What factors might a company consider in determining whether an individual foreign country is material to its operations?
HOW DOES A COMPANY DETERMINE WHETHER A FOREIGN COUNTRY IS MATERIAL?
Segment reporting can provide useful information for investors and competitors. Segment disclosures could result in competitive harm for the company making the disclosures. By analyzing segment information, potential competitors can identify and concentrate on the more successful areas of a disclosing company’s business. Indeed, the FASB recognized competitive harm as an issue of concern for companies disclosing segment information. In developing the current segment reporting guidelines, the FASB considered but ultimately decided not to provide companies an exemption from providing segment information if they believed that doing so would result in competitive harm. The FASB believed that such an exemption would be inappropriate because it would provide a means for broad noncompliance with the standard.
The previous segment reporting standard required geographic segments with 10 percent or more of total firm revenues, operating profit, or identifiable assets to be reported separately. In contrast, the current guidelines require disclosures to be provided by country when revenues or long-lived assets in an individual country are material. However, U.S. GAAP does not specify what is material for this purpose but leaves this to management judgment. Some commentators have expressed a concern that firms might use high materiality thresholds to avoid making individual country disclosures, perhaps to avoid potential competitive harm. Anecdotally, the very different levels of disclosure provided in 2014 by IBM and DuPont shown in Exhibits 8.7 (Links to an external site.) and 8.8 (Links to an external site.), respectively, show that companies define materiality differently.
What factors might a company consider in determining whether an individual foreign country is material to its operations? Should U.S. GAAP require a percentage test to determine when an individual country is material?
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