3(c). Types of Disaggregated Information Disclosed
As part of its oversight activities, the Oversight Committee of the Financial Accounting Foundation interviewed and requested written comments (collectively, "the interviews") from thought leaders among the FASB's constituencies. There were 107 interviews in total, including 12 with representatives of financial statement users and 17 with regulators (a special class of financial statement users). [FASOversight, p. 1]
While the interviews were not designed to elicit criticisms of financial reporting, in general, or to identify the needs of users of financial information, interviewees did comment on those matters. [FASOversight, p. 1]
Following is a summary of the principal comments received [on the subject] from users and regulators relating to . . . the needs of users. [FASOversight, p. 1]
Disaggregated or "consolidating" financial information is more meaningful than consolidated financials only. [FASOversight, p. 2]
__________
The APC [Accounting Policy Committee] has considered and expresses below its opinions on a number of specific issues affecting financial accounting standards and financial reports. The APC believes that the following [item] should be included in the single body of accounting concepts, standards, principles and methods: [RMA90, p. 5]
For companies that engage in more than one line of business (segment), income from continuing operations should be disclosed for each significant segment. Multinational enterprises should provide disaggregations by geographic location. When significant amounts of revenue emanate from a single customer or related group of customers, that fact should also be disclosed. [RMA90, p. 7]
__________
Cash flow analysis [by equity sell-side analysts] displays considerable variety in format and content. Many reports present and/or discuss cash flow extensively. Cash flow information is sometimes presented by segment or operating unit. Some reports make no mention of cash flow at all. Cash flow type phrases occurred about 6,000 times in the full sample. [Separately, dividends are mentioned over 2,000 times.] [Also included in 1(b), 1(c), and 5(c)] [PREVITS, p. 18]
To the extent that earnings, earnings momentum and earnings potential drive the equity analytics of sell-side reports, the need for more frequent than annual information on performance is clear, as is the need for more finely disaggregated performance information, in common sized formats to enhance intercompany comparisons. [Also included in 1(a), 2(c), 3(d), and 11(a)] [PREVITS, p. 21]
__________
[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(b)] [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(b)] [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.
Financial analysts have consistently over the years requested financial statement data disaggregated to a much greater degree than it is now. Most analysts have found the provisions of 1976's Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise," helpful but inadequate. This situation has been exacerbated by the issuance in 1987 of Statement of Financial Accounting Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries." That statement has the good effect of presenting an overall report on complex economic entities and brings onto the consolidated balance sheet a large amount of debt that previously had not appeared there. Its cost has been the loss of much detailed information about subsidiary operations quite different in character from those of the parent company. [Also included in 3(a)] [AIMR/FAPC92, p. 39]
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(b)] [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(b)] [AIMR/FAPC92, p. 40]
Reporting How the Business is Managed
FAS 14 requires disclosure of line of business information classified by "industry segment." Its definition of "segment" is necessarily imprecise and it recognizes that there are numerous practical problems in applying that definition to different business entities operating under disparate circumstances. That weakness in FAS 14 has been exploited by many enterprises to suit their own financial reporting purposes. As a result, we have seen one of the ten largest firms in the country report all of its operations as being in a single very broadly defined industry segment. At the other extreme, there is a publicly-owned provider of funeral services that reports in three segments: funeral services, caskets and other merchandise sales, and cemetery operations. We also are aware of and sympathetic with the problems some enterprises have in collecting and reporting data that conform to FAS 14 categories because their businesses are organized and managed differently. [Also included in 3(a)] [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(b)] [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(b)] [AIMR/FAPC92, p. 40]
Research in Progress and Prognosis for Change
Those are questions that we anticipate will be addressed and answered in a research study on "Disclosure of Disaggregated Information" launched by the FASB in the first quarter of 1992. This topic is so important to AIMR that it has contracted with the FASB to provide partial funding to support this important research project. We envision that the project will culminate in an FASB discussion memorandum in which the views of all parties, including those of financial analysts, will be presented in a neutral and comprehensive manner for consideration by the entire financial community. [AIMR/FAPC92, p. 41]
We urge the FASB to move the disaggregation project along at all due speed. It sometimes seems as if the projects which promise to produce information of greatest use to financial analysts are the most interminable. There is no reason for further delay or procrastination in giving attention to this subject by: (a) standard setters, the FASB and the IASC as well; (b) capital market regulators, the SEC and IOSCO; (c) the accounting profession, the AICPA as well as the International Federation of Professional Accountants. [AIMR/FAPC92, p. 41]
Consolidating Financial Statements
Although we support the requirement that consolidated financial statements be the basis for general purpose financial reporting, we lament the concomitant loss of detailed information about an economic enterprise's constituent corporate entity components. Currently, published summary data on consolidated subsidiaries are insufficient for analysts to be able to deconsolidate them with sufficient assurance of accuracy. We seek the best of all worlds: consolidating financial statements. Complex entities often prepare these for use by lenders. Since the issuance of FAS 94, a small number of companies have even included them in their published financial reports. There seems to be little reason why they could not be required of all companies. The cost to prepare them would be trivial, except perhaps for additional audit fees caused by a lower materiality threshold. We urge the FASB to consider requiring them. [AIMR/FAPC92, p. 41]
__________
[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-6
Coming back to cash flow, I think it's important but I don't think you can get there without earnings. If we're going to have true segment disclosures, earnings are nice but with a diversified company that is in coal mining, gold mining, natural gas and manufacturing, how about having cash flows by segments too? Cash flow is an important piece of the equation, but if you don't have it by segment, you're deceiving yourself if you think you're forecasting. [Also included in 1(b)] [TI 10/16, p. 22]
Participant I-11
I join the chorus on segment accounting. We could do with much more consistent and detailed segment accounting on a quarterly basis. At least two diversified companies that I know establish the segments they report in a manner totally separate from the method in which they run their business and it's clear they're just trying to obfuscate things. I can't find any justification for that. [Also included in 1(b), 3(a), and 3(d)] [TI 10/16, p. 22]
Participant I-9
I don't think it's worth the costs for the companies I follow to have segment reporting on a quarterly basis. What I would ask is that it be consistent from year to year. With respect to pharmaceutical, for example, if you switch a drug from the ethical sector to the over-the-counter sector, make some sort of adjustments in the figures of the prior years so we can look at the trends on that. I go back to the point about what the auditor should look at for a particular industry. With respect to pharmaceutical, the companies are now showing price increasing data; it would be nice to have an auditor to say whether that data is reasonable. Research is also a big item; why not segment out what is basic research from research on drugs and give the FDA categories (phase 1, phase 2, and phase 3 breakdowns)? The other problem in the area is that companies are international; for example, [name deleted] has 40% of its business in the U.S. and is headquartered in London. You convert the U.S. earnings to British accounting and then reconvert it back to ADRs and you can get two reports that have to be reconciled for a company that is half in the U.S. and half abroad. And you will have more problems with the Swiss companies. The other problem is marking to market on currencies. We don't understand the accounting standards. Those areas call for particular expertise where accountants could be very helpful. [Also included in 1(b), 3(d), and 17(b)] [TI 10/16, p. 23-24]
__________
Committee/Staff/Observer
This relates again to financial information, but financial information that is not required in external reporting. What additional financial information do you regularly use that is not part of external reporting? [Also included in 1(b)] [TI 10/16, p. 44]
Participant I-11
Sale and profit information by product line or product category. [Also included in 1(b)] [TI 10/16, p. 45]
[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
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(b)] [TI 12/9, p. 7]
__________
Committee/Staff/Observer
We want to discuss the types of information that should be reported within each of the bases. For example, consider disaggregated information based on industry segments. As you know, under today's rules, companies report certain summarized information such as revenues, operating profit, identifiable assets, depreciation, and capital expenditures. Our question is whether you are satisfied with the level of information currently reported or whether you believe that companies should report additional information. If you are not satisfied, what additional types of information do you want or that companies should report? [TI 12/9, p. 21]
Participant I-12
The critical information that you need is the revenues, the expenses, after tax income, assets and liabilities. There is a very large number of companies that have gotten into financial related businesses and that are taking on a certain amount of financial risk; some measure of that risk needs to be available. Personally, I would go into enormous detail on this. [TI 12/9, p. 21]
Participant I-7
I would like to see segment net profit. Allowing the segment information to stop at the operating profit line and not showing me things like interest expense is not terribly useful. Order backlog by segment is important in the electrical equipment industry because the backlog can stretch out for a long period of time (for example, in the nuclear industry, for as much as 8-10 years). [TI 12/9, p. 21]
Participant I-8
I can't imagine everybody here wouldn't want all the information listed on page 8 of the meeting materials, to the exception perhaps of the number of employees by segment. [TI 12/9, p. 22]
Participant I-7
But that would give you productivity. [TI 12/9, p. 22]
Participant I-8
The per-share segment data, we could do the arithmetics for that one. [TI 12/9, p. 22]
Participant I-11
I think you run into problems when you carry segment information down below the operating profit line. In some cases, it's very clear where capital comes from and where it goes; in other cases, it's not clear at all. I'm not sure that I would want management to allocate costs to segments below the operating profit line. [TI 12/9, p. 22]
Participant I-6
I'm almost in [participant I-11] camp. I'm not sure I would like the segment information to go beyond the operating profit level. I'm not sure it's very helpful unless you require companies every year to tell us how they allocate corporate costs, so we know if they have been consistent every year. I use the corporate number basically as a catch-all to compare the efficiency of corporate headquarters. [TI 12/9, p. 22]
Participant I-7
I don't understand why allocating overheads would be a problem; it's done routinely as part of management's cost accounting. [TI 12/9, p. 22]
Committee/Staff/Observer
I think what people are saying is that there is such discretion in that allocation that the number below operating profit may not be meaningful. I'm not saying I agree or disagree. [TI 12/9, p. 22]
Participant I-11
I think it's a problematic number. [TI 12/9, p. 23]
Participant I-12
What I would like to know is which costs are being allocated versus costs that are directly attributable to a segment. I would also like to see the capital used by a business segment because I'm interested on return on investment or capital. [TI 12/9, p. 23]
Participant I-7
If you're not allocating the costs properly, you're not charging the customer properly. I want to see the information even if it does nothing more than forcing the company to allocate costs properly. [TI 12/9, p. 23]
Committee/Staff/Observer
It was mentioned at the last meeting, but nobody has mentioned production information by segment. [TI 12/9, p. 23]
Participant I-6
I made that plea last time; I want the information. [TI 12/9, p. 23]
Committee/Staff/Observer
What about if too much segment disclosure affect the company's competitive position? Where do you draw the line? Is that an issue? [TI 12/9, p. 23]
Participant I-7
If a competitor wants to know, he will find out. I believe there is certain advanced information (dealings with the unions, pricing strategies, new product strategies) that does not belong to the public until the company decides to make the information public. [TI 12/9, p. 23]
Participant I-8
When you ask companies for additional information, 99 times out of a 100 they tell you they don't want to disclose it for competitive reasons, which I don't accept. The one good reason could be if you have a very profitable operation and you don't care to have your customers know how much money you're making on that product. [TI 12/9, p. 23-24]
Participant I-12
I heard this argument for years from brokerage firms and I think the only reason they don't want to disclose the information is because they don't know. That bothers me as an investor; it does not make me confident. The accounting rules are flexible enough that there is enough room to aggregate the information in a way that is reasonable while keeping truly proprietary information where it belongs. [TI 12/9, p. 24]
Participant I-13
In the industry that I cover, there is no competitive disadvantage because all companies are dealing on the public precious metal markets. So I would like as much information as possible, from revenue to detailed cost to profit by operating unit. [TI 12/9, p. 24]
Participant I-12
In terms of format, there are certain items that I would like to see. I would like to know how much of the costs, and in some cases revenues, are on allocated (or discretionary) basis as opposed to directly attributable to the business, because those allocations can really make a massive difference. As long as I know what the number is, then I can determine whether or not it is appropriate. [Also included in 3(e)] [TI 12/9, p. 25]
[Context] Meeting of the Creditor Discussion Group on December 8, 1992. Part of the meeting was devoted to the topic of disaggregated information.
Committee/Staff/Observer
What type of [segment] information would you want to see [in interim reports]? [Also included in 3(d) and 11(c)] [TC 12/8, p. 38]
Participant C-13
Same as annual. [Also included in 3(d) and 11(c)] [TC 12/8, p. 38]
__________
Participant C-10
On your list we've got backlog and I wrote "heavy" next to that, in other words heavy use, I put a big emphasis on that. Some companies don't have much backlog, it's almost a daily order business. It varies from company to company, and then sometimes by type of product line; one type of product line would have a heavy backlog because of its link to the construction nature, like your production contracts. That's a short term piece of information, but very helpful to understand how your company is going, especially its liquidity. [Also included in 1(b) and 13] [TC 12/8, p. 51-52]
[Context] Responses to the postmeeting questionnaire to the December 8, 1992 Creditor Discussion Group meeting.
QUESTION 6
Regardless of your choice of the basis of disaggregation, please indicate below your preference for disclosure of disaggregated components.
Indicate E - Essential,
P - Preferred but Not Essential, or
N - Not Normally Needed
Disaggregated Disclosure Components
E P N
15 1 a. Revenue
12 3 1 b. Gross Profit
13 3 c. Operating Profit
4 10 2 d. After-tax Profit
2 11 3 e. All Income Statement Components
12 4 f. Total Assets
10 5 1 g. Total Liabilities
5 8 2 h. Working Capital
4 10 2 i. Net Assets
1 10 5 j. All Balance Sheet Components
14 2 k. Cash Flow from Operations
7 7 2 l. Cash Flow from Financing Activities (Borrowings & Stock Transactions)
7 7 2 m. Cash Flow from Investing Activities (including capital expenditures)
6 5 4 n. All Cash Flow Statement Components
o. Other:
p. Other:
Participant C-4 - Other categories: Management responsibility - in organization chart form that matches with the segments. Historic Results.
Participant C-18 - If you're going to do it - provide complete information
Participant C-11 - To some extent, this will depend on the type of industry.
Participant C-13- Other categories: Capital expenditures.
[PMQC 12/8, p. 16-17]
[Context] Responses to the postmeeting questionnaire of the December 9, 1992 and January 13, 1993 Investor Discussion Group meetings.
QUESTION 3
a. Regardless of your preference of the basis of disaggregation, please indicate below your preference for disclosure of disaggregated components.
Indicate E--Essential
P--Preferred but Not Essential, or
N--Not Normally Needed
Rank E, P,
or N
Essential Preferred Not
but Normally
Not Needed
Essential
a. Revenue 7
b. Gross Profit 6 1
c. Operating Profit 7
d. After-tax Profit 4 2 1
e. All Income Statement Components 1 4 2
Participant I-12: I would suggest
KEY components only 3-4 items
f. Total Assets 2 5
g. Total Liabilities 3 4
h. Working Capital 1 5 1
i. Net Assets 2 2 3
j. All Balance Sheet Components 5 2
k. Cash Flow from Operations 5 2
l. Cash Flow from Financing 2 5
Activities
m. Cash Flow from Investing 3 4
Activities
n. All Cash Flow Components 2 4 1
o. Other 1
Participant I-12: Average balance
sheets for any lending operation
p. Other
b. Are there any segment disclosures listed above or any other segment disclosures that you would like to obtain that could harm a company's competitive position (vis-a-vis its domestic competitors who would report the same information or vis-a-vis its foreign competitors who would not have to report that information) if disclosure was required?
Yes 4 No 3
If YES, which ones?
Participant I-7 Market share
Participant I-9 Gross profit, Operating Profit, Cash flow from
operations
Participant I-10 Wage costs, R&D, advertising expenses
Participant I-11 Maybe some harm from financing, investing data.
Companies will claim P&L data will cause harm-
I seriously doubt that in most cases.
[PMQI 12/9 and 1/13, p. 4-5]
[Context] Responses to the postmeeting questionnaire of the December 9, 1992 and January 13, 1993 Investor Discussion Group meetings.
QUESTION 4
b. At the meeting, participants made a number of specific suggestions related to some disaggregated disclosures. Please indicate your views on the following suggestions.
Indicate A--Agree with the proposed disclosure
D--Disagree with the proposed disclosure
P--Proposed disclosure preferable but not essential
Agree Disagree Preferable
but
not
essential
i. Separate disclosure within the 5 1 1
disclosure made for each segment of
the effect of discontinued
operations
ii. Multi-column consolidating 5 1 1
financial statements if a financial
subsidiary is consolidated in
accordance with the requirements of
FAS 94
iii. Multi-column consolidating 4 2
financial statements in other
cases. Please specify.
iv. Multi-column consolidating cash 5 1 1
flow statement in all cases that
consolidating statements are
disclosed
Agree Disagree Preferable
but
not
essential
v. Other. Please specify
Participant I-12: Consolidating
statements are useful, but half the
fun of being an analyst is tracking
down discrepancies between segment
disclosure and the official
statements. Reasonable segment
disclosure with a single line to
reconcile to the total is usually
sufficient for a good analytical
job.
[PMQI 12/9 and 1/13, p. 6]
__________
[An] example [by the Georgia-Pacific Corporation] of . . . disclosure that address[es] one the most important needs of the investor; concise and complete segment information. In its 1991 annual report to shareholders, Georgia-Pacific Corporation presented a breakout of sales and operating profit in 13 different forest product sectors. The breakout not only provides current year numbers but also equivalent data for each of the preceding ten years. [Also included in 1(b)] [AIMR/CIC92, p. 4]
__________
Consolidation (Statement No. 94) theoretically may be the correct answer, but for many users the destruction of the financial data base far exceeds any advantage of having consolidated statements. A few major corporations have understood the problem and are providing separate supplementary financial statements or consolidating financial statements in their annual reports. The user can only hope that more managements will understand the importance of the loss of the disaggregated information and provide it on an annual and quarterly basis. We also encourage the FASB to expedite its review of FAS No. 14, Financial Reporting for Segments of a Business Enterprise. [Also included in 2(c)] [AIMR/FAF91, p. 11]
__________
Analysts were able to identify many areas in which they believed expanded disclosures would be useful, but most of those had little or no relation to fair value information. The disclosures they were most interested in were: [Also included in 3(e), 5(b), 10(c), 13, and 17(f)] [KPMG BANK STUDY, p. 38]
Detailed disclosures of operating income and expense by operational segment [Also included in 3(e), 5(b), 10(c), 13, and 17(f)] [KPMG BANK STUDY, p. 38]
[Context] The papers are a summary of a committee and staff members' discussions with selected sell-side analysts from Goldman Sachs.
Financial statements are imperative for [one analyst] in her work. Her main complaint is that banks should report their revenues and expenses by lines of business (segments). She does not like market value accounting; she feels it will lead to behavioral disadvantages, such as the shortening of the maturities of portfolios. Furthermore, earnings would become far too volatile. She can read the footnotes to find out what she wants to know about market values. [Also included in 1(b) and 4] [GOLDMAN, p. 1-2]
__________
From what has briefly been described of the [foreign] financial analysts' work, there results a series of requirements with regard to accounting data, which are but insufficiently met at present. We have broken them down into . . . major categories. [Also included in 1(b), 2(c), 2(d), 4, 5(a), 5(c), 6, 8(a), 9, 11(b), 11(c), and 15] [BETRIOU, p. 1]
Breaking down business, profit and main items of the balance sheet per origin (geographical zones and business segments). This type of data which could be limited to a few major elements of the profit and the balance sheet is still too often unavailable. [Also included in 1(b) and 15] [BETRIOU, p. 2]
The publication of the profit/loss of the main divisions of a group is also desirable, especially when they have appreciably different margin ratios (moreover, when some lose money). This data is in fact particularly useful for examining the development of the total profit. [Also included in 1(b) and 15] [BETRIOU, p. 2]