Segment Reporting: Analysis of the Impact on the Banking Industry

This paper summarizes a close attention on the application of FASB Statement 131 Reporting Disaggregated Information about a Business Enterprise, and the step to which any consistencies exist in the banking industry. Samples of 8 top-50 banks' were take a view ofed to assess the interpretation and implementation of section reporting. Specifically, this research evaluated the following:

1 Are there consistent part definitions?

2. Are similar performance measurement methodologies used in addressing the profitability of each segment?

3 Are there consistent policies for restating portion financial information?

4. What resources are required to disclose internal reporting and segment reporting?

5 Has portion reporting improved the disclosure of relevant information around the different business activities of the industry?

BACKGROUND

Operating parts are components of a company for which separate financial information is available and is evaluated regularly by dint of the chief operating decision maker (CODM) in deciding in what manner to allocate resources and in assessing performance.

Prior to 1998 detailed information for sections was only required annually, and requirements were vague. To improve this, FASB Statement 131 requires that internal portion financial information should be the basis for external section reporting. "Analysts wanted what management was looking at."2

A 1999 view conducted by Investor Relations Magazine lay the foundation of that 86% of the Association for Investment Management and Research (AIMR) members rated enhanced section reporting as the second greatest in quantity important disclosure issue behind the reporting of extraordinary events3 The prior standard, SFAS 14 - Financial Reporting of parts of a Business Enterprise - had significant shortcomings in the definitions of a portion As a result, most financial institutions chose to report all of its operations in a single, broadly defined industry section The Board established FASB 131 with the following objectives:

a. Better understand the enterprise's performance

b Better assess the enterprise's spectacles of future net cash flows

c Make more informed sagacitys about the enterprise as a whole.4

The standard provided further definition of a section and established quantitative guidelines upon what should be reported separately. However, the sec recognized inconsistency among these definitions:

"In a certain quantity of cases, financial statements of public companies have not conformed to these requirements. We have seen instances where: (1) the internal reporting package included operating information upon more segments than were disclosed in the financial statements; (2) those additional portions were disclosed in management's discussion and analysis (MD&A) or analysts' reports; and (3) the company's executives also discussed the additional parts in press releases or business periodicals."5

SEGMENT DEFINITIONS

FASB believed its of recent origin standard would have minimal organizational or reporting impact. Quite the contrary, more [i]or[/i] less analysts have argued that companies may change their organizational conformation to avoid segment reporting that may provide competitive insights.

According to a 2000 American Accounting Association research six of 160 companies had realigned their organizational construction following the 1998 FASB statement. It was believed that this realignment was taken in an effort to avoid providing insights into the authentic financial results of the company. In all on the contrary one of the six cases, a further review of the portion analysis results in conflicting data between the introductory annual report material, the MD&A, and the portion reports.

The sec stated that "when reviewing part information as part of its normal filing review and make comments [i]or[/i] remarks process, the staff is not reticent to ask registrants for a transcript of internal reports or other materials supplied to the chief operating decisions maker of the company as well as analysts' reports and pres releases. Consequently if the portion information provided in the financial statements does not mirror a similar breakdown of company portions as is evident in the internal reports and other materials, the staff will look for amendment of the registrant's filing."6

Table 1 throw backs the common segments reported in the survey

Although little consistency exists among the reporting portions defined above, the segmentation of retail banking from commercial baking is public Only two of the eight organizations separated their Mortgage Banking practice, although six of these banks have a significant mortgage operation.

According to the contemplate conducted for this research, 100% of the banks define their portions along line of business, although many have internal reports reflecting geography as well. FASB 131 stipulates that organizations who manage along one as well as the other geography and line of business should report the operating portions based on line of business.

Seven of the eight banks reported having centralized services that perform operations or services for all the parts In all seven cases, the outlays of these centers are allocated 100% to the sections The management of these shared services varied from an executive in the corporate part to an executive in single of the line of businesses.