In accordance with AASB 8, it is imperative for the company to report not only consolidated results of the business but also the corresponding results of various operating segments. The identification of these operating segments is the discretion of the company and it is expected that the operations segments which the company internally treats as one must also be externally listed as an operating segment (Gay & Simnett, 2012). In order to ensure that the underlying exercise is meaningful from the disclosure perspective, it is imperative that these operating segments must account for atleast 75% of the total operating revenue of the company. This would ensure that the investors are able to obtain relevant information about the business. Further, there are other related provisions which pertain to the segment reporting such as AASB 12, AASB 13 (Deegan, 2015).
Objective and research methodology
In wake of the above background, the objective of the given task is to provide theoretical background with regards to need for segment reporting in companies. Also, there would be brief discussion of relevant literature on the segment reporting and the underlying need. Besides, a company has been selected in the form of BHP Billiton which is one of the largest mining companies in the world. Through the example of BHP Billiton, the application of segment reporting would be highlighted with brief discussion of the various segments that the company has. Additionally, any change that the company may have made in the recent times with regards to segment reporting would also be highlighted in this report. Thus, the research methodology deployed in this case refers to the use of both theoretical and practical approach. While the theoretical discussion would build on the need of segment reporting, the use of practical example in the form of BHP Billiton would validate the same.
Literature Review
According to researchers, a critical role is played by segment reporting both in terms of internal and external information dissemination. This is because on one hand the various investors have informational needs that are better served by disclosures such as segment reporting. Also, this is internally useful since it tends to highlight the performance of the different segments which forms the basis of performance management and simultaneously also ensures that there are no frauds in reconciliation (Deegan, 2015). As per Dana Hollie et. al. (2011), there are a host of frauds that tend to occur in segment reporting and these are not limited to small firms but major corporations. Benjamin et. al. (2010) highlight in the Malaysian context that as the businesses have grown more complex and conglomerates have become common, the importance of segment reporting has grown and also non-adherence to norms related to segment reporting tends to have an adverse impact on the valuation of respective companies. Also, other researches have indicated that the gains in terms of competitive advantage are higher for smaller firms that tend to resort to segment reporting. Besides, the more detailed, the segment reporting is in terms of revenue coverage, the more significant the disclosures would be considered.
Theoretical Background
In companies where the management and ownership do not converge, there is an inherent agency problem and hence periodic financial disclosures are required to be made. These tend to satiate the informational needs of the external users particularly shareholders who need to make the decision with regards to investing in the company based on the disclosures. In the recent times, as the businesses have grown in size, the informational needs of the external users are better served by the segment reporting. This also provides viral information to analysts about the performance of various divisions which then can be extrapolated into expected future performance based on which a fair valuation of company can be drawn (Gay & Simnett, 2012).
However, these segment reporting disclosures has costs in the form of key segmental data being released which can attract competition. For instance, in the segments that are highly profitable, it is likely that the competitors would make an entry or foray. On the other hand, in those businesses which are giving below average performance or loss making, it is likely that the competitors may bid on the same in the hope of turnover. Also, the risk taking ability of the management would be adversely impacted since any adverse impact would be difficult to hide (Deegan, 2015).
Current Trend
There is an increasing trend towards segment reporting driven both by mandatory disclosures along with voluntary disclosures. With regards to BHP Billiton, this makes sense considering the wide geographical reach and presence in different minerals ore along with oil. Since these are different commodities whose price are determined by their respective demand and supply factors, hence these have been treated as different operating segments. In accordance with the latest annual report of the company, there are primarily the following five segments of the business listed in decreasing order of revenue (BHP, 2017).
In the recent times, there has been a change in the segment reporting as earlier the company focused on provided the collective results of each of the above mentioned segments. However, since 2016 onwards, the company besides providing a consolidated performance of each of the above segments, also presents the contribution of each of the individual location in a given segment. This is highlighted below (BHP, 2017).
Even though the company is not mandated to provide the above information, but still the company voluntary provides such information to enhance the overall transparency. Hence, there is a clear trend on the part of company to disclose the details of the segment reporting to have greater transparency.
Analysis and Interpretation
The company has global presence which is apparent from the following figure (BHP, 2017).
The above figures highlight the geographical presence of the company with presence in all the major continents. Besides, the geographical reporting of the company highlights the following distribution of non-current assets which is indicative of the scale of operations of the company (BHP, 2017).
It is apparent that company has majority presence in Australia with significant presence in North America and South America. The company’s presence in Asia and Africa does not seem much significant from the deployment of non-current assets which are critical for mining operations.
Also, considering the geographical spread of operations, it would be expected that the company would have global customers. This is validated from the following table (BHP, 2017).
It is apparent from the above table, that about 50% of the revenues is derived from China thereby highlighting the vulnerability of the company to the demand of various mining ores in China. The other key customers are based in Japan and India.
Further, the key information about the various operating segments along with their financial performance from the latest annual report of the company is captured as follows (BHP, 2017).
From the above table, it is apparent that maximum revenue for the company is derived from the iron ore segment. Also, out of the four segments, petroleum has the least contribution in terms of revenue. Similar trend is seen with regards to the profits from the segments. It is also noteworthy that the total revenue from the reported segments tends to exceed 75% of the total revenue reported by the company in FY2017.
Findings
Based on the above analysis and interpretation, it is apparent that BHP Billiton has global operations and global customer base. The four key reporting segments for the company are coal, iron ore, copper and petroleum even though the company does not interests in other minerals such as uranium. The company besides complying with the AASB8 and related accounting standards also does voluntary disclosures in the form of information regarding each of the facility in the given segment. The importance of these segmental disclosures can be easily understood owing to differences in the price trends of these commodities. The demand of these ores tends to be derived from different industries and hence the segment reporting allows the investors and analyst to obtain information about the ongoing prices of the given commodity which is pivotal for future estimation. Besides, considering that the company is one of the largest producers of a host of minerals, hence information regarding any disruption of any facility can impact global supply and hence the prices. Clearly, such information is vital to be disclosed and leads to better forecast of future performance for the company.
Conclusion
The theoretical background and relevant literature review both lend support to the growing need of segment reporting owing to the growing complexity of businesses which require detailed information about the different business segments so as to improve future visibility. This is demonstrated in case of BHP Billiton which has a wide3 geographical spread of business along with dealing with different commodities. These commodities tend to have different demand and supply factors and hence are rightly classified as separate segments. The company has made recent changes in segmental reporting and goes way beyond the mandatory disclosures by making disclosures regarding each facilities’ performance. This is expected to enhance transparency and provide better estimate of the ongoing pricing trends in different mineral ores.
References
Benjamin, S., Muthaiyah, S., Marathamuthu, M & Uthiyakumar, M. (2010) A Study Of Segment Reporting Practices: A Malaysian Perspective. Journal of Applied Business Research. 26. 31-42.
BHP Billiton (2017) Annual Report 2017, Retrieved from https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gay, G. and Simnett, R. (2012), Auditing and Assurance Services in Australia, 5th ed. Sydney: McGraw-Hill Education
Hollie, D., Nicholls, C. & Shaokun, Y. (2011). A Forensic Accounting Examination of Financial Reporting Fraud at the Segment Level, Retrieved from https://www.researchgate.net/publication/228283157_A_Forensic_Accounting_Examination_of_Financial_Reporting_Fraud_at_the_Segment_Level
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