About the Authors . . . Alfred Rappaport, Associate Professor of Accounting and Information Systems, Graduate School of Management, Northwestern University. M.S., Ph.D., University of Illinois. Associate Professor of Accounting, Tulane University, 1963-67. Senior accountant, Price Waterhouse & Co., 1957-60. Consultant to industry in strategic planning and management information systems. Publications include Information for Decision Making: Quantitative and Behavioral Dimensions; co-author, A Framework for Financial Reporting by Diversified Companies; co-editor, Public Reporting by Conglomerates; and articles on accounting, financial planning, and information systems. Eugene M. Lerner, Professor of Finance, Graduate School of Management, Northwestern University. M.A., University of Wisconsin; Ph.D., University of Chicago. Member, Research Staff, National Bureau of Economic Research, 1955-56. Senior Economist, Federal Reserve Bank of Chicago, 1956-58. Academic appointments at City College of New York, University of California (Los Angeles), and New York University, 1959-66. Senior Economist, House Banking and Currency Committee, 1963-64. Coordinator, Federal Deposit Insurance Corporation on Rating Municipal Bonds; and, Consultant, Federal Communications Commission on Study into the Rate of Return for American Telephone and Telegraph Company, 1966-67. Publications include A Theory of Financial Analysis, Readings in Financial Analysis and Investment Management, and various other books and articles in financial, economic and political journals. Foreword IN IN APRIL 1968, NAA published a research report, External Reporting for Segments of a Business, which concluded that knowledge of segment operating results is essential to making sound investment and credit decisions with respect to companies whose component activities differ significantly in rates of growth, profitability, and risk. The study showed that both investment analysts and commercial bankers are interested in such data primarily for estimating future earnings. Using the economic outlook for each industry or market segment, relationships derived from historical segment sales and earnings contributions are used to build up a forecast of consolidated earnings for the future period of interest. Intercompany comparisons of segment data are not an objective. These conclusions were confirmed by a Financial Executives Research Foundation study issued shortly afterwards. With the general nature of the need which investors and creditors have for segment data thus established, practical problems remained in implementing this knowledge. Primary among these problems was how to segment a diversified business in a manner which would provide data having maximum relevance to users of a company's financial reports. Closely associated were questions as to the content and presentation of segment operating data. Hence a second study was initiated to explore possible answers to the foregoing questions. Employing logical analysis and synthesis as their research methodology, the authors of this report have drawn reasoned conclusions to guide the development of methods for segment reporting which can provide data relevant to report users' information needs. Well known valuation models widely employed by investors constitute the basis for their reasoning. Techniques described in this report should have interest to management, not only for reporting to investors and creditors, but also for internal decisions allocating available capital within a company. Conclusions from this research go beyond current practice. However, beginning with August 14, 1969, disclosures of sales and contribution ix to income by lines of business will be required in registration statements filed with the SEC. The Accounting Principles Board is considering whether breakdown of total sales and income by lines of business in annual reports to stockholders should be a generally accepted accounting principle. The SEC has placed on management responsibility for devising a plan of segmentation appropriate to each company's operations. Hopefully, this report will provide suggestions for testing as segment reporting practices develop. NAA research reports present findings and conclusions of those who did the research and do not necessarily reflect views of research committee members nor does publication constitute endorsement by the Association. Walter B. McFarland |