Question

I've included the entire scenario. What other information do you need?

SMC Inc. operates restaurants based on various themes, such as Mex-delight, Chinese for the Buffet, and Steak-it and Eat-it. The Steak-it and Eat-it restaurants have not been performing well recently, but SMC prefers not to disclose these details for fear that competitors might use the information to the detriment of SMC. The restaurants are located in various geographical locations, and management currently measures profits and losses and asset allocation by restaurant concept. However, when preparing the segmental disclosures, the company reports the segment information by geographical location only. The company recently hired you to review the financial statements.

1.What disclosures should the company report for segment purposes?

2.The company’s CEO believed that the rules are vague and that the company could easily support its decision to dis-close disclose the segment data by geographic regions. What would you recommend to the CEO and how would you approach the issues?

Answer 1

1.         Information to be presented for each of a firm’s reportable segments:

• General information
• Information about segment operating profit or loss
• Information about segment assets
• Information about the bases for measurement
• Reconciliation (IAS 14 vs. FASB ASC 280) of segment amounts and consolidated amounts for revenue, profit or loss, assets, and significant other items.
• Interim disclosures
• Enterprise-wide disclosures

1.         Product or service disclosures

2.         Geographic area disclosures

3.         Major customer disclosures

2.         Since the management currently measures profit and losses and asset allocation by restaurant concept, an abrupt change to presenting the segment information by geographical location only could be viewed as unethical. However, this area is one where the standards clearly leave the door open for subjectivity in interpretation. If management has a motivation for preferring to keep the information about the poorly performing restaurant private that is not counter to the objectives of the shareholders and other claim-holders (for example, prefers not to expose that information to competitors while a restructuring plan is implemented), then there could be ethical reasons for a shift in disclosure choices. According to FASB ASC 280 , firms should segment their disclosures along the same lines that management uses in decision-making. This does not appear to be the case here. Thus, the CEO’s decision to present the segment information by geographical location seems to be counter to the intent of segmental reporting, i.e., the unveiling of information that has been merged or buried in the consolidated data.