Segment Reporting: Analysis of the Impact on the Banking Industry

Article excerpt

This paper summarizes a study on the application of FASB Statement 131, Reporting Disaggregated Information about a Business Enterprise, and the degree to which any consistencies exist in the banking industry. Samples of 8 top-50 banks' were surveyed to assess the interpretation and implementation of segment reporting. Specifically, this research evaluated the following:

1. Are there consistent segment definitions?

2. Are similar performance measurement methodologies used in addressing the profitability of each segment?

3. Are there consistent policies for restating segment financial information?

4. What resources are required to develop internal reporting and segment reporting?

5. Has segment reporting improved the disclosure of relevant information around the different business activities of the industry?


Operating segments are components of a company for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance.

Prior to 1998, detailed information for segments was only required annually, and requirements were vague. To improve this, FASB Statement 131 requires that internal segment financial information should be the basis for external segment reporting. "Analysts wanted what management was looking at."2

A 1999 survey conducted by Investor Relations Magazine found that 86% of the Association for Investment Management and Research (AIMR) members rated enhanced segment reporting as the second most important disclosure issue behind the reporting of extraordinary events.3 The prior standard, SFAS 14 - Financial Reporting of Segments of a Business Enterprise - had significant shortcomings in the definitions of a segment. As a result, most financial institutions chose to report all of its operations in a single, broadly defined industry segment. The Board established FASB 131 with the following objectives:

a. Better understand the enterprise's performance

b. Better assess the enterprise's prospects of future net cash flows

c. Make more informed judgments about the enterprise as a whole.4

The standard provided further definition of a segment and established quantitative guidelines on what should be reported separately. However, the sec recognized inconsistency among these definitions:

"In some cases, financial statements of public companies have not conformed to these requirements. We have seen instances where: (1) the internal reporting package included operating information on more segments than were disclosed in the financial statements; (2) those additional segments were disclosed in management's discussion and analysis (MD&A) or analysts' reports; and (3) the company's executives also discussed the additional segments in press releases or business periodicals."5


FASB believed its new standard would have minimal organizational or reporting impact. Quite the contrary, some analysts have argued that companies may change their organizational structure to avoid segment reporting that may provide competitive insights.

According to a 2000 American Accounting Association study, six of 160 companies had realigned their organizational structure following the 1998 FASB statement. It was believed that this realignment was taken in an effort to avoid providing insights into the true financial results of the company. In all but one of the six cases, a further review of the segment analysis results in conflicting data between the introductory annual report material, the MD&A, and the segment reports.

The sec stated that "when reviewing segment information as part of its normal filing review and comment process, the staff is not reticent to ask registrants for a copy of internal reports or other materials supplied to the chief operating decisions maker of the company as well as analysts' reports and press releases. Consequently, if the segment information provided in the financial statements does not reflect a similar breakdown of company segments as is evident in the internal reports and other materials, the staff will seek amendment of the registrant's filing."6

Table 1 reflects the common segments reported in the survey.

Although little consistency exists among the reporting segments defined above, the segmentation of retail banking from commercial baking is common. Only two of the eight organizations separated their Mortgage Banking practice, although six of these banks have a significant mortgage operation.

According to the survey conducted for this research, 100% of the banks define their segments along line of business, although many have internal reports reflecting geography as well. FASB 131 stipulates that organizations who manage along both geography and line of business should report the operating segments based on line of business.

Seven of the eight banks reported having centralized services that perform operations or services for all the segments. In all seven cases, the expenses of these centers are allocated 100% to the segments. The management of these shared services varied from an executive in the corporate segment to an executive in one of the line of businesses.

Not every part of an organization is part of an operating segment that engages in business activities which earn revenue. There are many organizations that identify a separate "Other or Corporate" segment to capture these activities. FASB specifically defines an enterprise's pension and other post retirement benefit plans as are not to be considered as an operating segment. Four of the eight banks included a Corporate or Other segment to capture these and other activities that may not be an operating segment. These "other" activities require separate reconciliations to the audited financials. Similarly, six of the eight banks allocated Corporate Overheadrelated expenses back to the defined segments. Corporate overhead was consistently defined as including Accounting, Finance, Executive Management, and some Corporate Administrative costs.


In banking, financial reporting within the bank is difficult given the need to separate the interest margin between deposit gathering activities and lending activities. This process, known as funds transfer pricing (FTP), has been used since the late 1970's to allow for financial reporting by segments. However, the application of the rules for FTP is not consistent among banks.

Likewise, the allocation of capital to each segment for the purpose of calculating a risk adjusted return applied differently across the industry. Although not required by FASB 131, this is the best indicator for risk adjusted profitability analysis. Some banks do not allocate capital other than for regulatory purposes to evaluate capital adequacy. In fact, three of the eight surveyed banks did not allocate capital to the segments. Cost accounting methodologies also differ among the banks surveyed. Three of the eight banks allocate costs on a standard costing basis while the other five allocate actual costs. Three of the eight banks also allocate costs broken into fixed and variable components.

all banks surveyed did apply some consistent technique for attributing revenue to the responsible segments. Various techniques for revenue shadowing and contra revenue reporting were used with appropriate eliminating entries at the entity level.

Although these internal accounting methodologies differ among the banks surveyed, they appear to be universally applied within the same organization. This does not jeopardize compliance with segment reporting per se, but does make it difficult to compare segment results within the same industry.


For segment reporting purposes, changes to internal organizational structure, errors, or changes to accounting methodology require a restatement. FASB requires restatement of previously reported segment information following a change in the composition of an enterprise's segments unless it was impractical to do so.7 If an organization does not restate due to a data limitation, significant costs or effort required, they must provide current-period segment information under both methods.

Accountants generally loathe the idea of restatements, since it requires significant backward analysis to prior periods. Ironically, most financial reporting units are very skilled and prepared for restatements and produce the data internally for executive management as course of any organizational decision making.

Interestingly, none of the eight banks surveyed had a documented policy on the basis for segment restatement. all eight banks stated that no one event triggers a restatement; each event is first evaluated based on materiality. Reorganizations are the most likely event that would trigger a restatement and only if material.


Banks are notorious for benchmarking their organization against that of their peers as a means to assess their efficiency. As part of this survey, additional questions were asked regarding the size of the internal reporting function, the structure, and the timeframe for report delivery.

Only one bank in the survey reflected organizational separation between internal reporting staff and segment reporting staff. In the other seven, their internal reporting teams also included the responsibility for management accounting FTP, capital allocations, and performance reporting. Staffing levels varied from 3 to 42 full time employees. On average, this reflects about 1.7 FTE to 10 billion in assets.

Seven of the eight banks have financial analysts in each of the segments as well as in the corporate finance division. One bank conducted all financial analysis centrally within the corporate division.


While FASB Statement 131 has gone a long way to improve segment reporting for US banks, it has not entirely standardized the reporting. As such, segment reporting may give insights into the operating performance between segments, but has too many variables to compare similar segments within the industry.

The number of segments, the names of the segments, and the segment definitions differ among banks that are similarly organized and in similar businesses. The closest trend in segment reporting for banks is the identification of a retail segment separate from a commercial segment. Likewise, the methodologies used to develop and report segments differ between organizations as each applies a tailored method of management accounting, FTP and capital allocations.

The following guidance can be made based on this research, related research, and commentary provided by FASB:

1. Insure that all identified segments are consistent with the information provided in the notes and MD&A in the annual report, analyst's reports and forecasts, and all internal reports and documentation.

2. Identity any changes to organizational structure, accounting methodology, and identified errors in the footnotes to the financial statements. Apply the materiality principle to determine if restatement is required.

3. Organize and store all financial data in a manner that will allow future restatements along any defined dimension. Detailed center level data is most conducive for future restatement flexibility.

4. Err on reporting on more segments and more financial data than on less.

1 Federal Deposit Insurance Company (FDIC). 2003. june 30, 2003 Call report data. 1999. Tracy Byrnes. Cracking the Books II, Has FASB Failed Us?

3 Investor Relations Magazine. (1999) What analysts and investors want.

4 IBID, FASB (1997).

5 U.S. securities and Exchange Commission. (1999) Lynn E. Turner, Chief Accountant, Speech at AICPA Conference on Banks and Savings Institutions

6IBID, sec. Turner 1999.

7IBID. FASB. (1997).

[Author Affiliation]

by Kevin W. Link


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