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.