance company, but that may have a significant portion of its operations that are not regulated, and whether it would be important in that circumstance to segregate those operations and provide the kinds of disclosure we have been talking about. [TI 12/9, p. 15]
Participant I-12
In most of those regulated businesses, I can go to the FDIC and get a Call Report on a bank any day of the week. I'm not sure that it is an appropriate basis for determining line of business reporting. If you ask [two companies] to report their regulated banking activities versus anything else, you would get the same information you are getting today, which is sort of no-segment kind of information. I have trouble with that. [TI 12/9, p. 15-16]
Participant I-7
The answer to your question is absolutely yes. What you are seeing increasingly is regulated industries moving outside of their basic business. [TI 12/9, p. 16]
Participant I-9
I used to cover the telephone industry and I think it's very important to have their non-regulated revenues shown. I don't think the profits are important because there is too much shared cost; the profit figures can be manipulated. [Name deleted] is a case in point. [TI 12/9, p. 16]
Committee/Staff/Observer
How about the legal entity basis for disaggregated information? [TI 12/9, p. 16]
Participant I-8
If you mean all the separate corporations, I think that would be too cumbersome. [TI 12/9, p. 16]
Participant I-6
I'm in his camp. I'd love to see it because it would force the companies to clean up a lot of stuff and do away with paperwork. Look at [name deleted] with 1,000 separate legal coal companies. [TI 12/9, p. 16]
Participant I-7
Where this really pays to know was in the [name deleted] era where, if you were in a certain state, it was either easier or more difficult for takeovers. [TI 12/9, p. 16]
Participant I-4
I think you're talking about legal entities that are constructed for tax reasons in a lot of cases. [TI 12/9, p. 16]
Participant I-12
There are legal entities that are constructed for regulatory reasons. I once looked at the 200-page [company] document that listed all the legal entities that constituted [that company]; it's a daunting prospect. [TI 12/9, p. 17]
Participant I-4
Who could possibly be interested in that? [TI 12/9, p. 17]
Committee/Staff/Observer
The banks that loan these companies money usually loan to legal entities as opposed to economic entities. [TI 12/9, p. 17]
Participant I-5
So you're getting to borrowing-unit-legal-entity. [TI 12/9, p. 17]
Committee/Staff/Observer
If you take the legal entity concept and take two cuts at it, parent company versus all of its subsidiaries, would you change your answer? [TI 12/9, p. 17]
Participant I-6
I would as long as the subsidiaries are classified into industry segments. Even without that, I probably would. But I wouldn't want to see all the legal entities, it's too cumbersome. [TI 12/9, p. 17]
Committee/Staff/Observer
The parent company could be a holding company and, in order to pay dividends, might have to get dividends up. European companies conventionally disclose parent companies; we do not do that in this country. [TI 12/9, p. 17]
Participant I-12
We do that because there is a requirement. There are not many companies that are true holding companies where you have a non-operating holding company that holds subsidiaries. Banking is most often where you find it and maybe some public service companies. They are required to report parent-only statements separately under SEC guidelines. [TI 12/9, p. 17-18]
Participant I-11
There are a number of reasons for which companies establish legal entities. Many of those are not economic reasons; they are regulatory, liability, tax. I'm not sure those legal entities are terribly relevant to us. We're more interested in the economic units. I can think of two companies, one which has its operations organized into subsidiaries, the other into divisions; totally different legal structures for the same economic structure. [TI 12/9, p. 18]
Committee/Staff/Observer
How about individual product or product group, even within an industry? [TI 12/9, p. 18]
Participant I-13
Yes. [TI 12/9, p. 18]
Participant I-8
That would cover cases where a company says it's in the electronics business but it really is in 3 different businesses within that. [TI 12/9, p. 18]
Participant I-13
I cover a minuscule industry called the precious metals mining business. I have been on a crusade for some time to get gold mining companies to adopt a standardized quarterly reporting format. That would save a great amount of time to analysts because they would know where to look to find the pieces of information they're interested in. It would be easy to impose a standardized format for an industry like mine because the companies are likely to be more uniform in the nature of the business that they're in. In that standardized format, the companies would give us cost by $ millions and revenue per product. In that way, you can build a quarterly income statement based on production data. [Also included in 3(e) and 11(c)] [TI 12/9, p. 18]
Participant I-12
I have a different problem with the companies that I cover; how do you define the product, product group, or even industry? For example, under an SIC code basis, I believe that credit card businesses carried on by banks are still classified as banking. We're in a world that's evolving where product and industry definitions are changing; it seems to me that the focus should be on the economic units and the fundamental operating characteristics and how they relate to revenues and expenses. [TI 12/9, p. 19]
Committee/Staff/Observer
I skipped borrowing unit after legal entity. Any comments on how important is disaggregation information by borrowing unit? [TI 12/9, p. 19]
Participant I-6
I would have a little interest in it. The mining industry is global; when I look at a mining company, I would like to know whether project financing is taken out against one of the big profitable mines and not against the other less profitable mines. But it's not that big of a deal to me. [TI 12/9, p. 19]
Participant I-5
I follow distressed bonds; so for me it's absolutely critical. [TI 12/9, p. 19]
Committee/Staff/Observer
How about purchases from major vendors? [TI 12/9, p. 19]
Participant I-8
The only place where I think it could be crucial is if there were some exotic mineral that could only come from one place in the world. But other than that, I don't see the necessity for that information. [TI 12/9, p. 19]
Participant I-7
I think this is extreme; most companies have multiple vendors. I'm sure somebody could come up with one particular example; when it's so significant, one would like to see the disclosure. [TI 12/9, p. 19]
Participant I-8
You tend not to worry about vendors unless it's crucial. [TI 12/9, p. 20]
Participant I-6
I don't care if the information is there or not. I'd like to know but for a devious reason; Alcoa is the largest supplier of alumina in the world, so I know that [Company A] (3rd largest aluminum company in North America) buys 100% of its alumina from [Company B]. Since [Company B] doesn't give me any information, I would learn a lot from [Company A] disclosure. It would tell you a lot about the producing company that is burying the information. [TI 12/9, p. 20]
Participant I-11
I think the risk element is the key thing. The other side of the risk element is if you have major customers that could cause problems. [TI 12/9, p. 20]
Committee/Staff/Observer
The trouble is how do you define a threshold? [TI 12/9, p. 20]
Participant I-6
I would do it more along the materiality concept. If it's material, let's disclose it; then, we can debate materiality. [TI 12/9, p. 20]
Participant I-7
I would like to see sales to major customers. [TI 12/9, p. 20]
Participant I-8
There is already a requirement for that in FASB 14; I think when the sales represent 10% of sales. [TI 12/9, p. 20]
Committee/Staff/Observer
Other candidates for basis of disaggregation? [TI 12/9, p. 20]
Participant I-12
I mentioned operating characteristics but I'm not sure how you would make that a specific basis; that's kind of vague. [TI 12/9, p. 21]
Participant I-9
The accountants should put on the hat of somebody using those statements from the outside, and see if there is something that somebody trying to make security valuations would find misleading. You should not have any segments that blend a cash and carry business with a present value annuity stream because it's absolutely worthless. [TI 12/9, p. 21]
Participant I-6
This goes back to [participant I-7]'s earlier point; give us the information as you manage the company. If you do that, you have the data available every quarter. [Also included in 3(d)] [TI 12/9, p. 27]
Participant I-11
I don't agree with [participant I-9] on that. I am an advocate of having management report to me the way they manage their business. They have that information; the cost argument doesn't hold. And if they don't have it, then they're lousy managers and maybe I'm helping them out by forcing them to get the information together. [Also included in 3(d)] [TI 12/9, p. 27]
[Context] Meeting of the Creditor Discussion Group on December 8, 1992. Part of the meeting was devoted to the topic of disaggregated information.
Participant C-3
I think the way financial institutions have looked at the current segment reporting rules is that if I service a certain customer and provide different types of services to that customer, it's one segment, because it's one customer. And I wonder whether the rules ought to be geared to the types of services that are being provided and the types of revenues that are being generated. [Also included in 3(a)] [TC 12/8, p. 18]
Participant C-12
I don't have a good answer, but the information could be broken down by management reporting categories. That's ironic that when we look at a finance company report or a bank report, they're in one line of business; but if you talk to them, you talk to a half a dozen people, and they tell you about the different discrete businesses they are in. They're already preparing that information. [Also included in 3(a)] [TC 12/8, p. 18-19]
Participant C-4
One problem with segment reporting is that a lot of the companies that are required to report on a segment basis don't report internally on that basis. If we could somehow tie the corporate structure with subsidiaries and match that to the segments, it would be a lot more helpful for analyzing the segment results. [Also included in 3(a)] [TC 12/8, p. 19]
Participant C-9
I want to see if I understood you. You're saying that if you have a particular segment, you'd like to know what percentage is related to various legal entities? [TC 12/8, p. 19]
Participant C-4
Various subsidiaries, yes. [TC 12/8, p. 19]
Participant C-5
I guess from the bank credit standpoint, we typically lend at the operating company level. So the legal entity reporting is very important to us because we are lending to different legal entities. Where we did get in holding company credit in the past, we've actually pushed down to operating company levels. Invariably we deal with specialized companies (each company or borrowing entity is a specialized industry) so there are no segmentations within that. We really do need legal entity reporting. And while segment reporting isn't bad, I don't think it really helps us as much as some of the other items. [Also included in 3(a)] [TC 12/8, p. 19]
Participant C-11
I think there is a conflict to think about between a legal entity and business segment as you look at how different people analyze things, and not just debt versus equity analysts, but people with different interests, maybe. I think there are times when a legal entity does embrace a business segment, and it's certainly the most logical thing to deal with. But there are other times when not all of an operating business segment is included in a legal entity framework; there's part of it there and part of it somewhere else. I think that you have to understand the segment operations broadly, and how they all fit together. You can get too technical just by looking at a legal entity if it does not embrace the whole business that you have to ultimately rely on to get paid off. [TC 12/8, p. 20]
Participant C-1
But that' the problem; legal entities determine how you get paid off. The classic example with that would be [two companies] where trade creditors who shipped directly to legal entities, such as [name deleted], got paid off 100 cents on the dollar. Trade creditors who shipped to the holding company got paid off with the rest of the unsecured creditors and it was about 30 cents on the dollar. I think you're right, we can get too technical, but in some instances this concept of legal entity, of at least where debt or trade claims are, can be very important. [TC 12/8, p. 20]
Participant C-11
Well, your comment is right so I guess that I would have to say that you have to know both aspects. [TC 12/8, p. 20]
Participant C-12
As soon as we make something primary, management manages to that, and lets other things slide. But it's not a great hardship to do multiple cuts of a company. If I look at [name deleted], I'd like to know what the individual banks look like. I'd also like to know what credit card looks like. And I know they house that in different pieces of the institutions. [TC 12/8, p. 20]
__________
Committee/Staff/Observer
It's a general question on the subject of disaggregated information. Is it feasible, having heard what I just heard about the needs and wants and desires, for a set of external reported financial statements to meet all of these needs? [TC 12/8, p. 22]
Participant C-14
We find that a lot of our needs are met when we asked for the consolidating financial statements. What we look at is what legal entity is the debt at, and ultimately that's what's going to prevail. If we have the consolidating financial statements, we can do what we think is the most important part of the due diligence in evaluating what the cash flow is of the legal entity relative to the debt at that entity. [TC 12/8, p. 22]
Committee/Staff/Observer
So you would seek those consolidating statements from management? [TC 12/8, p. 22]
Participant C-14
We ask for them in every situation where there is more than one legal entity. And usually we've had to spend a lot more time on those statements than on the statements that are published by the company. [TC 12/8, p. 22]
Participant C-11
I think my concern is that you're going to end up getting a primary report. You can't get both legal and business segments. Or at least that's my concern. So that given a choice, to the extent that an operating business is done in two or three or four different places, I am unhappy if I cannot get the thing put together in one business segment statement. [TC 12/8, p. 22]
Participant C-5
We've done some significant analysis in terms of moving to a re-rating system within our bank, modifying the past rating approach. What we've seen is a point where you shift your focus, whether it's accrual versus cash. On the high end credit accrual is very important because it really does get down to period reporting. Cash becomes important when liquidity and viability is more of a question. The same thing goes with things like segment reporting versus legal entity. The more concerned I am about viability, the further I move down the curve. If I am more concerned with the pieces of the debt, how I control the debt structure with the whole consolidated group, I then move up the curve. Businesses are not managing legal entities, they really are managing segments. The concept should be that we have a set of tools; obviously, as a bank creditor we can demand preparation of financial statements in certain fashions as long as we have an agreed-upon standard upon which those can be prepared. For a company that we would grade a borderline pass credit, we would not ask for segment reporting, we'd need legal entity consolidations. For a company that's a high grade multinational, typically they would provide more segment-type information. I don't believe standards should be different but the on-off switch should be there to shift the focus in the middle at the point where the debt holders make some determinations as to which are more important. I know that's a difficult thing to implement, but we have clearly seen that there is a shift about middle of the pass grade, which would be basically minimum investment grade type credit, there's a shift away from cash viability to accrual and legal entity to segment type information. [Also included in 1(a)] [TC 12/8, p. 22-23]
__________Participant C-12
I deal mostly with large investment grade institutions, and I find in general they do a pretty good job of giving me information I need to see to know what the core earnings are. For example, [name deleted] in its quarterly press release will give me a chart showing the changes quarter to quarter in ten different items, but they've never told me what they earn in credit card. One of the most basic segments I'd want to get just is not there. So, segment information is my first priority. [Also included in 3(a), 5(a), and 15] [TC 12/8, p. 28]
__________
Participant C-16
I'm in the leasing business, and we are continuously asked to extend credit to subsidiaries of major companies, and even subsidiaries of mid-sized companies. The absence of consolidating financial statements is difficult. I guess it's unrealistic to expect consolidating statements on a major company, but certainly for mid-sized companies I'd like to see more segment reporting a greater level of detail. [Also included in 3(a) and 15] [TC 12/8, p. 28]
__________
Committee/Staff/Observer
Is there anything more that needs to be said about disaggregated approaches (what additional bases of disaggregated information would you like to see reported) other than the notion of legal entity, and whether or not you combine legal entities together to get segments? [TC 12/8, p. 30]
Participant C-10
The fourth and the fifth points about individual product or product group and purchases by major vendor are both important bases. In other words, I want information about any segment that the management can control, any little variable in the company and the way they work their company, so that we can understand if there is a gross margin of 27% here and 23% here, and that this part of the business is 20% growing to 50%, and that type of thing. We're trying to understand where the management has the ability to deliver an improvement in their company's operations. [TC 12/8, p. 30]
Participant C-5
I had comparable operations as category. To understand core earnings and what the improvement of the trend line is in core earnings, you need to understand disaggregated businesses and the impact of discontinued operations. [TC 12/8, p. 31]
Participant C-12
I had management units. This is anything over 10% in revenues or income. And I know what I mean by management unit, because management tells me how they divvy the business up. I'm not sure how one can impose that externally. Also, at some point you could say that if a company is of a given size, they've got to have a minimum number of segments; that if you are [name deleted] and you have one business, you've got the one bank, but you're all over the state of California, you're really in multiple segments, you're in consumer banking, real estate banking, and break it up. At some point you get big enough, you have to be able to cut it in multiple ways. And that's not true of a $20 million bank, but by the time you get to $50 billion it is true. [TC 12/8, p. 31]
Participant C-13
Just to pick up on that, 10% of income is far too broad a definition. Companies growing at 5% a year, that's two years' growth. The materiality standards should be related to changes in income and cash flows. [TC 12/8, p. 31]
Committee/Staff/Observer
I'm a little confused, and perhaps some of the commentators on the need for segment information can clarify this for me. The fourth bullet talks about product line, and I'm wondering if some of these comments are driving toward more disclosure of product lines within segments? [TC 12/8, p. 31]
Participant C-10
Yes. You want to understand what that significant piece of the business is going to do, and that's one product line. [TC 12/8, p. 31]
Participant C-3
Increasingly, we're getting into an argument of what's proprietary and what isn't, though, and where do you draw the line between what types of information should users of financial statements have, and what we shouldn't have. So maybe the best way to approach the issue of how do you define a segment is based on revenue volatility, and not individual products or individual legal entities, although I guess the legal entity issue is important. [Also included in 2(d)] [TC 12/8, p. 32]
Participant C-13
I think it's more a matter of the way the company runs the business. Just take another real life example, there is a financial company that's currently in registration, and basic business which is 80% of their business has about an 8% operating profit margin. The rest of their business is currently close to break even, losing money; that part of the business is being downsized. They're entering into a new business which has about a 5% profit margin which they expect to grow at a very rapid rate. And yet that information comes from conversation with the company, and that's nowhere disclosed in the financial statements, although the company happens to be in registration as well. [TC 12/8, p. 32]
Participant C-5
In the financial institutions where consumer products are in fact products and they're managed that way, I would still be careful about the use of product terminology in financial institutions, because letters of credit or interest rate swaps are quite often just an extension of a relationship activity. For example, at one point we had fixed rate loans, so therefore we had one product bundled together. We've disaggregated the product, but we really manage it as a relationship business. I think the point that was made is how you manage the business, how you think of it, and then report accordingly. Banks would report on a customer grouping basis, not by industry. It's more commercial customer, real estate customer, consumer customer. It seems overly simplistic, but banks are a maze of both products and relationships. [TC 12/8, p. 32]
Participant C-9
If I take that further, I think that one reason we may not be getting segment information is I don't think big companies are being operated on that basis. As you say, the banks are operated more on a relationship basis, and there is not always a bottom line accounting of some of those smaller, discrete products. But there are discrete products within the banking industry, the credit cards, the mortgage banking business, and I think there could be more effort on that score. And I think it would be a positive development for both the management of the companies and those of us who evaluate the companies. [Also included in 3(a)] [TC 12/8, p. 33]
Participant C-4
Speaking about segment reporting, the management of segments is probably done on maybe some other basis, legal entity, or some other method of reporting. I think when we're trying to determine what's going to happen with the segment, the legal entity is very important, because that's typically how management is going to dispose of that segment. I don't think management typically sells a segment, they sell subsidiaries within that segment. And I'm just trying to drive home the point of reporting segment information on a legal entity basis, as well as another segment basis. [TC 12/8, p. 33]
__________
Participant C-12
I would much rather have them do more on an annual basis. Because if I look at [name deleted] today, I'd like them to do a product cut for me, a geographic cut, a legal entity cut. And I don't know that I want all that quarterly, but each of those has some meaning, at least. [Also included in 3(d) and 11(c)] [TC 12/8, p. 38-39]
[Context] Responses to the postmeeting questionnaire of the December 8, 1992 Creditor Discussion Group meeting.
QUESTION 5
a. Various alternative means of disaggregating financial information were proposed by meeting participants. Please indicate below your preference for the kind of disaggregation that should be provided. That is, mark "1" next to the disaggregation basis you most prefer in credit analysis, mark "8" next to the disaggregation method you least prefer:
Disaggregation by:
Priority 1 2 3 4 5 6 7 8
i. Legal Entity 9 3 1 1 1
ii. FAS 14 industry segment, as defined 1 2 3 2 2 1 1 1
iii. Borrowing unit 5 6 1 1 2
iv. Management responsibility assignment 2 3 2 1 2 2 2
v. Geography - by location of operators 1 4 3 2 4 1
vi. Geography - by location of markets 1 1 2 2 4 4 1
vii. Individual product or product group
within an industry 3 5 2 1 3 1
viii. Other:
Participant C-3 - Under item iv: See b ii.
Participant C-15 - Under Other: Profit contribution by segment.
Participant C-11 - I prefer segment data that best reflects that operations and risks of the enterprise. These can vary from company to company. I do not necessarily prefer legal entity or borrowing per se, since in some cases these do not embrace all operating risks of a business segment. For example, some retailers would include only some customer receivables in their narrow-focus credit sales.
Participant C-9 - 1 and 2 are by far the overwhelming priorities - indifferent after 4.
b. Many at the meeting expressed a preference for disaggregated disclosures that are consistent with the way management responsibility is delegated within the reporting organization. At the same meeting, suggestions were made for reporting improvements that enhance the comparability of financial reports by industries/disaggregated units within the same industry. It can be argued that allowing/encouraging disaggregated disclosures along the unique lines of authority within an organization frustrates intercompany comparability. That is, similar companies with similar industrial activities might provide significantly different disaggregated information to the extent their internal organizations differ.
Help us better understand your needs by answering the following regarding the relative importance of disaggregated disclosures versus comparability:
i. Do you agree that allowing companies to use subjective criteria for how information is disaggregated could result in less comparable information?
_ YES _ NO
16 1
If NO, please explain your response:
Participant C-3 - Absolutely!
Participant C-15 - Maybe there should be more than one basis of presentation.
Participant C-7 - As a bank, our primary focus is the operations of our borrower. The ability to obtain disclosure is a matter for negotiation, not mandate.
Participant C-12 - 1) Less comparable with what? 2) Most companies manage to units that are fairly obvious, i.e., there aren't many ways to divide a business, and managers at different companies tend to agree on the appropriate divisions (and competitive pressure force companies to align their businesses similarly to competitors). 3) Company management will respond to greater disaggregation by lining up their businesses along common lines: competitions will demand this and investors will demand this.
Participant C-11 - Except for small, single-product companies, there isn't that much comparability in a narrow sense. I vote for relevance and reliability over comparability.
ii. Do you have suggestions for mitigating the effects of disaggregation by management responsibility on comparability?
Participant C-3 - I would never promulgate a standard that uses management responsibility as a basis for disaggregation, because it allows the reporting entity too much leeway in reporting results. You'll get less detail (for example, management could easily realign the organizational structure to support less detailed disclosure).
Participant C-14 - The key is to be able to analyze the cash flow generating capability and resources of the borrowing entity.
Participant C-15 - See i.
Participant C-12 - 1) A lot of companies aren't comparable to anything now, so breaking them into pieces, some of which are more easily compared, will be an improvement on the current situation. 2) Breaking businesses into "unitary" components makes them useful without direct comparisons: (a) level and trend of profits by unit, (b) concentration/diversification of profits.
Participant C-5 - Minimum standards by legal structure, product and geography could sustain comparability.
Participant C-4 - Allow for disaggregation by management responsibility, but require management to disclose why their disaggregation method is preferred and to disclose what industries are proportionately included in their disaggregated segments.
Participant C-11 - No. Ultimately, pressures from analysts and preparers and the good will of company managements are the essential elements for good segment disclosure.
Participant C-13 - I believe that the management responsibility criteria is not the most helpful, but it has the advantage that managements cannot claim that the costs of preparing the information exceed the benefits, since they must prepare the information for due diligence on part of Board, etc. Maybe better definitions and more oversight by SEC of compliance with FAS 14.
iii. If you believe there is an inherent conflict between 1) the management responsibility approach to disaggregation and 2) comparability, which should be given greater importance in financial reporting:
10 _ Comparability
6 _ Disaggregation
Comments:
Participant C-14 - As industry analysts, we tend to know how a company should be performing within the peer group. What we need is to have the disaggregated information to make a more meaningful analysis of the borrowers inherent ability to repay.
Participant C-10 - Our goal is comparing disaggregated data for that one company - not against industry data.
Participant C-7 - In commercial lending, each transaction is somewhat unique, disaggregation would provide greater insight into the operations of our borrowers.
Participant C-12 - I can always make adjustments for greater comparability, but I can't disaggregate by myself.
Participant C-5 - 1) Legal disaggregation, 2) Comparability and 3) Disaggregation.
Participant C-4 - Comparability to industry results and to historic results of the segment are vital. Objectivity and consistency are essential for this comparison.
Participant C-18 - Comparability - STRONGLY!
Participant C-9 - Those interested in further information by management responsibility may well be in a position to request it.
Participant C-2 - Comparability is critical to the comparisons of a borrower's financial information to others within the same industry, which is an integral part of the credit analysis.
Participant C-13 - Tough call!
[Also included in 2(c)] [PMQC 12/8, p. 12-16]
[Context] Responses to the postmeeting questionnaire of the December 9, 1992 and January 13, 1993 Investor Discussion Group meetings.
QUESTION 1
At the December 9, 1992 meeting, we discussed several bases for disaggregating financial information. Please indicate below your preference for the basis or bases of disaggregated information you would like to obtain. That is, mark "1" next to the disaggregation basis you most prefer, mark "8" next to the disaggregation basis you least prefer.
Disaggregation by:
Rank each item
1 through 8 (use a
number only once)
i. Legal entity Ranking Number of responses 7 6 Average Ranking 7
ii. Industry segment, based on type of product or service provided Ranking Number of responses 1 1 2 3 3 2 Average Ranking 2.17
iii. Borrowing unit Ranking Number of responses 6 5 8 1 Average Ranking 6.33
iv. Segmentation based on internal reporting to senior management or the Board of Directors Ranking Number of responses 1 4 4 1 5 1 Average Ranking 2.17
v. Geography--by location of operations Ranking Number of responses 4 1 5 4 6 1 Average Ranking 5
vi. Geography--by location of markets Ranking Number of responses 4 3 3 3 Average Ranking 3.5
vii. Individual product or product group within Ranking Number of responses 1 1 2 3 4 1 3 1 Average Ranking 2.33
Summary of Rankings Average
Ranking
iv. Segmentation based on internal reporting to senior 2.17
management or the Board of Directors
ii. Industry segment, based on type of product or service 2.17
provided
vii. Individual product or product group within 2.33
vi. Geography--by location of markets 3.50
v. Geography--by location of operations 5.00
iii. Borrowing unit 6.33
i. Legal entity 7.00
QUESTION 2
a. Many participants at the December 9, 1992 meeting expressed a preference for disaggregated disclosures that are consistent with the way the company views itself and reports internally. At the same time, participants have emphasized the need for comparability of financial reports among companies, particularly within the same industry. Unfortunately, segmentation based on internal reporting may be inconsistent with better comparability. That is, similar companies with similar operations might provide significantly different disaggregated information solely because their internal organizations differ.
However, our understanding is that investors would prefer segment reporting consistent with the way the company views itself internally, rather than based on other approaches that would result in more comparable disaggregated information among companies. In other words, in the area of segment reporting, investors assign greater importance to the relevance of information based on internal reporting than to comparability among companies. Is our understanding correct?
Yes 6 No 1Participant I-12: The key is how the company organized itself and conducts operations to generate a return to the shareholder.
If NO, please explain :
Participant I-9: Comparability is more important and lends itself to less management "abuse" or manipulation. The problem is how to sort out companies into industry groups without forming too many or too few. Aluminum companies are homogeneous but retailers cover a broad range - wholesalers, supermarkets, department stores, etc.
b. Do you have suggestions for mitigating the effects on comparability of disaggregation based on the way the company views itself and reports internally?
Participant I-9: This is hard to answer without knowing how internal reports differ from each other. For instance, the [name deleted] reports to Directors years ago were designed to prevent anyone from figuring out how profitable the [name deleted subsidiary] partnership was. It was virtually impossible to reconcile internal financial reports with shareholders financial reports. Perhaps there have to be standards that are generally accepted for internal statements.
Participant I-11: In many cases, I think the differences will be small. In any event, I think the value of "comparability" is overstated- the variations in accounting practices between companies can reduce "comparability" enough to make it of little value.
Participant I-12: Most companies in a given business will tend to organize internal reporting systems in a surprisingly similar fashion - ex. all credit card companies track similar info. because it is inherent in the business. As long as information is disclosed, analysts can make adjustments for major discrepancies.
[Also included in 2(c)] [PMQI 12/9 and 1/13, p. 3]
__________
[Context] Responses to the postmeeting questionnaire to the March 17, 1993 Investor Discussion Group meeting.
At our December meeting we discussed several bases for disaggregating financial information. The following two questions seek your views about four of those bases.
QUESTION 25
At the December meeting, investors ranked highly several bases for disaggregation. Two of those bases were (1) industry, that is, type of product or service provided, and (2) company organization, that is, how the company views itself and reports internally to senior management and the board of directors.
Although the two bases of disaggregation may be similar for some companies, for others they may differ. Consider, for example, the auto industry. Disaggregation based on industry could segment the company into, for example, luxury cars, economy cars, minivans, light trucks and heavy trucks, which may cross lines of internal management. In contrast, disaggregation based on how the company views itself and reports internally could segment the company into divisions, such as Cadillac, Buick, Oldsmobile, Pontiac, Chevrolet, and GMC, each of which produces a variety of products.
If forced to choose between the two methods, which would you choose and why? (Please check your preference and indicate the reason for your choice in the space provided.)
Industry, that is, type of product or service provided, even if products or services cross lines of
Company organization, that is, how the company views itself and reports internally
4
Please describe the reason for your preference.
Participant I-16: It would be extremely difficult and perhaps meaningless to attempt to allocate costs in
ways that do not correspond to the company's management and control systems.
Participant I-7: Gives me another checkpoint on how management runs the business and may, in fact,
be the reason for company success or lack of it.
Participant I-10: Better able to compare with general market data.
Participant I-11: This is a close call, but on balance I think that I will gain more insight from
reporting by organization than by type of product or service. Why, for instance, has [one division]
been successful and [another division] less , and what implications does that have for [parent's]
consolidated profitability. Also, I note that the extraordinarily detailed "industry data" on motor
vehicle sales by type is unusual. There's usually far less, and far less accurate, information
available on the size and trends of an "industry."
[PMQI 3/17, p. 43-44]
QUESTION 26
At the December meeting, several investors also supported disaggregation based on geographic
segment. However, geographic segmentation could be based on at least two methods: (1) the
location where products or services are produced, or (2) the location where products or services
are delivered or consumed.
If forced to choose between the two methods, which would you choose and why? (Please check
your preference and indicate the reason for your choice in the space provided.)
Geographic segmentation based on the location where products or services are produced 1
Geographic segmentation based on the location where products or services are delivered or
consumed 1
A mixed approach that provides some information based on the location where the products or
services are produced and other information based on where they are delivered or consumed. For
example, disclosures of revenues could be based on the location where products or services are delivered, and disclosures of assets, costs, and expenses could be based on where products or
services are produced. 4
Please describe the reason for your preference.
Participant I-16:
The results of the business should be influenced more by the location of the customer (demand,
pricing, distribution) than the location of production (manufacturing cost).
Participant I-7: One gives me a better understanding of the last factors, the other, the revenue factors.
Participant I-11: If a product is made in Singapore and sold in San Francisco (or vice versa) there
are different economic, political, business and accounting issues than if it's made in Singapore and
sold in Singapore.
[PMQI 3/17, p. 44-45]
Most [CIC] subcommittees agree . . . [that] the following suggestion seems appropriate: [Also
included in 1(b), 2(b), 2(c), 3(d), 5(a), 5(d), 11(a), 13, and 16(b)] [AIMR/CIC92, p. 3]
Segmented financial and operating data, particularly on a quarterly basis, where appropriate
both by lines of business and geographic. [Also included in 1(b), 3(d), and 16(b)]
[AIMR/CIC92, p. 3]