Three other businesses will also likely stand alone: the credit operation, which has provided a sizable piece of Sears's overall profits in past years; the home services business, which provides appliance repair and home improvements; and the international segment. Finally, Sears would report a "corporate" segment, as will most companies.
Smaller operating segments, like Sears's direct-marketing group, would not likely meet the standard's minimum quantitative threshold of 10 percent of revenues, profits, or assets. As a result, these businesses will likely be folded into the substantially similar services group, explains Blanda.
While not an issue for Sears, there is also a minimum segmentation standard that requires results for businesses representing at least 75 percent of total revenues to be reported by individual segments. At some highly segmented companies, that would mean that results for smaller segments that do not meet the quantitative thresholds must be reported.
All of this raises the question of whether companies will change their management structures to get around elements of the rule that they dislike. For instance, a company might require the head of a smaller segment to report not to the chief decision maker but to another executive, avoiding any need to disclose that unit's results to the public. "I've heard innuendo already that some companies may make some internal reporting changes to get the segment groupings they want, mostly to reduce competitive harm," says James Harrington, director of accounting and SEC technical services at Coopers & Lybrand LLP.
Separately, many companies may decide to alter the internal cost allocation methods or formulas they use for tracking segments, particularly those that don't follow GAAP. "We're already considering some changes to our internal reporting," says Bill Lowe, controller of Columbus, Indiana-based Arvin Industries Inc., a $2.4 billion (in revenues) maker of exhaust and suspension systems for the auto industry. "I suspect many companies may do that. No one wants big reconciliations to explain the gap between segment numbers and overall results."
Examples of potentially large reconciliation items include future retiree benefit costs; goodwill from purchase method transactions; and shared services costs, for operations like accounts payable processing or purchasing if done centrally.
"Unless you charge some of this stuff back to the units, your segment information is going to get really messy," says Lowe.
The Outside Game
All this internal rejiggering is needed because most finance executives hope to report the absolute minimum to satisfy their external auditors and the Securities and Exchange Commission that they are complying with the new rule. The main reason, they say, is to reduce the amount of information that would be useful to competitors, vendors, and customers.
"Any additional information we have to report on our business units would be useful to Caterpillar or John Deere," says Bob Naglieri, vice president and controller of $5.5 billion (in sales) Case Corp., an agricultural- and construction-products maker in Racine, Wisconsin. "Of course, anything we can get on them would be useful, too. So I think everyone is going to try to put forward as little information as possible."
There is also the fear that customers and vendors will respond to new disclosures of wide-margin businesses with tougher bargaining.
"I think I'll be able to learn a lot about some of my vendors and manufacturers, and I'll naturally be using that information when we sit down to negotiate with them," says Don Platt, CFO of US Office Products Co., in Washington, D.C., a $3.5 billion nationwide office-supplies and business-services firm. "Of course, that may be difficult. There are a lot of games one can play with this standard, and everyone will have a different reporting method, so real profitability will be tough to determine."
But analysts doubt that more information about business segments will hurt a company's competitive position. "We all heard the same thing when FAS 14 was introduced, but everyone got used to it," says Bear, Stearns's McConnell. "After all, most competitors know much more about each other financially than is reported already, so there will be little news in these new disclosures for them."
To analysts, the complaint is merely a smoke screen for corporate executives who simply want to prevent investors from criticizing their decisions and revaluing businesses based on their parts. But now that FASB has backed down from requiring more-specific disclosures, those executives needn't prove Wall Street wrong.
Ian Springsteel is an associate editor at CFO.
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