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Discretionary allocation of corporate income to segments

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  • Wang, Qian
  • Ettredge, Michael

Abstract

The SEC continues to view companies' segment disclosures, including segment earnings, as needing improvement. Under a controversial provision of FAS 131, the sum of a company's segment earnings need not equal corporate net income. We refer to the difference between summed segment earnings and corporate-level income, when it exists, as the Gap. This study examines why Gaps exist. We find that the existence and direction of Gaps appear to reflect both reporting decisions intended to better reflect segment operating results and reporting incentives to obscure differences in profitability across segments. Gaps created for the former reason are shown to provide useful information to investors. We also find that summed segment earnings are, on average, more useful than corporate earnings (i.e. more persistent, predictable and informative) when there are negative Gaps (aggregated segment earnings exceed comparable corporate earnings), but less useful, on average, when positive Gaps are observed. On balance the evidence suggests that the FASB's decision in FAS 131 to allow segment-related income Gaps was justified.

Suggested Citation

  • Wang, Qian & Ettredge, Michael, 2015. "Discretionary allocation of corporate income to segments," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 1-13.
    • Handle: RePEc:eee:reacre:v:27:y:2015:i:1:p:1-13
    DOI: 10.1016/j.racreg.2015.03.001
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    Cited by:

    1. Roland Königsgruber & Pietro Perotti & Oliver Schinnerl & Fanis Tsoligkas & David Windisch, 2021. "Product Market Competition and Firms’ Disclosure of Cross‐segment Differences in Performance," Abacus, Accounting Foundation, University of Sydney, vol. 57(4), pages 709-736, December.
    2. Göttsche, Max & Küster, Stephan & Steindl, Tobias, 2021. "The usefulness of Non-IFRS segment data," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    3. Cereola, Sandra J. & Nichols, Nancy B. & Street, Donna L., 2017. "Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 119-128.
    4. Cereola, Sandra J. & Nichols, Nancy B. & Street, Donna L., 2018. "The predictive ability of entity-wide geographic sales disclosures: IAS 14R versus IFRS 8," Research in Accounting Regulation, Elsevier, vol. 30(2), pages 121-130.
    5. Edmonds, Mark A. & Smith, David B. & Stallings, Matthew A., 2018. "Financial statement comparability and segment disclosure," Research in Accounting Regulation, Elsevier, vol. 30(2), pages 103-111.

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    More about this item

    Keywords

    Segments; FAS 131; Proprietary costs; Agency costs; Mandatory disclosure; Earnings response coefficient;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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