FAF Takes a Look Back at Standards for Segment Disclosures

By Frank Byrt

The accounting rules makers are nothing if not thorough. In one of the latest examples of that thoroughness, the Financial Accounting Foundation (FAF), charged with oversight of the accounting standards set by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), recently took a look back at the effectiveness of a 1996 accounting standard established to improve the way public companies report financial information about their business segments in annual and interim financial statements.
 
The post-implementation review (PIR) was of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the way that public companies report information about operating segments, including disclosures about products and services, operations in various geographic areas, and disclosure of major customers. The rule does not apply to private companies or to not-for-profit organizations.
 
The FAF review, which included input from investors and other financial statement users, tax preparers, auditors, academics, and financial regulators, concluded that Statement No. 131 "generally achieves" its planned purpose. However, some of the reviewers suggested improvements, which likely means some FASB tinkering to come in the future.
 
The review found that Statement No. 131 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant economic consequences. In its statement, FAF said, "Both the costs and the benefits associated with Statement 131's required segment disclosures are consistent with the Board's and stakeholders' expectations."
 
FAF said the information in Statement 131 helps "investors understand the different types of activities in which a company engages and its prospect for future growth. . . . Investors also use the improved segment information to make judgments about the company as a whole."
 
However, it noted that "some companies might be aggregating segments to reduce transparency because of competitive harm concerns or for other reasons." And an issue that will likely be addressed in the future is the need for more consistency across company segments in the measurement and reporting of information, such as gross margin and cash flow, in order to provide investors greater clarity on the performance of the various business units. 
 
"The post-implementation review report on Statement 131 affirms the overall effectiveness of the standard," said FASB Chairman Leslie F. Seidman. "However, the report identified aspects of Statement 131 that stakeholders think could be improved; for example, the effect of changes in technology on the determination of what information is reviewed by the chief operating decision maker. We are considering the reported findings and will provide our initial response in the coming weeks."
 
FAF's oversight responsibility does not extend to recommending standard-setting action, which is the sole, independent responsibility of FASB. 
 
This is only the second such review of a FASB standard undertaken by FAF, but there are likely more to come. "With the completion of our second post-implementation review, we believe that PIR has become an established and valuable part of the standard-setting process," said FAF President and Chief Executive Officer Teresa S. Polley. 
 
Access the entire FAF report.

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