Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the June 3, 2008 issue of the Bangkok Post.
By Nopanuch Apichatsatien
In recent years, the effects of globalisation on the Thai economy and the wave of mergers and acquisitions have changed dramatically how Thai companies operate and structure their corporations.
Many Thai conglomerates have expanded into more diversified businesses and some have entered overseas markets. As a result, their operations have become too sophisticated to allow financial performance to be analysed from the profit-and-loss statement and balance sheet alone. So, how do shareholders or investors know which businesses are making money and which are losing money? The answer is ''segment information''.
Segment information is a part of the financial statements that provides useful information about a company's revenues, operating results and assets, by business segment and geographical segment.
In Thailand, the disclosure of segment information is currently governed by Thai Accounting Standard (TAS) 24. TAS 24 is based primarily on International Accounting Standard (IAS) 14 that dates back to 1998. Although IAS 14 was revised in 2002, the Thai Accounting Standard is still based on the old version of IAS.
IAS 14 requires identification of two sets of reports. One is business segment according to the nature of the products or services, and type of customers or distribution method. The other is geographical according to the location of facilities or markets, economic environment, or proximity of operations. However, it provides only general definitions without providing detailed guidance as to how a company identifies business and geographical segments.
The segment reporting standard applies to companies whose equity or debt securities are publicly traded; for other companies, voluntary disclosure is encouraged. Still, it is rare for non-listed Thai or international companies to voluntarily disclose segment information in their statements, as they fear it may be used by competitors and may disadvantage the company.
A coin always has two sides. Many companies have demonstrated good governance through transparent financial reporting, in which segment disclosure, as an accounting standard applicable for listed companies, plays a major role.
However, there might be threats in terms of business confidentiality, particularly in oligopoly markets. For example, a company that reports high profit margins on a particular business may face pressure to lower prices from regulators and is likely to see competitors muscling into its captive market.
Recently, the International Accounting Standard Board (IASB) issued International Financial Reporting Standard (IFRS) 8 ''Operating Segment'', which supersedes IAS 14. IFRS 8 will be effective for accounting periods beginning on or after Jan 1, 2009. This standard is part of the IASB convergence project with the US Financial Accounting Standards Board (FASB' designed to reduce variations between IAS/IFRS (which are widely adopted in European and Asian countries) and US generally accepted accounting principles (US GAAP).
Though many comments by the European Commission and 300 non-government organisations confirm strongly that accounting standard convergence does not necessarily result in identical IASB and FASB standards, IFRS 8 is one example of a product of the convergence project that aligns the IAS to the US disclosure standard.
So, why are so many people concerned about IFRS 8 which leans towards US GAAP? Upon adoption of IFRS 8, the segment entity will be identified on the basis of internal reports that are regularly reviewed by the management or, in other words, the segment reporting will be defined through the eyes of management. This segment definition by key management under IFRS 8 differs significantly from the existing IAS 14.
The IASB has admitted that it took this approach because the information should already be used internally by management, and there should therefore be less cost for preparers and the information will be available on a timely basis. IFRS 8 was released in 2007.
Now may be the right time to consider whether Thailand needs a more up-to-date segment reporting standard. If the answer is yes, we have to ask ourselves which standard we should adopt. Following the IFRS 8 footprint may appear to be the most likely option for international accounting standard convergence purposes.
However, judging from the current levels of disclosure of large listed companies in Thailand, the major concern is that the basis of preparing management accounts could be significantly different from financial reporting and this could create a burden in preparing the segment information. More importantly, some preparers could view that disclosing the internal management accounts to the public could be excessive.
