Segmented Financial Information on External Reports:

The Financial Accounting Standards Board (FASB) now requires that companies in the united states include segmented financial and other data in their annual reports and that the segmented reports prepared for external users must use the same method and definitions that the companies use in internal segmented reports that are prepared to aid in making operating decisions. This is a very usual requirement. Companies are not ordinarily required to report the same data to external users that are reported internally for decision making purposes. This may seem like a reasonable requirement for the FASB to make, but it has some serious drawbacks. First segmented data are often highly sensitive and companies are reluctant to release such data to the public for the simple reason that their competitors will then have access to the data. Second companies must reconcile their segmented financial statements, which need not be prepared under Generally Accepted Accounting Principles (GAAP). It is important to realize that the segmented income statement prepared on Segment reporting and profitability analysis-segmented income statements page does not conform to GAAP. For example statements prepared in accordance with GAAP do not distinguish between fixed and variable costs and between traceable and common costs. To avoid the complications of the reconciliations between non-GAAP segment earnings and GAAP consolidated earnings, it is likely that at least some managers will choose to construct their segmented financial statements so as to be within GAAP. This will result in more occurrences of the problems.

You may also be interested in other articles from “decentralization, segment reporting and transfer pricing” chapter:

1. Decentralization in organizations
2. Traceable and common fixed costs
3. Segment reporting and profitability analysis-segmented income statements
4. Hindrances/Problems to Proper Cost Assignment in Segmented Reporting
5. Segmented Financial Information on External Reports
6. Return on Investment (ROI) for Measuring Managerial Performance
7. Controlling and Improving Rate of Return on Investment
8. Return on Investment (ROI) and Balanced Scorecard
9. Criticism, Disadvantages or Limitations of Return on Investment (ROI)
10. Residual Income-Another Method to Measure Managerial Performance
11. Limitations, Criticism or Disadvantage of Residual Income Method
12. Allow the managers involved in the transfer to negotiate their own transfer price (negotiated transfer pricing).
13. Set transfer prices at cost using variable or full (absorption) cost
14. Set transfer prices at the market price
15. Divisional Autonomy and Sub optimization
16. International Aspects of Transfer Pricing

Other Related Accounting Articles:

• Transfer at Cost to the Selling Division
• Limitations, Criticism or Disadvantage of Residual Income Method
• Criticism/Disadvantages or Limitations of Return on Investment (ROI) Method of Performance Evaluation
• Set Transfer Price at Market Price
• Return on Investment (ROI) and Balanced Scorecard
• International Aspects of Transfer Pricing
• Traceable and Common Fixed Costs
• Segment Reporting and Profitability Analysis – Segmented Income Statements
• Divisional Autonomy and Sub-optimization
• Residual Income-A Method to Measure Managerial Performance