SFAS 131 (1997)
IAS 14 (Revised, 1997)
Segment Reporting

In June 1997, the FASB issued SFAS 131, revising SFAS 14 standards for reporting information about operating segments. The FASB and the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) collaborated on this project and reached the same conclusions. The IASC, which had also been working on a revision of IAS 14, reached somewhat different conclusions despite identical stated objectives. The exposure drafts for these standards are discussed in The Analysis and Use of Financial Statements (AUFS) Box 13-4, pages 717-718. Both final standards reduced the disclosure requirements proposed in the EDs.

SFAS 131 Requirements

The standard requires use of the management approach; that is, segment reporting depends on the firm's internal organization. The standard defines an operating segment as a firm component

1. that engages in business activities generating revenues and incurring expenses
2. whose operating results are regularly reviewed by the enterprise's chief operating decision maker to allocate resources and assess performance
3. for which discrete financial information is available

Reportable segments are operating segments that report any of:

• revenues (including intersegment revenues) of at least 10% of total revenues (including intersegment revenues) of all reported operating segments

• profit (loss) of at least 10% of the combined profit (loss) of all operating segments reporting a profit (loss)

• assets of at least 10 percent of the combined revenues, profit or loss, or assets of all operating segments.

A reportable segment may aggregate two or more operating segments if their products and services, production processes, type of customer, distribution, and regulatory environments are similar. Reportable segments must total at least 75% of external revenues; if not, additional segments must be reported until that threshold is reached.

Required Disclosures

SFAS 131 requires four types of information:

1. General information about factors used to identify reportable segments, including the basis of organization and classes of products and services that are the sources of revenue for each reportable segment.

2. A measure of profit and loss and the following data for each reported segment:

1. revenues from external customers
2. intersegment revenues
3. interest revenue and expense (which may be netted for financial businesses if reported that way to the chief operating decision maker)
4. depreciation, depletion, and amortization expense and other significant non-cash items
5. unusual items included in reported segment profit or loss
6. equity in net income of equity method investees
7. income tax expense
8. extraordinary items
9. total segment assets
10. additions to long-lived assets (mainly property)
11. investment in equity method investees
12. Items i. through viii. must be reported only if they are included in the measure of profit or loss reported to the chief operating decision maker. Items x. and xi. must be reported only if included in the determination of segment assets reviewed by the chief operating decision maker.

3. Reconciliation of items i. through xi. above to the corresponding enterprise amounts.

4. Interim period financial statements must disclose for each reportable segment:

1. revenues from external customers
2. intersegment revenues
3. segment profit or loss
4. any material change in total assets from the prior annual report
5. any differences from the prior annual report in the basis of segmentation or the measurement of segment profit or loss
6. a reconciliation of segment data to total consolidated income from continuing operations before income tax

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Measurement of segment profit or loss:

Because SFAS 131 mandates the use of segment data prepared for management use, such data may not be consistent with data reported for the enterprise as a whole. Principal differences may include:

1. Omission of interest expense, research and development, employee benefit expense, and other income and expense categories not allocated by segment for internal reporting.
2. Use of different accounting methods such as statutory methods for regulated subsidiaries and non-U.S. GAAP for foreign subsidiaries when adjustments for those differences are not made for internal reporting.
3. Use of different accounting methods (e.g. inventories) when adjustments (such as LIFO) are made in consolidation.

These differences will be apparent from the reconciliation requirements. However in most cases users will not be able to allocate them by segment.

Lack of Symmetry:

The use of internal data may also result in asymmetry between assets and segment result. For example, segment assets may not include jointly used assets or unallocated assets. Yet segment result may include depreciation expense or other allocations related to those assets if such allocation is made for internal reporting.

Amendment to SFAS 94:

SFAS 131 eliminates the SFAS 94, Consolidation of All Majority-Owned Subsidiaries requirement to disclose summarized information about subsidiaries that were not consolidated prior to the effective date of SFAS 94. This elimination is a significant loss of information because firms are not required to disclose segment liabilities. Prior to the issuance of SFAS 94, the non-homogeneity exemption of Accounting Research Bulletin 51 was invoked to use the equity method to report highly leveraged financial subsidiaries.

Enterprise-Wide Disclosures:
SFAS 131 requires the following disclosures (which may be included in segment data), even for firms that have no reportable segments:

I. Revenues from external customers for each product or service or each group of similar products or services.

II. Revenues from external customers in:

A. the firm's home country
B. all foreign countries
C. any material single foreign country

III. Long-lived assets (such as property) in:

A. the firm's home country
B. all foreign countries
C. any material single foreign country

IV. Revenues from each external customer (identity need not be disclosed) accounting for 10 percent or more of the enterprise's revenues and the identity of the segment or segments reporting the revenues. This requirement is carried over from SFAS 14.

Note that the geographic segment requirements are sharply reduced from SFAS 14.  AUFS Page 1134 of Appendix A provides DuPont's geographic segment disclosures under SFAS 14. Page 715 of AUFS Chapter 13 analyzes these disclosures. Under SFAS 131, DuPont would report only

unless any foreign country was deemed material.¹ Information about transfers between geographic areas, after-tax operating income, and capital expenditures are no longer required. It will not be possible to evaluate relative profitability of different regions. 

Effective Date and Transition

SFAS 131 is effective for fiscal years beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, segment information for prior years must be restated to conform to the requirements of this statement unless it is impracticable to do so. SFAS 131 need not be applied to interim financial statements in the initial year of application. However, comparative information for interim periods in the initial year of application must be reported in the second year of application.

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Comparison of IAS 14 (Revised) with SFAS 131

Despite identical stated objectives, the IASC standard has significant differences from SFAS 131. IAS 14 (para. 9) defines business segment as an enterprise component

that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. [Emphasis added]

and a geographical segment as an enterprise component that operates

within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. [Emphasis added]

Economic and political conditions, proximity of operations, exchange controls, and currency risks are among the factors used to distinguish geographic segments. IAS 14 permits firms to define geographic segments on the basis of either the location of the assets (origin of sales) or the location of its customers (destination of sales).

IAS 14 requires the firm to determine whether its risks and reward are predominantly based on business differences or geographic ones. The dominant factor is used for primary segment reporting; secondary segmentation requires fewer disclosures.

Reportable segments under IAS 14 are based on the same quantitative criteria as in SFAS 131. The requirement that segments cover 75% of the firm is also identical.

Although the IASC expects external segment reporting to be identical to segment disclosures provided to top management, the standard has explicit risks and rewards criteria similar to those in the superseded IASC and FASB standards. This "safety net" is intended to ensure that segment data reflect the firm’s portfolio of different business. SFAS 131 does not contain any "safety net." It is not clear that all firms can use the same disclosures to satisfy both SFAS 131 and IAS 14.

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Required Disclosures:

IAS 14 requires slightly greater disclosure for reportable segments than does SFAS 131. Primary segments must report segment result for each segment, including:

1. revenues from external customers
2. intersegment revenues
3. interest revenue and expense (which may be netted for financial businesses if reported that way to the chief operating decision maker)
4. depreciation, depletion, and amortization expense and other significant noncash items
5. (encouraged but not required) unusual items included in reported segment profit or loss
6. equity in net income of equity method investees (when investee operations are within a single segment)
7. income tax expense
8. extraordinary items
9. total segment assets
10. *segment liabilities
11. additions to long-lived assets (mainly property)
12. investment in equity method investees [when equity method income is disclosed pursuant to (vi)]
13. *(encouraged) cash flow components (operating, investing, financing)

* Not required by SFAS 131

In contrast to SFAS 131, all disclosures are required regardless of whether they are included in the measure of profit or loss reported to the chief operating decision maker. The requirement to disclose segment liabilities, combined with the symmetry requirement discussed below, enables financial statement users to compute ROE for each primary segment.

Secondary segmentation:

IAS 14 requires the following disclosures for secondary segments:

• When business segments are primary:
1. segment revenue from external customers for each geographic segment (based on customer location) with revenues of at least 10% of firm external revenues
2. segment assets (by geographic location) for each such segment with assets at least 10% of total assets of all geographic segments
3. additions to long-lived assets for each segment in (ii)
• When geographic segments are primary, for each business segment with sales to external customers or assets equal to 10% or more of firm totals:
1. revenues from external customers
2. segment assets
3. additions to long-lived assets
4. if geographic segmentation based on location of assets, and customer location is different, revenues from external customers for each customer-based geographic segment with sales equal to 10% or more of total sales
5. if geographic segmentation based on location of customers, and asset location is different, for each asset-based geographic segment with sales or assets equal to 10% or more of firm totals:
1. segment assets by geographic location
2. additions to long-lived assets

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Measurement of segment profit or loss:

IAS 14, in contrast to SFAS 131, mandates the use of the same accounting methods used to prepare consolidated net income, including adjustments normally made at the parent company level. Such adjustments must be allocated to segments on a reasonable basis

Symmetry:

In contrast to SFAS 131, IAS requires symmetry between segment result and segment balance sheet data. For example, if segment result included interest income (expense), segment assets (liabilities) must include those generating such income (expense).

Interim Reporting:

IAS 14 does not require segment disclosures for interim reports.

Effective date:

IAS 14 is effective for periods beginning on or after July 1, 1998, with restatement required. Earlier application is encouraged.

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¹   Materiality is not defined in SFAS 131 and disclosures are likely to vary widely among firms.

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