Segment disclosure quality and relevance under IFRS Vs. U.S. GAAP

Abstract

Both IFRS (IFRS 8) and the United States (U.S.) GAAP (SFAS 131) use similar approach for reporting segment information as a part of annual financial statements. Large and multinational firms that operate in more than one operating segment are required by IFRS and the U.S. GAAP to provide financial information about their operating segments in the notes to the annual financial statements using the “management approach.” However, the primary difference between these two pronouncements is how the management approach is implemented. Using a sample of foreign companies cross listed on the U.S. stock exchanges, we test for differences in segment financial reporting under the two sets of financial standards and how this information is valued by the market. We find significant differences in the quality and quantity of segment disclosure made by our sample firms during the fiscal year 2017 under the two sets of accounting standards. We also find that market values the choice of accounting standards as well as the overall quality/quantity of the segment disclosures. Specifically, we find that the decrease in the informativeness of earnings with IFRS as the choice of accounting standards for our sample firms. Additionally, we also find that the predictability and informativeness of earnings is increasing in the quality/quantity of the segment disclosure of the sample firm.