Capital Intelectual

disclosure

Considerable variation was found in the companies’ geographic disclosure quality both under IAS 14R and IFRS 8. (see previous sections) The question is what might be the reason behind this diversity. Part of these variations can be explained by the effects of different company characteristics on the companies’ geographic disclosure quality. The effect of the different company characteristics on the quality measures of the companies’ geographic disclosures is summarised in Table 6.25. (RQ2.2)

Table 6.24 Summary: The effects of IFRS 8 on the geographic disclosures

Sample Positive effects Negative effects N=222 the proportion of non-disclosing companies

decreased under IFRS 8 from 19.37% to 15.32%

only 56.13% of the sample companies disclosed more or less detailed geographic NCA information

36.94% of the companies increased the number or their disclosed geographic locations

only 73.42%(50.45%) of the sample companies disclosed domestic revenue (NCA) information the proportion of companies providing geographic

revenue for at least one individual country increased (62.61% → 79.28%)

32% of the revenue and NCA disclosing companies used different geographic structure for providing revenue and NCA information 40.54 % of the companies increased the number of

their reported individual countries

the geographic region disclosure of the companies is highly “personalised”

the problem of broad, vague geographic aggregation is still exists

the use of “ROW” geographic region increased and the disclosure of continents as geographic region decreased

N=155 companies disclosed significantly higher (lower) number of geographic locations and countries (regions) under IFRS 8

the proportion of revenues reported by ROW within the total revenue generated by the sample companies increased (9.379% → 16.70%) the proportion of revenues reported by individual

countries within the total revenue generated by the sample companies increased (47.97% → 60.32%)

almost a third of the companies (31.61%) decreased the percentage of their total revenues reported by individual countries

the companies disclosed significantly higher proportion of their revenues by country (44.45% → 61.52%)

the companies disclosed significantly higher proportion of their revenues by ROW (6.22% → 12.00%)

63.23% of the companies increased the percentage of their total revenues reported by country

the percentage of the companies that do not use ROW category decreased (46.45% → 34.19%) the companies disclosed significantly finer

(measured by fineness score) geographic revenue information under IFRS 8 (2.17 → 2.31)

49.03% of the companies increased the percentage of their total revenues reported by ROW

41.94% of the companies increased the fineness of their geographic revenue information

17.42% of the companies decreased the fineness of their geographic revenue information

most of the companies reported only external revenues and NCA for individual countries only 27.74% of the companies disclosed profit measure for the reported individual countries the basis for attributing revenues to individual countries was not disclosed by 28.39% of the companies

N=126 under IFRS 8 companies disclosed significantly lower number of items by countries (5.49 → 3.95) under IFRS 8 significantly lower percentage of the companies disclosed capital expenditures, profit measure, segment assets and liabilities

Table 6.25 Summary: The effect of the different company characteristics on the quality of geographic information disclosed by the companies

(YES: significant effect at the 0.05 level76_{, +/-: direction of the relationship}77₎ N=155

Company characteristics / Tested hypothesis

No. of the reported Revenue % by Fineness score78

No. of the reported

items locations countries regions country ROW

Categorical company characteristics

Industry / Ha10 YES NO YES YES NO NO YES

Auditor / Ha1 NO NO NO NO NO NO NO

Single segment / Ha4 NO NO NO NO NO NO NO

FTSE 100 / 250 / Ha4 YES YES YES NO NO NO NO

Listing status / Ha11 NO NO NO NO NO NO NO

US listing / Ha11 YES NO YES NO NO NO NO

Early adopter / Ha3 NO NO NO NO NO NO NO

Type of operating segment / Ha9

NO NO NO NO NO NO YES

Geographic revenue disclosure / Ha9

NO NO NO NO NO NO YES

Quantitative company characteristics

Total sales / Ha4 NO NO NO NO NO NO NO

Foreign revenue / Ha11 YES (+) YES (+) YES (+) YES (-) NO YES (-) NO

Capital intensity / Ha2 NO NO YES (-) YES (+) YES (-) YES (+) NO

HHI / Ha2 NO YES (+) NO NO NO NO NO

Growth rate / Ha8 NO NO NO NO NO NO NO

Profitability / Ha7 NO NO NO NO NO NO NO

Current ratio / Ha6 YES (+) NO NO YES (-) NO NO YES (-)

Gearing / Ha5 YES (+) YES (+) NO NO NO NO NO

No. of foreign countries with subsidiary / Ha11

YES (+) NO YES (+) YES (-) YES (+) YES (-) NO No. of subsidiaries in foreign

countries / Ha11

YES (+) NO YES (+) YES (-) YES (+) YES (-) NO

Effective tax rate / Ha12 NO NO YES (+) NO NO NO NO

No. of tax haven countries with subsidiaries / Ha12

NO NO NO YES (-) NO YES (-) NO No. of subsidiaries in tax

havens / Ha12

YES (+) NO NO NO NO YES (-) NO

The results indicate that none of the studied company characteristics had significant effect on all of the quality measures. However, industry type, the proportion of foreign revenues in total revenues, capital intensity, the number of foreign countries with subsidiaries and

76 _{both for parametric and non-parametric tests} 77 _{where applicable}

78 _{YES: if both parametric and non-parametric tests show significant relationship for the three fineness}

the number of subsidiaries in foreign countries significantly affect most of the quality measures.

The results suggest that the internationally more visible companies (higher percentage of foreign revenues in total revenues; higher number of foreign countries with subsidiaries; higher number of subsidiaries in foreign countries) report greater number of geographic locations. However, they also tend to report lower percentage of their revenues by countries. Therefore, the fineness of the geographic information provided by them tends to be lower as well. As the number of countries with subsidiaries increases, it may be less likely that (1) a particular country meets the company’s materiality threshold and (2) revenues from this country reported individually. On the other hand, the lower quality geographic information (lower percentage of the revenue by country, lower fineness scores) could indicate that internationally more visible companies might prefer to hold back country level information to conceal the company’s activity in those countries. This could reduce their political and proprietary costs and hide the management’s activity from the shareholders and debt providers (e.g. poorly performing countries, management’s empire building plans) (Ha11)

The preparers’ decision to disclose more or less segmental information depends both on the segmental rules and on the management’s decision. In determining the level / quality of segment disclosure preparers, among other factors, consider the competition on the market (industry, geographic location) in which they operate. Results from previous studies supported the hypothesis that companies operating more (less) competitive markets have more (less) incentive to disclose segmental information to the market, because there is less (more) competitive harm associated with the information provided. (see more in Section 2.4.4) The results of this study indicate significant positive correlation between the capital intensity and the proportion of revenues reported by countries / the fineness of the geographic information provided by the companies. The higher the capital intensity, the lower the market competition because it is more difficult to enter the market. Thus, the more capital intensive the company (the less competitive the market), the higher the quality of the geographic information it provides. It seems that these results are not in line with the findings of previous research and the findings of the compliance part of this research (Chapter 5). However, previous research focused on the connection between the market competition and the information provided by the

between market competition and the companies’ geographic disclosure quality. One possible explanation of the finding could be that the more capital intensive the business is, the more costly is to set up a new site of business in different geographic locations (companies are protected by the higher entry barriers). Thus, because of the high entry barrier the companies might have less competitors and competitive harm to fear. (Ha2)

On the other hand, the results in Chapter 5 indicate that companies operating in less competitive environment (higher capital intensity) tend to disclose less commercially sensitive segment information (lower level of compliance with entity-wide disclosure requirements). In summary, the result of this study seems to be inconclusive on the effect of market competition on the companies’ segmental disclosure quality (where quality measured by the company’s compliance index, the proportion of revenues disclosed by country and the fineness of revenue information provided). However, beside geographic information external revenue from each products and services and from major customers need to be disclosed under entity-wide information. Additionally, the sample analysed in Chapter 6 is only a part of the sample used in Chapter 5. Companies analysed in Chapter 6 are the ones whose domestic and foreign revenues are disclosed under segmental notes. Thus, the compliance level for these companies can be expected to be generally higher.

Although, there is some indication that the companies’ tax (avoiding) policy (proxied by the number of tax haven countries with subsidiaries and the number of subsidiaries in tax havens) might have an impact on the companies’ geographic disclosure practice / quality (significant negative correlation between the number of tax haven countries with subsidiaries and the fineness score / revenue percentage reported by countries; significant negative correlation between the number of subsidiaries in tax havens and the fineness score) the results are not conclusive. Further research on this subject might find more conclusive results. (Ha12)