Are recent segment disclosures of Japanese firms useful?: Views of Japanese financial analysts

Since 1990, the Japanese Ministry of Finance (MOF) has required Japanese firms to disclose segment data in annual financial statements. Using a survey instrument, we examine whether Japanese analysts find these segment disclosures to be useful. Our study finds that analysts perceive that segment data aid them in forecasting consolidated sales and net income. However, results also show that analysts are concerned that Japanese firms do not define segments meaningfully and consistently and are arbitrary in the allocation of common costs. Further, the analysts do not believe that the usefulness of segment data improves when it is audited. These results have implications for investors in Japanese stocks and accounting policy bodies, such as the US Securities and Exchange Commission (SEC).     

The materiality of country-specific geographic segment disclosures

SFAS 131 (1997) substantially changed geographic segment reporting in the United States by requiring disclosures to be made by individual foreign country when operations in an individual country are material. Although SFAS 14 (1976) provided a quantitative threshold for determining separately reportable segments, SFAS 131 provides no guidance for determining when operations in an individual country are material. In SAB 99 (1999), the SEC reminds firms that exclusive reliance on quantitative benchmarks to assess materiality is inappropriate; qualitative factors also should be considered.Using financial analysts as subjects, we conduct an experiment to examine two possible benchmarks for determining the materiality of operations in an individual foreign country: (1) the percent of total operations located in an individual country (a quantitative benchmark) and (2) the level of risk associated with the country in which the operations are located (a qualitative benchmark). The results indicate that across two regions both the magnitude of operations and the level of country risk significantly affect financial analysts’ judgments about firm risk. However, the effect that the magnitude of specific country operations has on risk assessment does not apply to countries of relatively high and relatively low risk. These results suggest that, although materiality is often evaluated in quantitative terms, the qualitative criterion of country risk may dominate in importance.     

Geographic segment disclosures: Theories, findings, and implications

This article discusses both the relevant theories and the research findings on geographic segment disclosures under SFAS 14 and relates implications of these findings to the FASB/AcSB's exposure draft. Research studies on geographic segment disclosures are divided into three broad categories: predictive ability, security pricing, and risk assessment. For each category, we provide a theoretical analysis of the importance of geographic segment information and the related empirical findings. Finally, we relate potential implications for the usefulness of geographic segment disclosures to the FASB/AcSB's exposure draft, discussing both weaknesses and improvements.     

The predictive ability of entity-wide geographic sales disclosures: IAS 14R versus IFRS 8

This report examines the predictive value of geographic revenue disclosures under IFRS 8 in forecasting company revenues using four forecast models. The findings show that the predictive accuracy of IFRS 8 entity-wide geographic sales significantly outperform consolidated sales in forecasting consolidated sales one year out. The results indicate that the predictive ability of country specific entity wide geographic sales improves on average by six percent when geographic sales are reported for country of domicile or by each individually material country. The study also finds that geographic sales disclosures by companies located in countries with high and moderate enforcement regimes improve the predictive accuracy of geographic sales by five percent. These results provide evidence that the disclosure of finer geographic sales data is more decision useful and associated with improved predictive accuracy for large listed companies in Europe, Australia and New Zealand.     

Determinants of voluntary disclosure of segment information: A re-examination of the role of diversification strategy

This paper explores the determinants of management's decision to voluntarily disclose segment information. It is an extension of McKinnon and Dalimunthe (1993) who investigate the role of six hypothesised determinants. Their results indicate that firm size, industry membership, ownership diffusion, and the level of minority interest are related to the voluntary disclosure of segment information. However, they find that leverage and diversification into related versus unrelated industries are not related to this disclosure. It is the diversification finding that motivates our work. This paper explores the effect of differences in data, differences in samples, and differences in the measurement of diversification on the McKinnon and Dalimunthe (1993) results. Using an alternative definition of diversification, we find diversification strategy, firm size, and the level of minority interest to be related to segment disclosure while the results for ownership diffusion and industry are mixed. We find no support for a leverage effect.     

Financial statement comparability and segment disclosure

Statement of Financial Accounting Standards (FAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (FASB [1997]), reestablishes standards for how public business enterprises report segment information in financial statements. A prevailing criticism of FAS 131 is that it likely reduces financial statement comparability for firms with similar lines of business. This study estimates comparability of accounting disclosures surrounding the implementation of FAS 131 to examine potential variation in comparability associated with the segment reporting regime shift. Financial statement comparability is operationalized following the De Franco et al. (2011) accounting system comparability measure as the degree that firms have similar mappings for economic performance into financial statements. Results indicate decreased comparability for firms following FAS 131 adoption. Specifically, segment information reformulated according to how companies manage their businesses marginally limits this reduction in comparability, but greater segment information disaggregation through an increase in the number of reported segments attributed to FAS 131 application diminishes comparability overall. This study contributes to the standard setting process, as the FASB has assigned comparability to an important position in its conceptual framework and has made the goal of increasing comparability a vital component of its agenda that drives the need for accounting standards.     

Geographic area disclosures under SFAS 131: materiality and fineness

This paper describes and evaluates certain aspects of the enterprise-wide geographic area disclosures provided by Fortune 500 companies in the implementation of SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” The first objective of this study is to determine how companies are complying with the materiality criterion of SFAS 131 for determining when an individual country is reportable. The second objective is to evaluate whether foreign operation disclosures provided by companies in accordance with SFAS 131 result in a finer set of information than was provided under SFAS 14. The results suggest that there is considerable diversity among companies in the way that materiality is defined, with a majority of companies that provide country-level disclosures using quantitative thresholds less than 10%. For a large percentage of companies, the information provided under SFAS 131 appears to be finer than the information provided under SFAS 14. However, a significant minority of companies has taken a step backward in this regard.     

The relationship between competition and business segment reporting decisions under the management approach of IAS 14 Revised

This research addresses the relationship between industry competition and managers’ choice regarding whether to separately disclose a business segment following the adoption of International Accounting Standard 14 Revised (IAS 14R) and the management approach to segment determination. Logistic regression reveals a significant negative relationship between disclosure and company returns in excess of the industry average.Prior research indicated a significant relationship between disclosure and abnormal returns under the industry approach to segmentation. Our results provide evidence that this flexibility persists as managers maintain their ability to aggregate segments to protect excess returns under IAS 14R and the management approach. Our findings are timely as the IASB plans to modify its segment reporting requirements as part of the Board's convergence agenda and as thousands of companies worldwide, effective from 2005 onward, are now preparing financial statements using IFRS.     

Global warming, commitment to the Kyoto protocol, and accounting disclosures by the largest global public firms from polluting industries

This study evaluates disclosures on pollution and greenhouse gases by firms domiciled in countries that have ratified the Kyoto Protocol compared to others. The study is based on disclosures made in the annual reports, environmental reports, and websites of 120 of the largest (in terms of revenues) public firms from the chemical, oil and gas, energy, and motor vehicles and casualty insurance industries. The study uses content analysis to construct weighted and unweighted disclosure indices.The results show that firms from countries that ratified the Protocol have higher disclosure indexes as compared to firms in other countries. Additionally, larger firms disclose more detailed pollution information. Multinational firms that operate in countries that ratified the Protocol but have their home offices in countries that did not are associated with lower disclosures. This lack of consistency in disclosure is not likely to be helpful in informing shareholders about the social responsibility of their investments.     

The interplay between mandatory country-by-country reporting,geographic segment reporting,and tax havens: Evidence from the European Union

We investigate whether mandatory public country-by-country reporting (CBCR) by European Union (EU) banks affects geographic segment reporting. We find no significant change in the reported number of geographic segments, country segments, or line items per geographic segment disclosed in segment reporting notes after the introduction of CBCR. Consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities, we find a positive association between tax haven intensity and geographic segment aggregation. Further, we document the location of banks’ operations and the extent of their economic presence in tax havens. We find that EU banks report significantly higher profit margins, turnover per employee, and profit per employee, and lower book effective tax rates for operations located in tax havens, relative to non-tax havens. Our evidence suggests that mandatory public CBCR has limited impact on geographic segment reporting. Nevertheless, CBCR provides additional information to better identify the existence and scale of tax haven involvement. Our results should be informative for EU policymakers currently considering the expansion of public CBCR to all industries. They might also be relevant to researchers considering the decision usefulness of CBCR for financial statement users in estimating after-tax profitability and tax enforcement risk.     

Firm-specific determinants of continuous corporate disclosures

Continuous disclosure is the immediate release of material information by issuers within a regulatory and information dissemination framework. Under such a regime, the market is informed at all times and no investor is disadvantaged by lack of access to information. We attempt to identify the firm-specific determinants of these disclosures.We examine the frequency and regularity of online announcements on the stock exchange websites of companies included in the Morgan Stanley Capital Index for small-cap firms in eight developed markets in Asia and Europe. We find that firms with higher information asymmetry have a higher frequency and regularity of continuous online reporting. Our results also show that the frequency and regularity of online disclosure is positively associated with agency costs, earnings, and analyst following and is inversely related to the length of the product cycle of a firm. Our results are more robust for discretionary disclosures. We also find variations in the frequency of disclosures by countries, some of which are explainable by the online disclosure settings of the countries.     

Identifiable intangible asset disclosures, stock prices and future earnings

As a consequence of regulatory reforms currently being initiated as part of international convergence, it is likely that the recognition and disclosure of identifiable intangible assets by Australian firms will cease. This study provides empirical evidence on how this will impact financial reports. First, evidence is provided of a positive association between stock prices and voluntarily recognized and disclosed identifiable intangible assets. Second, evidence is provided of a positive association between identifiable intangible assets and realized future period income. This provides insights into the nature of the information provided by intangible assets, and identifies a basis for the association between stock prices and identifiable intangible assets. This leads to the conclusion that identifiable intangible assets disclosures are value relevant, and that with the application of the restrictive recognition rules in AASB138 these disclosures in financial reports will be greatly diminished.     

Optimistic bias in management forecasts by Japanese firms to avoid forecasting losses

Listed firms in Japan are effectively compelled to report management forecasts of sales, ordinary income, and net income along with actual earnings and sales each year. Prior studies report that Japanese managers tend to announce optimistic forecasts of earnings. We show that a large part (61.6%) of the overall optimistic bias in management earnings forecasts in Japan can be explained by loss forecast avoiding behavior of a small fraction (5.25%) of firms. Such behavior is caused in part by the view of the main bank and power group that the management forecast of earnings is the manager's earnings target. Our findings suggest that the Japanese stock market recognizes such loss forecast avoidance and accordingly discounts new information in management forecasts.     

The Association Between Market and Exchange Rate Risks and Accounting Variables: A GARCH Model of the Japanese Banking Institutions

This study has two purposes. First, it estimates the market, interest rate, and exchange rate sensitivities (betas) of the Japanese banking institutions. Second, it investigates the relationship between the market-based measures of risk and accounting-based financial ratios. We extend the literature in three important ways. First, we employ a multi-factor GARCH model to estimate the betas. This framework incorporates non-linearities in the bank stock return modeling and allows for time-varying risk premia. Second, we investigate the determinants of market and exchange rate risk in terms of bank financial ratios. To this end, we regress the beta measures derived from the GARCH model against the corporate decision variables to determine the direction and the magnitude of the impact of the latter on the market and exchange rate risk exposures. Third, by using data on the Japanese banking institutions, we provide a comparison of the bank interest rate and exchange rate sensitivities and the strength of the links between the risk measure and the corporate decision variables between the U.S. and the Japanese banking institutions. This comparison sheds light on the robustness of the results concerning interest rate and exchange rate risk, and their determinants, across the two countries. Several interesting results are obtained. First, empirical results indicate that interest rate is only occasionally significant while market and exchange rate variables are significant for all the banks in the sample. Second, market and exchange rate risk measures do impound information in the financial ratios with the explanatory power of the market beta model being higher than that of the exchange rate beta model. Third, the association of the market-based risk measures and the financial ratios is weaker for the Japanese banks than those found for their U.S. counterparts in the existing literature.JEL Classification: G21, F37     

Impact of Segment‐level Natural Resource Operational Risk Reporting on Earnings Predictions

Non‐financial reports alert investors to operational risks associated with issues such as insufficient access to natural resource inputs and related costly interruptions to production, while segment‐level reports alert investors to operational risk distribution across a firm. An important issue, to date unexplored, is how segment‐level non‐financial reporting has an impact on earnings predictions. We report the results of an experiment used to examine how mining company segment‐level water reports affect investors' earnings predictions, where water reports indicate whether the firm and its segments will have access to sufficient water to meet production needs. We find that investors do not change their earnings predictions when firm and segment‐level reports indicate low water risk but they do revise down their earnings predictions when firm and segment‐level water reports indicate high water risk. This is consistent with investors responding to the additional information provided in segment‐level reports confirming that water risk is high across the firm. Regardless of whether firm‐level water reports indicate high or low water risk, when segment‐level reports indicate that one segment is low water risk and another is high water risk, investors revise down their earnings predictions. This is consistent with investors recognizing that natural resource operational risk concentration in one segment can affect earnings more than evenly‐distributed risk. Overall, our findings suggest that belief‐adjustment theory explains how investors react to prospective operational risk information contained in segment‐level water reports according to the similarity of the segment‐level risks, and that this information is factored into earnings predictions.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

Country-specific risks and geographic disclosure aggregation: Voluntary disclosure behaviour by British multinationals

Country-by-country reporting can promote accountability and corporate transparency by highlighting the activities of multinational firms in different countries. We examine the voluntary disclosure behaviour of leading British multinational firms in respect of country-specific risks. Specifically, we consider whether British multinationals' engagement in geographic disclosure aggregation/disaggregation of their country-by-country operations is associated with the country-specific business, economic, and political risks faced by their principal operating subsidiaries. We study the information disclosed in two key sections of corporate annual reports: segment information, and principal uncertainties and risks. Our findings show that British multinationals are less likely to voluntarily report their segment and risk information on a disaggregated geographic country-by-country basis if they are engaged in operations in countries associated with higher levels of country-specific risks. Country-specific risk disclosures are an important case, consistent with voluntary disclosure theory, where costs tend to outweigh benefits from the perspective of what is perceived to be in a multinational firm's best interests.     

Examination of U.S.-based Japanese subsidiaries: Evidence of the transfer of the Japanese strategic cost management

As a result of global competition, many Japanese companies are now operating in the United States. This article presents a survey of the management accounting methods employed by U.S.-based Japanese manufacturers and documents evidence about the current direction of accounting practices that are being transferred from Japan to the U.S. work environment. The results of the study show that most of the U.S.-based Japanese firms are similar to Japanese domestic firms in their use of management accounting methods of target costing and value engineering, variable costing, and strategic adaptation of traditional methods such as standard costing and budgeting. It is also evident that U.S.-based Japanese affiliates may be influenced by U.S. practices, as shown by significant usage of activity-based costing and internal rate of return for evaluating capital investment projects. This article is an important part of a continuing effort to study the development of management accounting among foreign-owned subsidiaries in the U.S., helping them to meet the challenges of global competition. Additionally, expanding this line of research on foreign subsidiaries that apply world class management accounting practices in other countries may assist U.S. multinational firms in their overseas subsidiaries' operations. Two limitations of this study and, thus, suggestions for future research are identified. First, the data on U.S.-based Japanese affiliates were collected for one point in time. Second, this study did not match each U.S.-based Japanese affiliate with its parent in Japan.     

A literature survey of financial reporting in private firms

This paper provides a survey of the empirical literature on financial reporting in private firms. Although private firms play a dominant role in country-level economic development, research on their financial reporting is limited. The survey reveals that there remains uncertainty as to the purpose of financial reporting in private firms which is also reflected in the current body of the empirical literature. The survey provides implications for regulators with respect to regulating the financial reporting of private firms. The survey also identifies some limitations of existing research and offers potential avenues for future research.