In 2006, the International Accounting Standards Board (IASB) issued a new standard, IFRS 8, Operating Segments, to replace IAS 14R on the same subject, effective 2009. Under IFRS 8, an operating segment can be viewed as a regularly reviewed business component of an entity and economically similar units can be grouped together as one operating segment. The idea is to differentiate between operating segments with varying risk and return characteristics that lead to variability in segment-level profitability. Under the new standard, certain requirements of quality and quantity for segment reporting have been set, and the authors explore the usefulness of these two characteristics for financial analysts. The quantity of segment reporting is measured as the number of segment-level line items. Intuitively, more managerial discretion can be exercised over quality than quantity, and these areas of discretion are associated with such proprietary concerns as market concentration and higher levels of management ownership.

Assessments of multisegment companies pose a challenge for financial analysts, who depend heavily on the disclosures provided. According to the authors, the adoption of the management approach in IFRS 8 has led, on average, to an increase in the number of segments reported but to a decrease in the number of line items disclosed per segment. The authors recommend, for the benefit of practitioners, that standard-setters review the reporting format so that neither the quality nor the quantity of information is compromised.

Interestingly, the number of forecast errors for both underdisclosers and overdisclosers is higher than that for the box-ticker group of companies (i.e., those that follow the standard precisely). This finding can imply either a “disclosure overload” phenomenon or analysts’ discounting the extra disclosure information as being of low quality. Companies with overall good financial performance and those involved in mergers and acquisitions are more likely to be in the higher-quality-information group than in the average-quality-information group. The challenge appears to be how to ensure that high-quality information is being provided in the disclosures.

The authors base this research on one-year information derived from a sample of 270 nonfinancial multisegment European firms in the STOXX Europe 600 Index as of 31 December 2009 that report nongeographic operating segments. They explore both dimensions of segment reporting: quality and quantity.

By using multinomial logistic models in which companies fall into the underdiscloser or overdiscloser group compared with the benchmark (i.e., middle) box-ticker group, the authors examine the quantity issue. Similarly, they investigate measures of segment-reporting quality by using multilogit analyses, classifying segment-reporting quality as high (High Ql), low (Low Ql), or average (Avg Ql). The companies are then plotted along quantity and quality dimensions to determine the accuracy of financial analysts’ earnings forecasts.

The challenge of how to formulate the perfect standard that will address the issue of the quality of disclosure information faced by financial analysts remains. This issue is global, requiring the involvement of practitioners, who should offer their input to standard-setters.