3(d). Frequency of Segment Reporting
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]
Quarterly segment information would improve the value of quarterly financial information. [FASOversight, p. 2]
__________
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), and 11(a)] [PREVITS, p. 21]
__________
Quarterly Segment Reporting (QSR)
The topic of disaggregation is sufficiently important to merit its own separate discussion in the next part of this report. Here we wish to discuss only the need for disaggregated information to be provided more frequently than it is currently. Quarterly segment reporting (QSR) is a topic that has been advocated by analysts so consistently and so avidly over so many years that it has acquired its own acronym. In 1990, the AIMR Financial Accounting Policy Committee surveyed member analysts in the United States and Canada who responded overwhelmingly in favor of mandated quarterly segment reporting12. Not only do analysts need financial reports as frequently as every three months, they need them in vastly more detail than is mandated today. Some companies do an excellent job in presenting segment data; others offer only the bare minimum disclosures required. We seek a much higher standard to apply to the latter. [Also in 11(a)] [AIMR/FAPC92, p. 37-38]
It is the unusual publicly-owned company that today operates with a single line of business or in a single geographical area. All others requires analysis of their separate parts before an assessment can be made of their value as a whole. It is absolutely necessary for analysts not to have to wait for a full year to discover, for example, that a manufacturer of heavy equipment suffered major losses in Latin America earlier in the year. Or, that a manufacturing operation has been losing money, a fact concealed by the excessively good results of its finance operations. These data must be made available more frequently than is required now. [Also in 11(a)] [AIMR/FAPC92, p. 38]
[Context] The AIMR report's introduction to the section entitled "Summary of Important Positions and Guide to Future Actions" begins and ends as follows:
Much of this report relates to the present state of the art and implications for future developments in financial reporting. Righfully, so do most of the positions stated in this section . . . [T]hey all build on positions taken by AIMR in the past . . . [Also included in 1(b), 1(d), 4, 5(a), 8(c), 11(a), 12, 18(a), 18(c) and 18(d)] [AIMR/FAPC92, p. 59]
We expect the positions set forth below to build on the precedents of the past. That does not prevent them from breaking new ground, but they do not introduce significant inconsistencies with previous AIMR positions. To the extent that they do establish new stances those are largely the result of the changing world that we describe earlier in this report. [Also included in 1(b), 1(d), 4, 5(a), 8(c), 11(a), 12, 18(a), 18(c) and 18(d)] [AIMR/FAPC92, p. 60]
Those two paragraphs introduce the following summary of a position taken by the Committee.
Provide Frequent and Detailed Financial Reports
Interim financial reporting requirements in this country have been the subject of much unjust criticism. They have been blamed for everything from "short termism" to a degradation in U.S. competitiveness. Not only are those charges without merit, they also fail to credit interim reporting for its vital role in keeping investors informed, diminishing opportunities for trading on privileged information, and maintaining peak efficiency of the financial markets. We believe we present in this report and elsewhere27 valid reasons to continue mandated quarterly financial reporting. [Also included in 1(d) and 11(a)] [AIMR/FAPC92, p. 63]
One of the primary deficiencies in contemporary financial reports is the minuscule amount of disaggregated data. In annual reports, that which is provided usually is skimpy and many firms have interpreted the provisions of FAS 14 so as to report fewer segments than an analyst might expect, and sometimes segments are defined by the firm in peculiar ways. Not only are we in urgent need of new definitions and disclosure requirements to emanate from the newly-inaugurated FASB project on disaggregation, we also need segment reporting extended to interim reports. Analysis of a complex enterprise with diverse operations is futile in the absence of significant quantities of disaggregated financial data. [Also included in 1(d) and 11(a)] [AIMR/FAPC92, p. 63]
__________
[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 frequency of segment reporting.
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(b), and 11(c)] [TI 10/16, p. 21]
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(c)] [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(c), and 17(b)] [TI 10/16, p. 23-24]
[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
If the company in the annual report reports on a FASB 14 basis, the SEC should insist that they do so on the same basis in the quarterly reports. [Also included in 3(e)] [TI 12/9, p. 24]
__________
Committee/Staff/Observer
. . . [S]hould segment disclosures be required in interim reports? If so, should the interim segment disclosures be the same as in the annual report, less extensive, etc? [TI 12/9, p. 26]
Participant I-12
Yes. [TI 12/9, p. 26]
Participant I-6
I think they should be required every single quarter. They should be more thorough than they currently are. I do the information every quarter in my industry; we need better disclosure every quarter. [TI 12/9, p. 26]
Participant I-12
I believe we need quarterly segment disclosure in order to understand a business. But there is also the issue of cost for preparers of the information. In some cases, the cost can be quite high; in other cases, companies have the data available as part of their management information and it's not costly. [TI 12/9, p. 27]
Participant I-6
This goes back to [participant I-7] 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(b)] [TI 12/9, p. 27]
Participant I-9
I can see how for [participant I-12] industry it would be crucial. For the industries I am most familiar about, health care and retailing, I don't think it's that necessary. If the quality of the data drops off, then it's counterproductive. If a business doesn't have a rapid rate of change, you are not going to have dramatic changes from quarter to quarter. If you did it in retailing, the retailers would fudge the numbers. If you do it well (segment reporting) once a year, then it's better than having quarterly statements prepared on a less reliable basis. [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(b)] [TI 12/9, p. 27]
Participant I-9
But do they have the information? If you're closing the books of your Thailand subsidiary at a different time than you do the ones in Germany and U.K., isn't it a burden to ask them to do this four times a year instead of one? [TI 12/9, p. 27]
Participant I-11
I hope they have their acts together more than four times a year. [TI 12/9, p. 27]
Participant I-12
[Name deleted] has an extensive international operation and they report on the 9th day of the month at the end of the quarter. What they've done is to close their books internationally slightly earlier than they do domestically. The first time they did it, all the numbers were off, but the next time you had reasonable comparability; it's not like they close the books internationally in the middle of the quarter. [TI 12/9, p. 28]
Participant I-9
But for a lot of businesses, I think it's much more of a problem than for [name deleted] and I don't think it's that relevant. [TI 12/9, p. 28]
Participant I-8
Once you're organized to do it once a year, I don't see why you can't do it four times a year. [TI 12/9, p. 28]
Participant I-7
I follow a group of manufacturing companies and they range in size from $300 million to $65 billion. By the 10th of every month (it's true that the foreign operations lag by 30 days but they're included on a lag basis) this information is available to the chief executive and the chief financial officer. And if it isn't, I don't want to follow the company. [TI 12/9, p. 28]
Participant I-9
Just looking at the research department of our shop. Once a year, I'll do a cost allocation for the branch offices; if I'm forced to do it quarterly, I'm not going to do it with the same intensity and with the same precision. What I'm arguing about is how well it's going to be done. [TI 12/9, p. 28]
[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of interim reporting. During the discussion, comments were made on the frequency of segment reporting.
Participant I-7
I'd like to make an appeal here that any company that has more than one business and that doesn't produce FAS 14 disclosures should be significantly penalized. [Also included in 11(c)] [TI 3/17, p. 41]
Committee/Staff/Observer
Does the market already penalize those companies? [Also included in 11(c)] [TI 3/17, p. 41]
Participant I-7
I would say that the penalty ends up on the bottom line of the company. In the industry that I follow, one out of 8 companies produces FAS 14 information and it does not get a higher valuation because of a lack of consistency in operating or profit performance, even though they give more information than the other 7 companies. [Also included in 11(c)] [TI 3/17, p. 41]
Participant I-12
In my industries, my observation has been that whenever a company begins to provide segment detail, the valuations do go up after a year and they stay up. I think the reason for that is that it provides clarity of what's going on in the company and consistency between the way management talks about its businesses and run them and what we analysts see and are able to track. [Also included in 11(c)] [TI 3/17, p. 41-42]
Participant I-7
In my industry, clarity without performance doesn't buy anything in terms of incremental value. [Also included in 11(c)] [TI 3/17, p. 42]
Committee/Staff/Observer
[Participant I-12], is that because the companies that are providing such information are the stronger companies? [Also included in 11(c)] [TI 3/17, p. 42]
Participant I-12
Yes, they wouldn't provide it otherwise. [Also included in 11(c)] [TI 3/17, p. 42]
Participant I-7
In my industry, the strongest companies don't provide that information. [Also included in 11(c)] [TI 3/17, p. 42]
Participant I-12
It comes back to the old saying that if you don't provide the information, it means one of two things: either you don't know, which is scary, or you're afraid to, which is even scarier. Both conclusions are negative. [Also included in 11(c)] [TI 3/17, p. 42]
[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-13
I think the pressure from the investment community on disaggregated information has been strong on the business community, and relatively successful, with one glaring exception, and that's interim segment information. And as a result, my answer to [committee/staff/observer] question would be that I think that at this point establishing core earning power is maybe more critical. [Also included in 11(c) and 15] [TC 12/8, p. 27]
__________
Committee/Staff/Observer
FASB statement 14 requires disaggregated information only in annual statements. Should disaggregated information be required in interim statements as well? [Also included in 11(c)] [TC 12/8, p. 37]
Participant C-13
Absolutely yes. I and many users feel quite strongly on this issue. There is significant evidence that there is material information content in quarterly reports. Therefore, if any kind of disaggregated information is important, it's also important in interim statements. And the volatility of results and the practice of companies of buying and selling divisions makes it imperative that on an interim basis you're able to analyze firms on disaggregated basis. [Also included in 11(c)] [TC 12/8, p. 37]
Committee/Staff/Observer
What type of information would you want to see on that? [Also included in 3(c) and 11(c)] [TC 12/8, p. 38]
Participant C-13
Same as annual. [Also included in 3(c) and 11(c)] [TC 12/8, p. 38]
Participant C-12
As strongly as I feel about getting disaggregated information, I think I can live without it on a quarterly basis, unless there is a major change. [Also included in 11(c)] [TC 12/8, p. 38]
Participant C-13
Well, when there's a major change, you need to have had it reported. [Also included in 11(c)] [TC 12/8, p. 38]
Participant C-12
I'm not sure how you enforce that. Otherwise quarterlies are getting bigger and bigger, and I'd just as soon leave something out. [Also included in 11(c)] [TC 12/8, p. 38]
Participant C-15
I'm not even sure if companies would physically be able to compile market shares and so on on a quarterly basis? [Also included in 11(c)] [TC 12/8, p. 38]
Participant C-13
Well, they're not required to present market share information even on an annual basis. But my contention would be that if a company is not reporting to its board of directors at least on a quarterly basis, and I'll bet virtually every major company reports monthly to its board of directors, then it's not being properly managed. So the information is available. [Also included in 11(c)] [TC 12/8, p. 38]
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(b) and 11(c)] [TC 12/8, p. 38-39]
Participant C-1
Part of that may be a difference, though, between companies that have heavy seasonal emphasis and companies that don't. For companies with seasonal emphasis, which is most industrial or retailers, the ability to get quarterly numbers is very important by segments. I think the rule for non-financial institutions is that quarterly statements are important, and that there is seasonality to them, and there is differences in the way these divisions or business segments report. And I don't know if you need as much detail as you get in the annual, but the ability to at least be able to determine operating income and revenues is important. [Also included in 11(c)] [TC 12/8, p. 39]
Participant C-13
The reason why I say that you should have the same as in the annual reports is that the minimum statutory requirement for annual reporting is not particularly onerous. Now maybe it should be better, but I think on an interim basis we should get at least what's currently required as a minimum for annual statements. [Also included in 11(c)] [TC 12/8, p. 39]
Participant C-11
I was just going to strongly reinforce what [participant C-13] said. I think in every aspect of business, not just seasonal sales, there are so many changes that go on during a year, interest rate trends and so forth, that if you don't know what's going on in different environments, you just don't know anything. [Also included in 11(c)] [TC 12/8, p. 39]
Participant C-4
I think that investors would probably want a lot more frequent information. For creditors, though, their obligations are a lot more long term in nature. And I think the purpose of accounting is to analyze an entity over an operating cycle. And to disclose too much information in an interim period may cause a lot of volatility in the markets, may cause a lot of panic, or discussion that may not be necessary. If we're in touch with our customers and we have open communication, we can get a lot of that information from them I'm all for improving year end segment reporting or operating reporting, and focusing on the full operating cycle rather than quarterly. [Also included in 11(c)] [TC 12/8, p. 39-40]
Participant C-13
Just an observation or rebuttal, if I may. There is academic literature that shows that quarterly reporting reduces volatility. There are fewer year end surprises. [Also included in 11(c)] [TC 12/8, p. 40]
[Context] Responses to the postmeeting questionnaire to the December 8, 1992 Creditor Discussion Group meeting.
QUESTION 7
FASB Statement 14 requires disaggregated information only in annual statements. Participants did not seem in agreement on the need for interim disaggregated information. Please consider the following:
If interim disaggregated information was provided:
YES NO
I would use it
i. All the time to update my credit
analysis _ 4 _
ii. All the time, but only to identify
"changes" _ 7 _
iii. Occasionally, but not always _ 3 _
iv. Rarely _ 2 _
v. Never, because interim information
is too volatile _ _
Participant C-12 - Occasionally, but not always because interim information is too volatile.
Participant C-18 - In my view, not cost justified to produce this, given limited value.
Participant C-11 - Only one person said he was overloaded and would be happy with annual. If you analyzed his actual work procedures and the requirements of his job, you'd get a different answer, I suspect.
[Also included in 11(c)] [PMQC 12/8, p. 17-18]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of priority of improvements needed in external reporting. During the discussion, a comment was made on segment reporting.
Participant C-13
I also picked core earnings as one of my three. I'm not sure that we need specific rule changes but improved disclosure under existing rules would probably be adequate. Secondly, I chose interim reporting because I think a rule change for a reporting segment would be a major step forward. And thirdly, I chose number thirteen, off balance sheet financing and hedge accounting. I think practice is ahead of theory in this sphere and we need some codification. [Also included in 11(c), 15, and 19] [TC 3/11, p. 69]
[Context] Responses to the postmeeting questionnaire of the December 9, 1992 and January 13, 1993 Investor Discussion Group meetings.
QUESTION 5
a. FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, requires disaggregated information only in annual statements. At the December 9 meeting, a majority of participants were in favor of obtaining quarterly disaggregated information. Do you need quarterly disaggregated information?
Yes 6 No 1
Comments:
Participant I-6: Very important.
Participant I-7: Where not available, company (multi-industry) has too much latitude in its once a year presentation
Participant I-8: Unfortunately the institutionally dominated market has excessively heightened emphasis on short term results.
Participant I-9: Sure, I would like it but this is asking too much of most companies to require it.
Participant I-12: Earnings forecasts are built on a quarterly basis and typically reflect the factors that make or break earnings, which are line of business results
b. If quarterly segment disclosures were made, would you want: The same level of detail as is currently reported in 3 annual statements under Statement 14? Participant I-12: Let's be consistent. The information marked E (Essential) in question 4 3(a)? Participant I-9: Perhaps an abbreviated segment report is the answer. The information marked P (Preferred but Not 1 Essential) in question 3(a)? Comments
c. If quarterly disaggregated information were provided, would you use it: All the time? 4 Participant I-12: I do now for earnings models, although the quarterly info. is only my estimates. Occasionally, but not always? 3 Participant I-9: I would always look at it. It would put me on notice of changes in the business and/or finances. Rarely? Never, because interim information is too volatile?
[PMQI 12/9 and 1/13, p. 7]
__________
Most [CIC] subcommittees agree . . . [that] the following suggestion seems appropriate: [Also included in 1(b), 2(b), 2(c), 3(b), 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(b) and 16(b)] [AIMR/CIC92, p. 3]