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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Jul 25

Written by: Jack Ciesielski
7/25/2005 6:08 AM 

Segment information has long been one of the areas that users of financial statements pretty much agree: more is always better. For the longest time, the segment information was something of a contradiction. Companies supplied the information in their annual reports according to a FASB prescription in Statement No. 14 - but in discussions with management, or in earnings conference calls, or reading the MD&A of SEC filings, investors found that the reported segment information didn't match up to the way managements were communicating their results.

A classic example: Sony Corporation. The company reported but two segments - Electronics and Entertainmnent - despite calls by its auditors and U.S.-based finance people for a split between "Music" and "Pictures" in the segments. You'd tend to believe they had managers of the motion picture business, but that wasn't the way things were reported to investors. In 1994, the firm's movie business was in sad shape and led to surprise asset writedowns, but the segment disclosures and MD&As prior to the writedowns, were never granular enough to give investors any clues. Eventually, the SEC slapped Sony with a "cease and desist" order.

Enter Statement No. 131, effective in 1998. Its aim: to have companies report segments to analysts and investors in the same fashion that they manage them. That way, reported results and management discussions are in synch. A beautiful thing, indeed.

From time to time, the SEC rattled its saber about the proper presentation of segments under Statement 131. And last week, it looks like Johnson Controls was on the receiving end of the saber: based on SEC staff inquiries, the firm filed a non-reliance 8-K on its financials filed for 2002 through 2004, and the quarterly filings through 2005. It will revise its segment disclosures for the Automotive Group. (Its Controls Group will remain unchanged.)

In 2004, the Automotive Group made up 77% of the 2004 revenues, 78% of assets, and 83% of total assets. Was it managed as just one unit? With a geographically diverse business like Johnson Controls', it would be tough to believe that. In the revisions to be presented, the Automotive Group will be shown as four segments: Seating & Interiors – North America, Seating & Interiors – Europe, Seating & Interiors – Asia, and the Battery Group.

From the sound of the titles of the new segments, those businesses must be the way they are managed internally - and thus, should be presented in the financial statements to investors. It will be interesting to see if there are any other restatements provoked by the SEC staff - or if this restatement initiates any self-examination by other firms.