When an investor buys a share of stock in a large corporation, often this means he has purchased a share of a conglomerate. Typically, there is a parent company with subsidiaries in different areas of business the investor as bought into with the purchase of his shares.
Not all the subsidiaries’ components may be thriving. An investor needs to know how each of the components are doing. FASB Statement No. 131 requires corporations report financial and some descriptive nonfinancial information about all its operating components.
The FASB defines these components as “the components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.”
The report should mirror the way the information is utilized by management internally for operating decisions etc.
The company must report the following information about each component it owns and operates:
- profit & loss
- certain revenue & expense items
- the component’s assets
- the component’s revenues
- total assets
- major customers
- the countries in which the enterprise earns revenues and holds assets
- the revenues from the enterprise’s products or services
The company must report the following descriptive information:
- the products and services offered by the operating components
- the way in which the operating components were determined
- any changes in the measurement of amounts from period to period for the components and the over-arching corporation
Understanding how each component contributes to the corporation’s overall finances and performance will assist any investor in evaluating the soundness of his investment.