You Say Tomato, I Say Managerial Accounting

A question came up in one of my master's-level accounting classes about whether managerial accounting and segment reporting were the same. A semantical battle promptly erupted between myself and the students that couldn't see the forest for the trees.

As one student put it:

"You make a good argument but as stated in my reply the manager makes his
decision on the financial statements of the segment so the manager is not really
doing the financials just interpreting them and making his decision. This
may make managerial accounting similar to segment reporting only because the
manager uses the same financials to inform others. Right?"

I agree that a manager makes decisions based on segment financials but frequently acts as the interpreter, not the creator, of this information. However, if "the manager uses the same financials to inform others," I'm a little confused how they aren't, well, "the same." Thus my contention that the differences are largely semantical.

There are aspects of managerial accounting that stray significantly from the financial reporting attributed to segments, such as throughput analysis, but I think such aspects tend to stray from the whole idea of accounting, which is generally accepted to be financial in nature. Attributing other performance measures to accounting only confuses the sense of the word - if I report certain performance information on a specific production line machine to management (units produced, operating temperature, energy consumption), that data is of considerable import, but is it all accounting information? Or should it properly be called something else? Thanks to the work of folks like Eliyahu M. Goldratt, we have new means to measure performance; I do not question the worth of these approaches (throughput is crucial in measuring station effectiveness, for example), but I'm not certain they fall within the realm of accounting per se, managerial or otherwise.

How about an authority on the subject - what does the Chartered Institute of Management Accountants (UK) have to say on the matter? Among other things, "Management accounting [. . .] comprises the preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities" ("Management Accounting," 2009). Interestingly enough, the Institute of Management Accountants has released a new definition of management accounting, effective just last month. In the new definition, management accountants are hailed as "providing expertise in financial reporting," suggesting that segment reporting is central to the function of a managerial accountant. The document goes on to reveal that the foundation of managerial accounting has always included "preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities," concurring word for word with the CIMA's view of the subject (IMA, 2008).

Reading and thinking further on the subject, I think some clarification is in order. Segment reporting isn't the only function of the managerial accountant, thus they aren't perfect analogs, just as my hand is not my entire person, but is an integral part of me. So would it be most fair to say not that segment reporting and managerial accounting are the same, but rather, that financial accounting and managerial accounting overlap in this function (that is, segment reporting)?

Six of one, half dozen of the same . . . I think terminology sometimes gets in the way of concept in accounting. When I first started learning about segment accounting issues, it struck me how segment reporting was nothing more than the information management already needed in order to make decisions. The FASB complicates things further by using phrases such as "the chief operating decision maker," which has no commonly accepted meaning. In fact, the phrase "the chief operating decision maker" may refer to more than one person, defying the basic rules of grammar (See SFAS No. 131, para. 12) (FASB, 1997). Incomprehensibility has long been a problem in law, with "plain English" statutes being enacted by exasperated legislators so that subsequent law could be understandable. Such mandates date back as far as 1362 in England; in the United States, President Carter signed into law a bill that required future federal legislation to be written "as simple and clear as possible" in 1978 (Tiersma, n.d.). States followed suit with similar legislation, but I am unaware of any similar, successful movement in accounting circles. In fact, a prominent M & A lawyer, Vince Pisano, bemoaned the reluctance of the industry to embrace the SEC's attempt to force plain-language disclosure in 1998, observing: "The initial reaction of many securities lawyers was total outrage. How could you possibly explain complex ideas in simple English? The true difficulty in the plain-English rules became clear in subsequent drafting sessions. Not all authors of disclosure documents could write. Not all of them understood what they were writing about. Hiding behind incomprehensible jargon gave the appearance of understanding. The SEC's comment letters with 300 comments related to plain-English disclosure finally caused all of us to think more about what we were trying to say and to say it clearly" (2008).

In the words of Pisano, "If Steven Hawking could write the history of the universe in plain English, or sort of, we can figure out how to write accounting disclosures that people can understand."

Sources

FASB. (June 1997). Statement of financial accounting standards no. 131 (as amended): Disclosures about segments of an enterprise and related information. Retrieved from Wiley's Accounting Research Manager database.

IMA. (2008, December). Statements on management accounting: Definition of management accounting. Retrieved January 22, 2009, from the Institute of Management Accountants website: http://www.imanet.org/pdf/definition.pdf.

Management accounting. (2009, January 21). In Wikipedia, The Free Encyclopedia. Retrieved 02:02, January 23, 2009, from http://en.wikipedia.org/w/index.php?title=Management_accounting&oldid=265450448.

Pisano, V. (2008, September 12). Speaking of accounting. Retrieved January 23, from the New Deal Magazine website: http://www.thedeal.com/newsweekly/community/speaking-of-accounting.php.

Tiersma, P. (n.d.). The plain English movement. Retrieved January 23, 2009, from the LanguageandLaw.org website: http://www.languageandlaw.org/PLAINENGLISH.HTM.