Appendix B — Identification of Reporting Units

B.1 Overview

ASC 350-20

35-33 The provisions of Topic 280 shall be used to determine the reporting units of an entity.

As discussed in Chapter 1, while ASC 280 addresses segment disclosures, the guidance on identifying operating segments is also referenced in ASC 350-20 with respect to testing goodwill for impairment. Under ASC 350-20, goodwill is generally tested at the reporting unit level; the ASC master glossary defines “reporting unit” as “an operating segment or one level below an operating segment (also known as a component).” Therefore, it is important for an entity to clearly distinguish among operating segments, reportable segments, and reporting units. ASC 280 addresses operating segments and reportable segments, while ASC 350 addresses reporting units.

The determination of reporting units under ASC 350 begins with the definition of an operating segment in ASC 280 and takes into account the disaggregation of that operating segment into economically dissimilar components for goodwill impairment testing purposes. The determination of reportable segments under ASC 280 also begins with an operating segment as defined in the Codification, but it permits operating segments that meet certain criteria to be aggregated into a single operating segment and further establishes thresholds for determining which operating segments represent reportable segments.

The level at which operating performance is reviewed also differs between ASC 280 and ASC 350. The CODM reviews operating segments and the segment manager reviews reporting units (components of operating segments). Therefore, a component of an operating segment would not be considered an operating segment under ASC 280 unless the CODM regularly reviews its operating performance. However, that same component might be a reporting unit under ASC 350 if a segment manager regularly reviews its operating performance (and if the other reporting unit criteria are met).

The diagram below demonstrates the interplay between these concepts.

B.2 Identification of Reporting Units

ASC 350-20

35-34 A component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component. Subtopic 805-10 includes guidance on determining whether an asset group constitutes a business. . . .

35-35 However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Paragraph 280-10-50-11 shall be considered in determining if the components of an operating segment have similar economic characteristics.

35-36 An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if it comprises only a single component.

35-37 Reporting units will vary depending on the level at which performance of the segment is reviewed, how many businesses the operating segment includes, and the similarity of those businesses. In other words, a reporting unit could be the same as an operating segment, which could be the same as a reportable segment, which could be the same as the entity as a whole (entity level).

35-38 An entity that is not required to report segment information in accordance with Topic 280 is nonetheless required to test goodwill for impairment at the reporting unit level. That entity shall use the guidance in paragraphs 280-10-50-1 through 50-9 to determine its operating segments for purposes of determining its reporting units.

To identify reporting units, entities may consider the following steps:

Step 1 — Identify the operating segments in accordance with ASC 280.
See further discussion in Chapter 2.
Step 2 — Identify the components of each operating segment (the Codification describes a “component” as “one level below an operating segment” in the definition of reporting unit). Determine whether each component meets the definition of a reporting unit in steps 2(a)–2(c).
- Step 2(a) — Determine whether the component constitutes a business.
  ASC 350-20-55-3 states:
  
  The determination of whether a component constitutes a business or a nonprofit activity requires judgment based on specific facts and circumstances. The guidance in Section 805-10-55 should be considered in determining whether a group of assets constitutes a business or a nonprofit activity.
- Step 2(b) — Determine whether “discrete financial information” is available for the component.
  ASC 350-20-55-4 states:
  
  The term discrete financial information should be applied in the same manner that it is applied in determining operating segments in accordance with paragraph 280-10-50-1. That guidance indicates that it is not necessary that assets be allocated for a component to be considered an operating segment (that is, no balance sheet is required). Thus, discrete financial information can constitute as little as operating information. Therefore, in order to test goodwill for impairment in accordance with this Subtopic, an entity may be required to assign assets and liabilities to reporting units (consistent with the guidance in paragraphs 350-20-35-39 through 35-40).
  
  See further discussion of discrete financial information in Section 2.4.
- Step 2(c) — Determine whether segment management regularly reviews the operating results of that component.
  ASC 350-20-55-5 further notes:
  
  Segment management, as defined in paragraphs 280-10-50-7 through 50-8, is either a level below or the same level as the chief operating decision maker. According to Topic 280, a segment manager is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. The approach used in this Subtopic to determine reporting units is similar to the one used to determine operating segments; however, this Subtopic focuses on how operating segments are managed rather than how the entity as a whole is managed; that is, reporting units should reflect the way an entity manages its operations.
  
  See further discussion of segment management in Section 2.3.2.3.1.
Step 3 — Aggregate components that have similar economic characteristics.
Components of an operating segment, which steps 2(a)–2(c) established as a business for which discrete financial information is available and segment management regularly reviews the operating results of that component, are aggregated and deemed a single reporting unit if the components have similar economic characteristics.
ASC 350-20-55-6 through 55-8 indicate:
55-6 Evaluating whether two components have similar economic characteristics is a matter of judgment that depends on specific facts and circumstances. That assessment should be more qualitative than quantitative.
55-7 In determining whether the components of an operating segment have similar economic characteristics, all of the factors in paragraph 280-10-50-11 should be considered. However, every factor need not be met in order for two components to be considered economically similar. In addition, the determination of whether two components are economically similar need not be limited to consideration of the factors described in that paragraph. In determining whether components should be combined into one reporting unit based on their economic similarities, factors that should be considered in addition to those in that paragraph include but are not limited to, the following:
1. The manner in which an entity operates its business or nonprofit activity and the nature of those operations
2. Whether goodwill is recoverable from the separate operations of each component business (or nonprofit activity) or from two or more component businesses (or nonprofit activities) working in concert (which might be the case if the components are economically interdependent)
3. The extent to which the component businesses (or nonprofit activities) share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms
4. Whether the components support and benefit from common research and development projects.
The fact that a component extensively shares assets and other resources with other components of the operating segment may be an indication that the component either is not a business or nonprofit activity or it may be economically similar to those other components.

55-8 Components that share similar economic characteristics but relate to different operating segments may not be combined into a single reporting unit. For example, an entity might have organized its operating segments on a geographic basis. If its three operating segments (Americas, Europe, and Asia) each have two components (A and B) that are dissimilar to each other but similar to the corresponding components in the other operating segments, the entity would not be permitted to combine component A from each of the operating segments to make reporting unit A.

In aggregating reporting units, an entity considers the same criteria as it does when aggregating operating segments (see Section 3.2). However, unlike with the aggregation of operating segments, two or more reporting units do not have to meet all the factors in ASC 280-10-50-11 to be aggregated. Further, ASC 350 outlines additional factors for an entity to consider when evaluating whether reporting units have similar economic characteristics and notes that the “assessment should be more qualitative than quantitative.”

This analysis will require judgment and effective ICFR to support the judgments reached.

B.3 Identification of Reporting Units — Examples

The examples below illustrate the reporting unit structure when the process for identifying reporting units is applied to a hypothetical and limited set of facts. Reporting unit structures will vary among entities on the basis of their facts and circumstances.

Example B-1

Identification of Reporting Units — All Components Have Similar Economic Characteristics

Assume that a parent company has three operating segments and two reportable segments determined in accordance with the provisions of ASC 280.

The reporting units would be determined as follows:

Step 1 — Identify the operating segments in accordance with ASC 280.
Operating Segments 1, 2, and 3 are identified.
Step 2 — Identify the components of each operating segment. Determine whether each component meets the definition of a reporting unit in steps 2(a)–2(c).
- Step 2(a) — Determine whether the component constitutes a business.
- Step 2(b) — Determine whether “discrete financial information” is available for the component.
- Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
  Assume that it is determined that Operating Segments 1 and 2 have no components that meet the conditions in steps 2(a)–2(c), while it is determined that Operating Segment 3 has three components (X, Y, and Z) that meet the conditions in steps 2(a)–2(c).
Step 3 — Aggregate components that have similar economic characteristics.
Assume that Components X, Y, and Z have been determined to have similar economic characteristics.

In this example, Operating Segments 1, 2, and 3 are reporting units.

Example B-2

Identification of Reporting Units — All Components Do Not Have Similar Economic Characteristics

Assume the same facts as those in the example above, except that it has been determined that Components X, Y, and Z do not possess similar economic characteristics.

In this example, Operating Segment 1, Operating Segment 2, Component X, Component Y, and Component Z are reporting units.

Example B-3

Identification of Reporting Units — Some but Not All Components Have Similar Economic Characteristics

Assume the same facts as those in Example B-1, except that the economic characteristics of Component Y and Component Z are determined to be similar to each other but not to those of Component X.

In this example, Operating Segment 1, Operating Segment 2, Component X, and the combination of Component Y and Component Z are reporting units.

Example B-4

Identification of Reporting Units — Economic Characteristics of Components Within Segments Are Dissimilar

Assume that a parent company has three operating segments and two reportable segments determined in accordance with the provisions of ASC 280.

The reporting units would be determined as follows:

Step 1 — Identify the operating segments in accordance with ASC 280.
Operating Segments 1, 2, and 3 are identified.
Step 2 — Identify the components of the operating segment. Determine whether each component meets the definition of a reporting unit in steps 2(a)–2(c).
- Step 2(a) — Determine whether the component constitutes a business.
- Step 2(b) — Determine whether “discrete financial information” is available for the component.
- Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
  Assume that Operating Segment 1 has two components (Component W and Component X) that meet the conditions in steps 2(a)–2(c); Operating Segment 2 has two components (Component Y and Component Z) that meet the conditions in steps 2(a)–2(c); and Operating Segment 3 has no components that meet the conditions in steps 2(a)–2(c).
Step 3 — Aggregate components that have similar economic characteristics.
Assume that the economic characteristics of Component W of Operating Segment 1 are similar to those of Component Y of Operating Segment 2, but not to those of Component X of Operating Segment 1. Further assume that the economic characteristics of Component Z of Operating Segment 2 are similar to those of Component X of Operating Segment 1 but not to those of Component Y of Operating Segment 2. Because the components with similar economic characteristics (i.e., W/Y and X/Z) are not in the same operating segment, the components are not aggregated or deemed to represent a single reporting unit.

Because the economic characteristics of the components within each operating segment are not similar, Component W, Component X, Component Y, Component Z, and Operating Segment 3 are reporting units.