2.5 Financial Measures Required by GAAP — Segment Information

The Rules prohibit the disclosure of non-GAAP measures on the face of or in the footnotes to the financial statements.2 However, financial measures that a registrant is required to disclose under GAAP are not considered non-GAAP measures in the application of the Rules even if they would otherwise meet the definition of non-GAAP measures. The most common examples of such measures are related to the required segment profitability measure that, in accordance with ASC 280-10-50-28 (as amended by ASU 2023-07), “management believes is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the public entity's consolidated financial statements” that must be disclosed for each reportable segment.3

In November 2023, the FASB issued ASU 2023-07, which amends the disclosure requirements related to reportable segments. See Section 2.5.2 for further discussion of the ASU. See also Deloitte’s Roadmap Segment Reporting for information about the basis of presentation of segment measures under ASC 280.

C&DIs — Non-GAAP Financial Measures

Question 104.01

Question: Is segment information that is presented in conformity with Accounting Standards Codification 280, pursuant to which a company may determine segment profitability on a basis that differs from the amounts in the consolidated financial statements determined in accordance with GAAP, considered to be a non-GAAP financial measure under Regulation G and Item 10(e) of Regulation S-K?

Answer: No. Non-GAAP financial measures do not include financial measures that are required to be disclosed by GAAP. Exchange Act Release No. 47226 lists “measures of profit or loss and total assets for each segment required to be disclosed in accordance with GAAP” as examples of such measures. The measure of segment profit or loss and segment total assets under Accounting Standards Codification 280 is the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance.

The list of examples in Exchange Act Release No. 47226 is not exclusive. As an additional example, because Accounting Standards Codification 280 requires or expressly permits the footnotes to the company’s consolidated financial statements to include specific additional financial information for each segment, that information also would be excluded from the definition of non-GAAP financial measures. [Jan. 11, 2010]

Question 104.02

Question: Does Item 10(e)(1)(ii) of Regulation S-K prohibit the discussion in MD&A of segment information determined in conformity with Accounting Standards Codification 280?

Answer: No. Where a company includes in its MD&A a discussion of segment profitability determined consistent with Accounting Standards Codification 280, which also requires that a footnote to the company’s consolidated financial statements provide a reconciliation, the company also should include in the segment discussion in the MD&A a complete discussion of the reconciling items that apply to the particular segment being discussed. In this regard, see Financial Reporting Codification Section 501.06.a, footnote 28. [Jan. 11, 2010]

2.5.1 Before Adoption of ASU 2023-07

At the 2016 AICPA Conference, the SEC staff discussed an example of an elective form of segment disclosures that would be subject to the non-GAAP rules. The staff noted that a registrant should not voluntarily expand its segment footnote in the financial statements to provide a non-GAAP measure of profit or loss in instances in which the chief operating decision maker (CODM) uses both a GAAP measure and a non-GAAP measure. ASC 280-10-50-28 indicates that if more than one measure of segment profit or loss is used by the CODM (e.g., operating income calculated in accordance with GAAP and adjusted EBITDA), the measures that should be reported in the segment footnote are those that are more consistent with GAAP.4 Therefore, any such additional measure (e.g., adjusted EBITDA) would not be required by GAAP and thus would be within the scope of the Rules.

Example 2-1

A registrant with multiple segments reports two measures of segment profitability to its CODM: GAAP operating income and a non-GAAP measure, adjusted EBITDA. Although the CODM uses both to measure performance and allocate resources, the registrant should disclose the GAAP measure — operating income — in the footnotes to the financial statements. Adjusted EBITDA would be considered a non-GAAP measure. The registrant may discuss adjusted EBITDA at the segment level in MD&A (see Section 2.5.3), but such disclosure would be subject to the Rules, including all required disclosures.

Further, if a registrant with only one reportable segment voluntarily elects to disclose, in the footnotes to its financial statements, a measure of profit or loss that is evaluated by the CODM, such a measure would also be subject to the Rules because the measure is not required by GAAP. As discussed above, the Rules prohibit the disclosure of non-GAAP measures in the footnotes unless the measure is “required” to be disclosed under GAAP. Therefore, an entity with one reportable segment should not disclose in the notes to its financial statements a non-GAAP measure of segment profit and loss, even if the measure is reviewed by the CODM or its disclosure is believed to be beneficial to readers.

Example 2-2

A registrant has a single reportable segment but reports its performance measure — adjusted EBITDA — to its CODM. The registrant would be prohibited from voluntarily presenting adjusted EBITDA as part of its segment footnote since such disclosure is not required by GAAP and is therefore subject to the prohibition against including non-GAAP amounts in the financial statements. However, the registrant could present adjusted EBITDA in MD&A, subject to any requirements under the Rules, including the required disclosures (e.g., the reconciliation).

2.5.2 After Adoption of ASU 2023-07

Changing Lanes

In November 2023, the FASB issued ASU 2023-07,5 which amends the disclosure requirements related to reportable segments. Before the adoption of ASU 2023-07, registrants are precluded under ASC 280 from disclosing more than one measure of segment profit or loss within the notes to the financial statements. Any additional measures of profit or loss that the CODM used would therefore be presented only if they were in compliance with the Rules.

Under ASU 2023-07, public entities may disclose “more than one measure of a segment’s profit or loss” as long as at least one of those measures is the segment profit or loss measure that is “most consistent with GAAP measurement principles” (the “required measure”). In some cases, measures beyond the required measure may not be determined in accordance with GAAP. At the 2023 AICPA Conference, the SEC staff communicated its view that additional measures are neither required nor expressly permitted by GAAP (i.e., the ASU does not identify specific measures that must be disclosed, such as EBITDA). Accordingly, if additional measures are included in the segment footnote and have not been calculated in accordance with GAAP, such additional measures would be considered non-GAAP measures.

Further, on the basis of informal discussions with the SEC staff in August 2024, we understand that:

The staff would not object to the inclusion of additional non-GAAP performance measures in the segment footnote that are disclosed in accordance with ASC 280-10-50-28B and 50-28C (added by ASU 2023-07).
These additional measures must meet the presentation and disclosure requirements of Regulation G and Item 10(e) (see Section 3.1 for further discussion).
A registrant may provide the additional disclosures required by Regulation G and Item 10(e) within or outside of the financial statements (e.g., in MD&A), and the financial statement footnotes may not include a cross-reference to other parts of a filing that contain such disclosures.

In addition to performing the segment reconciliation under ASC 280-10-50-28C, a registrant must provide a quantitative reconciliation of the segment non-GAAP measure to the most comparable GAAP measure in accordance with Regulation G (e.g., the required segment GAAP measure; see Section 3.2 for further discussion of the reconciliation requirement in Regulation G). However, since there is no specific guidance on the form of the Regulation G reconciliation, diversity in practice may exist related to how a registrant satisfies both types of reconciliation requirements.

Public entities considering including an additional segment measure or measures that have not been calculated in accordance with GAAP in the segment footnote may wish to consult with their auditors and SEC legal counsel.

Note that public entities with a single reportable segment must apply all of the ASU’s disclosure requirements as well as those under ASC 280. At the 2023 AICPA Conference, the SEC staff indicated that if a public entity with a single reportable segment is managed on a consolidated basis, the SEC would expect the entity to conclude that consolidated net income is the segment measure of profit or loss under the guidance in ASC 280-10-55-15D. Therefore, any additional measure(s) of segment profit or loss not determined in a manner consistent with GAAP would also need to be evaluated in light of the Rules.

2.5.3 Segment Profit or Loss Measures Outside the Footnotes

A measure of segment profit or loss, or of segment liquidity that is not consistent with the requirements of ASC 280, is a non-GAAP measure and therefore subject to the Rules. After the adoption of ASU 2023-07, such measures include additional segment measures of profitability that have not been calculated in accordance with GAAP. See Section 2.5.2 for further discussion.

C&DIs — Non-GAAP Financial Measures

Question 104.03

Question: Is a measure of segment profit/loss or liquidity that is not in conformity with Accounting Standards Codification 280 a non-GAAP financial measure under Regulation G and Item 10(e) of Regulation S-K?

Answer: Yes. Segment measures that are adjusted to include amounts excluded from, or to exclude amounts included in, the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance do not comply with Accounting Standards Codification 280. Such measures are, therefore, non-GAAP financial measures and subject to all of the provisions of Regulation G and Item 10(e) of Regulation S-K. [Jan. 11, 2010]

Example 2-3

Company X has three reportable segments. Company X’s CODM regularly reviews segment adjusted EBITDA to assess segment performance and allocate resources to each reportable segment and does not use other measures of segment profit or loss. Because X identifies segment EBITDA as the required measure of segment profit and loss, it discloses such amount in the notes to the financial statements under ASC 280 and is therefore not subject to the Rules. If, however, X further adjusts each segment’s adjusted EBITDA in its MD&A by excluding additional items such as restructuring costs, the resulting amounts are not calculated in a manner consistent with the requirements of ASC 280 and the “as further revised” adjusted EBITDA is subject to the Rules.

As noted above, financial information that a registrant is required to disclose under GAAP is not a non-GAAP measure. This is true even if, for example, the measure would otherwise be considered a non-GAAP measure, such as adjusted EBITDA.

On the other hand, the presentation of the total non-GAAP segment profit or loss measure, revenues, or assets on a consolidated basis outside the footnotes (e.g., MD&A) is considered a non-GAAP measure. For example, if the registrant’s measure of segment profitability is adjusted EBITDA, and adjusted EBITDA for all of the segments combined is disclosed outside the financial statements, total adjusted EBITDA is a non-GAAP measure and therefore Item 10(e) would apply to the disclosures in MD&A (see Example 2-3 for further illustration).6

C&DIs — Non-GAAP Financial Measures

Question 104.04

Question: In the footnote that reconciles the segment measures to the consolidated financial statements, a company may total the profit or loss for the individual segments as part of the Accounting Standards Codification 280 required reconciliation. Would the presentation of the total segment profit or loss measure in any context other than the Accounting Standards Codification 280 required reconciliation in the footnote be the presentation of a non-GAAP financial measure?

Answer: Yes. The presentation of the total segment profit or loss measure in any context other than the Accounting Standards Codification 280 required reconciliation in the footnote would be the presentation of a non-GAAP financial measure because it has no authoritative meaning outside of the Accounting Standards Codification 280 required reconciliation in the footnotes to the company’s consolidated financial statements. [Jan. 11, 2010]

Example 2-4

Company X has three reportable segments. Company X’s CODM regularly reviews segment adjusted EBITDA to assess segment performance and allocate resources to each reportable segment. It does not use other measures of segment profit or loss. In addition, X identifies segment EBITDA as the required measure of segment profit and loss. Assume that X includes the appropriate segment disclosures in its notes to the financial statements in accordance with ASC 280. The following is an excerpt from X’s segment footnote, which shows its segment measure of profitability (i.e., adjusted EBITDA) reconciled to income before income taxes:

Adjusted EBITDA at the segment level (i.e., separately for segments A, B, and C) is not considered a non-GAAP measure under the Rules when discussed in MD&A, whereas the total segment-adjusted EBITDA at the consolidated level is considered a non-GAAP measure and is subject to the Rules if presented in MD&A or elsewhere outside the financial statements. In this example, if total segment-adjusted EBITDA is presented in MD&A, it would be subject to the Rules and would need to be identified as a non-GAAP measure, and all of the appropriate disclosures would need to be provided.

2.5.4 Disclosure of Product and Service Revenues

ASC 280 also requires registrants to disclose in the notes to the financial statements revenues for “each product and service or each group of similar products and services unless it is impracticable to do so.” In MD&A, registrants often include such similar disclosures about revenues on a disaggregated basis by products and services. These are not considered non-GAAP measures.

C&DI Question 104.05 describes a situation in which a registrant presents a table that breaks down revenues by certain products but does not sum these amounts to the revenue amount presented in its financial statements. If the product revenue amounts are calculated in accordance with GAAP and are not adjusted, the information presented in the table is not considered a non-GAAP financial measure.

C&DIs — Non-GAAP Financial Measures

Question 104.05

Question: Company X presents a table illustrating a breakdown of revenues by certain products, but does not sum this to the revenue amount presented on Company X’s financial statements. Is the information in the table considered a non-GAAP financial measure under Regulation G and Item 10(e) of Regulation S-K?

Answer: No, assuming the product revenue amounts are calculated in accordance with GAAP. The presentation would be considered a non-GAAP financial measure, however, if the revenue amounts are adjusted in any manner. [Jan. 11, 2010]

Example 2-5

Assume that in accordance with ASC 280-10-50-40, Company X includes in its notes to the financial statements product revenues from external customers for three different types of products as part of its segment disclosures. In addition, X discusses in MD&A its revenue by products in accordance with the presentation in its segment notes but also presents product revenue by type of customer served, as reflected in the following table:

Company X uses GAAP to calculate revenues for products A, B, and C. When discussed in MD&A, these revenue amounts are not considered non-GAAP measures even if X does not sum the total of these products to the revenue amount presented in its financial statements. However, revenues from products A, B, and C that are adjusted from the amounts presented above are considered a non-GAAP measure if they are presented in MD&A or elsewhere outside the financial statements.

Footnotes

See Section 4.1 for a list of prohibitions, including the prohibition against presenting “non-GAAP financial measures on the face of the registrant’s financial statements prepared in accordance with GAAP or in the accompanying notes.”

See also footnote 19 of the Release, which states that ASC 280 “requires that companies report a measure of profit or loss and total assets for each reportable segment. This tabular information is presented in a note to the audited financial statements and is required to be reconciled to the GAAP measures, with all significant reconciling items separately identified and described. A registrant is required to provide a Management’s Discussion & Analysis of segment information if such a discussion is necessary to an understanding of the business. Such discussion would generally include the measures reported under [ASC 280].”

As discussed in Section 4.4.2 of Deloitte’s Roadmap Segment Reporting, in certain instances, a CODM may use multiple measures of profit or loss or assets. In such cases, the measures presented should be those that most closely reflect the measurement principle applied to the consolidated financial statements.

The amendments in ASU 2023-07 are effective for all public entities for fiscal years beginning after December 15, 2023 (e.g., for calendar-year-end public entities, annual periods beginning on January 1, 2024 — i.e., December 31, 2024, Form 10-K), and interim periods within fiscal years beginning after December 15, 2024 (e.g., for calendar-year-end public entities, interim periods beginning on January 1, 2025 — i.e., Form 10-Q for the first quarter of 2025).

See also Section 7.4 of Deloitte's Roadmap Segment Reporting for considerations related to SEC guidance on non-GAAP measures.

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