C.2 Measures of a Segment’s Profit or Loss | DART – Deloitte Accounting Research Tool

FAQ 5

Question

If an entity reports a single segment performance measure, does that measure need to be computed in accordance with the measurement principles of GAAP?

Answer

It depends. If an entity has multiple reportable segments and has concluded that its only segment performance measure is not computed on a basis consistent with GAAP, this would be the segment measure that the entity is required to disclose (the “required segment measure”). In this case, the segment performance measure is not considered to be a non-GAAP measure as that term is used in SEC rules, regulations, and interpretations.

However, as the SEC staff indicated at the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments and confirmed in informal discussions, if an entity is managed on a consolidated basis (i.e., has a single operating and reportable segment), the SEC staff would consider the entity to be managed on the basis of consolidated results as reported and would therefore consider a consolidated GAAP measure (i.e., net income) to be the required segment measure. See FAQ 12 for additional considerations related to entities managed on a consolidated basis.

FAQ 6

Question

Can an entity voluntarily disclose multiple measures of a segment’s profit or loss in its segment footnote?

Answer

Yes, provided that the entity presents at least one measure of segment profit or loss that, as stated in ASU 2023-07, “is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in a public entity’s consolidated financial statements” (“basis consistent with GAAP”).

Entities are not precluded from reporting additional measures of a segment’s profit or loss that are used by the CODM. However, since disclosure of additional measures is voluntary (i.e., ASU 2023-07 permits, but does not require, the disclosure of additional segment performance measures), each additional measure that is not computed on a basis consistent with GAAP is considered to be a non-GAAP segment measure (“non-GAAP performance measure”) and is required to comply with the SEC’s requirements for non-GAAP performance measures. See FAQ 8 for a discussion of such requirements.

In accordance with ASC 280-10-50-28C (added by ASU 2023-07), if multiple measures of a segment’s profit or loss are disclosed, an entity must reconcile each total reportable segment measure to the consolidated financial statements. The guidance in the ASU on significant segment expenses and other segment items also applies to each of these additional measures. See FAQ 9 for illustrative examples of additional measures that are subject to the SEC’s requirements for non-GAAP performance measures.

Because of the potential legal complexities associated with the interpretations of Regulation G and Regulation S-K, Item 10(e), we encourage public entities to continue providing the voluntary disclosures described above as part of MD&A instead of including them in the financial statements.

FAQ 7

Question

Would the SEC staff object to the inclusion of additional non-GAAP performance measures in the segment footnote?

Answer

It depends. The SEC staff would not object if the segment footnote includes additional non-GAAP performance measures, which are disclosed in accordance with ASC 280-10-50-28B and 50-28C (added by ASU 2023-07), provided that registrants comply with the SEC rules and regulations applicable to the preparation of financial statements filed with the SEC. Under the guidance in ASC 280 as amended by the ASU, these additional non-GAAP performance measures should be regularly reviewed and used by the CODM to allocate resources and assess segment performance.

However, these additional performance measures must comply with SEC rules and regulations. Non-GAAP measures to be included in financial statements should not be misleading, as noted in Regulation G, and therefore should comply with the presentation and disclosure requirements of Regulation G and Regulation S-K, Item 10(e).

The additional disclosures under Regulation G and Regulation S-K, Item 10(e), may be provided within or outside of the financial statements (e.g., in MD&A). Further, the financial statement footnotes should not include a cross-reference to other parts of a filing that contain such disclosures.

During the 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC Deputy Chief Accountant Sarah Lowe explained that not every part of a public entity is an operating segment or part of an operating segment (e.g., corporate headquarters or certain functional departments) and that it is possible that amounts reflected in a measure presented in the consolidated financial statements may not be fully allocated to operating segments. She provided an example of a measure of segment profitability in which certain corporate headquarter costs are included in the operating income line item of the statement of operations but are not allocated to the registrant’s operating segments. In these circumstances, the SEC staff will not consider the disclosure of segment operating income to be a non-GAAP measure solely because of the unallocated corporate headquarter costs.

In addition, Ms. Lowe observed that when determining reported segment profit or loss, entities should include segment allocations of revenues, expenses, and gains or losses only if they include such items in the measure of segment profit or loss that is used by the CODM. Ms. Lowe stated that the SEC staff would not consider an additional measure of segment profit or loss to be a non-GAAP measure if it is calculated by using measurement principles that are consistent with the corresponding measure presented in the consolidated financial statements. For example, if a registrant presents segment gross profit as an additional measure of segment profit or loss that is calculated by using measurement principles that are consistent with gross profit as presented in the consolidated financial statements, the staff would not consider segment gross profit to be a non-GAAP measure. On the other hand, a similar measure that excludes amounts such as depreciation expense would be considered a non-GAAP measure.

FAQ 8

Question

What are the requirements of Regulation G and Regulation S-K, Item 10(e), for additional non-GAAP performance measures that an entity voluntarily discloses?

Answer

Regulation G provides that:

Non-GAAP financial measures must not be misleading.
The most directly comparable GAAP measure must be presented.
A quantitative reconciliation of the non-GAAP financial measure to the most comparable GAAP measure must be presented for a non-GAAP measure.

Regulation S-K, Item 10(e), expands on Regulation G to require a registrant to:

Present the most directly comparable GAAP measure with prominence equal to or greater than that of the non-GAAP measure.
Include a statement indicating the reasons why the registrant believes that the non-GAAP measure provides useful information to investors about the registrant’s financial condition and results of operations.
Provide, to the extent material, a statement disclosing the additional purposes, if any, for which the registrant uses the non-GAAP measure.

The SEC staff’s C&DIs on the use of non-GAAP measures provide further guidance to registrants on how to apply the requirements of Regulation G and Regulation S-K, Item 10(e). Specifically, Section 100.01 of the C&DIs provides guidance on non-GAAP measures that could mislead investors. See also Chapter 4 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

FAQ 9

Question

Where in the SEC filing should the incremental disclosures under Regulation G and Regulation S-K, Item 10(e), related to additional non-GAAP performance measures be included?

Answer

In our informal discussions with the SEC staff, the staff indicated that the disclosures under Regulation G and Regulation S-K, Item 10(e), do not need to be included in the financial statements and could be elsewhere in the filing. This approach is consistent with how entities reporting non-GAAP measures in their filings historically have complied with the SEC’s disclosure requirements.

When a company voluntarily elects to show additional non-GAAP performance measures in the segment footnote, there are two separate reconciliations that are required: (1) the reconciliation of the segment performance measures (including non-GAAP performance measures) to consolidated income before tax (if the performance measures are pretax measures) or consolidated income after tax (if the performance measures are post-tax measures), as required by ASC 280; and (2) the reconciliation of the non-GAAP performance measure to the comparable GAAP measure (e.g., the required segment performance measure), as required by Regulation G. Possible alternatives for presenting both reconciliations may include:

Presentation of the ASC 280 reconciliation in the segment footnote with the Regulation G reconciliation presented in MD&A.
Separate presentation of the reconciliations required by ASC 280 and Regulation G in the segment footnote.
A combined presentation of the reconciliations required by ASC 280 and Regulation G in the segment footnote.

If an entity voluntarily includes additional non-GAAP performance measures, our firm’s preference would be for the entity to include, or continue to include, these Regulation G and Regulation S-K, Item 10(e), disclosures in MD&A rather than in the segment footnote, in a manner consistent with historical practice and in light of the complexities of the SEC rules and regulations. However, entities should make their own determination after discussing their specific facts and circumstances with their SEC counsel.

Note that in accordance with Regulation S-K, the financial statement footnotes should not include a cross-reference to other parts of a filing that contain such Regulation G and Regulation S-K, Item 10(e), disclosures.

The example below illustrates alternatives for presenting the required reconciliations under ASC 280 and Regulation G. However, note that these approaches could be updated in the future on the basis of additional discussions with the SEC staff.

Example

Background

The CODM of Company X regularly reviews GAAP segment profit and segment EBITDA to assess segment performance and allocate resources for X’s two reportable segments. Company X has identified GAAP segment profit as the required measure of segment profit and loss since it is the measure of segment performance that is most consistent with GAAP measurement principles. Company X has voluntarily elected to also disclose segment EBITDA as an additional measure of segment performance, which constitutes a non-GAAP performance measure. Company X has determined that segment EBITDA (1) is not considered to be misleading and (2) complies with the C&DIs on non-GAAP measures as well as with SEC rules and regulations.

Company X must include, among other SEC and GAAP disclosures, ASC 280 reconciliations for both the GAAP segment profit and segment EBITDA performance measures and a Regulation G reconciliation for segment EBITDA.

Below is an option for preparing the reconciliation, under which the ASC 280 reconciliation is presented in the segment footnote and the Regulation G reconciliation is presented in MD&A. Note that this option only illustrates the required reconciliation for the segment EBITDA performance measure that is voluntarily presented. Company X would still need to disclose its ASC 280 reconciliation of segment profit (i.e., the required measure of segment profit or loss) to profit before tax and provide all other disclosures required by ASC 280, as amended by ASU 2023-07, for both the GAAP segment profit and segment EBITDA.

Illustrative Disclosure

In the manner shown below, X prepares its ASC 280 reconciliation in the segment footnote and prepares the Regulation G reconciliation in MD&A.

ASC 280 reconciliation in segment footnote:

Regulation G reconciliation in MD&A:

FAQ 10

Question

Could subtotals in the segment footnote as part of either (1) the significant segment expense disclosure or (2) the ASC 280 segment performance measure reconciliation create multiple performance measures?

Answer

Yes. Additional subtotals could create additional performance measures that would need to comply with required disclosures under ASC 280. Further, an additional segment performance measure would need to be assessed in accordance with the SEC’s rules and regulations (see FAQ 8) if the segment performance measure is a non-GAAP performance measure.

Example

Background

Company X has two reportable segments and has identified segment EBITDA as its segment performance measure. Company X has identified cost of sales as a significant segment expense for each reportable segment. If X either (1) provides an unlabeled subtotal for revenue less cost of sales (i.e., $600 and $430, as noted below) or (2) includes a subtotal titled “gross profit” within its ASC 280 reconciliation, such subtotal (regardless of whether it is labeled) would create an additional performance measure. In accordance with ASC 280, X would then need to consider whether this additional performance measure is the measure most comparable to GAAP and, therefore, the required segment performance measure. In addition, X would need to consider the reporting and disclosure implications of having multiple segment performance measures.

See the illustrative disclosure below.

Illustrative Disclosure — Subtotal Creating Multiple Performance Measures

Although there is no label, the subtotal of revenue less cost of sales for each of the two segments should be evaluated under ASC 280 as an additional segment performance measure.

FAQ 11

Question

Would the SEC staff object to the use of a different measure of segment profit or loss for different reportable segments?

Answer

No. In a manner consistent with ASC 280, if an entity can provide evidence that it allocates resources and assesses performance by using different measures of segment profit or loss for different reportable segments, disclosure of different measures of segment profit or loss for different reportable segments would be acceptable. The entity would need to comply with the reconciliation requirements of ASC 280-10-50-30, as amended by ASU 2023-07, for each segment measure of profit or loss disclosed for each reportable segment.