The Effect of SFAS No. 131 on Numbers of Reported Business Segments

37 Pages Posted: 15 Feb 2000

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Soo Young Kwon

Korea University

David B. Smith

University of Nebraska

Date Written: April 27, 2000

Abstract

Users alleged that, under SFAS No. 14, many large and complex firms 'under-reported' their segments. A primary reason offered to justify this behavior was managers' desire to avoid competitive harm that supposedly would arise from disclosing sensitive segment profits to competitors, customers and suppliers. One intended consequence of SFAS No. 131 was that many firms would be required to increase the numbers of their reported segments. This paper examines the effect that adopting SFAS No. 131 had on the numbers of business segments reported by a sample of 3,735 firms.

If the new standard is successful in achieving the FASB's stated goals, changes in numbers of segments should be positively associated with firm size and complexity of operations. Changes also should be positively associated with proxies for under-reporting of segments under SFAS No. 14. Alternatively, if some firms continue to under-report, changes in segments should be negatively associated with proxies for competitive harm. We find that prior under-reporting is associated with increased numbers of segments upon adoption of SFAS No. 131. Firms subject to imperfect competition, measured by an industry concentration ratio, had smaller increases in segment numbers. This evidence suggests that SFAS No. 131 has been a mixed success in achieving one of the FASB's stated goals for segment reporting.

JEL Classification: C21, D81, D82, G38, M41, M45

Suggested Citation

Ettredge, Michael L. and Kwon, Soo Young and Smith, David Brian2, The Effect of SFAS No. 131 on Numbers of Reported Business Segments (April 27, 2000). Available at SSRN: https://ssrn.com/abstract=208549 or http://dx.doi.org/10.2139/ssrn.208549

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Soo Young Kwon

Korea University ( email )

#613 LG-POSCO Hall
145 Anamro, Seongbuk-Gu
Seoul, 136-701
Korea, Republic of (South Korea)
82232901937 (Phone)

David Brian2 Smith

University of Nebraska ( email )

College of Business Business Administration
Lincoln, NE 68588
United States
402-472-2927 (Phone)
402-472-4100 (Fax)

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