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Segment reporting for investor - Essay Example

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A segment by definition is a part. This paper would concentrate on a segment of a company as accepted in regulatory literature. A segment of a company is widely defined to be a part of the company that is carrying on business activities and which may or may not be earning revenues and/or incurring costs…
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Segment reporting for investor
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Download file to see previous pages Company segments arise due to the complex nature of activities carried on by today's corporates.These activities not only embrace multiple products produced over different business lines adopting varying technologies and processes but also because of the fact that these activities cross national boundaries and spread geographically over many countries. Consolidated financial results of such a corporate, widely spread and complex, become a simplistic statements of broad figures- which hides more information than revealing it.Any decision maker,be it an investor or some other person or organization,finds it difficult to analyze the true financial position of the company with this broad set of results.Segment reporting was specified exactly to get around this difficult position.Under segment reporting a corporate's financial results are broken down segment wise and presented in a manner to exhibit clearly as to how they are contributing to the consolidated position.This evidently would enable any decision maker to analyze the corporate body from several segmental views and identify strengths and weaknesses which may vary in degrees.The decision based on such an analysis would be more factual and objective. Two widely accepted segmenting techinques distinguish between operating business lines and geographical segments. We examine below how such segment reporting influences investors and corporate entities who prepare such segmental data. We also examine the various regulatory and accounting prescriptions that govern segment reporting by corporate entities before taking up concluding remarks.
Perception of Investors
Investors are primarily concerned with the safety and return on amounts invested or to be invested in any entity. Safety and return concerns have a direct bearing on risk perceptions of the investors. Investors are essentially risk profiling a corporate entity and invest money only if calculated risk is permissible with their risk taking capabilities. The information that goes in such risk profiling has been theoretically built into share price movements and asset pricing constructs. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements. RWT basically stated that speculative price changes were independent and identically distributed, so that the past price data had no predictive power for future share price movements. RWT also stated that the distribution of price changes from transaction to transaction had finite variance. The fundamental concept behind random walk theory is that competition in perfect markets would remove excess economic profits, except from those parties who exercised some degree of market monopoly. This meant that a trader with specialized information about future events could profit from the monopolistic access to information, but that fundamental and technical analysts who rely on past information should not expect to have speculative gains. Segment report essentially present investors an opportunity to project some such specialized information and gain from it.
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