Gains from Disaggregation and the Definition of a Segment: A Note on SSAP 25

The role of line of business segment disclosure is examined in a setting in which disaggregated data is a means of mapping analysts' specialist expertise concerning the future profitability of the industry, to the consolidated profit forecast of the individual firm. Using this analysis, we show formally that relevant segmental disclosure requires that the management of a company define segments in such a way that users (and, in particular, analysts) can use their specialist forecasting expertise. We show that, unless segments are so defined, consolidated profit alone is a sufficient disclosure. This means that appropriate reportable segments may not necessarily coincide with the company's organisational structure, which is unlikely to be determined solely by factors relating to forecasting efficiency. We also provide a rationale for different types of segmental information. Measures of segmental activity enable the expected performance of the industry to be mapped to the individual firm; but using these measures alone assumes that the segment profitability mirrors its industry. The additional disclosure of segmental profit allows this mapping to be varied according to the segment's position in relation to its industry norm.