C.4 Significant Segment Expenses, Significance Threshold, and Regularly Provided Information

How often must financial information be provided to a CODM to qualify as being “regularly provided” under ASC 280?

Information provided at least quarterly would generally meet the criteria to be considered regularly provided. However, as communicated by the SEC staff during the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, information provided less than quarterly may also qualify as regularly provided. Entities should consider their own facts and circumstances in determining which segment expenses are regularly provided to the CODM. The disclosure requirements introduced by ASU 2023-07 focus on information that is regularly provided to the CODM even if it is not regularly reviewed by the CODM.

Is the assessment of significant segment expenses based on just quantitative considerations?

No. An entity should consider both quantitative and qualitative factors when assessing its significant segment expenses. The magnitude of a segment expense item does not conclusively establish its significance. Rather, an entity may determine that an expense item needs to be disclosed as a significant segment expense even if, upon evaluation of other qualitative factors, another expense item of similar magnitude is not considered significant. An entity should apply judgment in determining its significant segment expenses, and there are no bright-line thresholds. However, we believe that the more quantitatively material an expense category, the more difficult it will be for entities to avoid disclosure by assessing qualitative factors.

We believe that an entity should consider all quantitative and qualitative factors, including, but not limited to:

• The magnitude of the expense item and its relevance to the reportable segment’s performance.
• The variability (relative to revenue) and volatility (over different periods) of the expense item.
• Whether reportable segments are sharing or incurring the same expense.
• The industry or business type in which the reportable segment operates and the associated key expense categories.
• The focus of stakeholders on expenses, such as those made publicly available in earnings calls and other external sources.
• Whether the expenses are provided to the board of directors or other governing bodies.
• Whether the expenses are used by the CODM.

The identification of quantitative and qualitative factors is a key management judgment, and in certain circumstances, an entity may identify different significant segment expenses for different reportable segments. In such cases, we believe that an entity may consider additional quantitative and qualitative factors, including, but not limited to:

• The quantitative and qualitative significance of the reportable segment expense item to the entity’s overall operations compared to the significance of the reportable segment expense item to the entity’s other reportable segments.
• Whether the reportable segment is expected to experience significant growth or other relevant economic changes.
• Whether management has disaggregated an expense category in such a way that each disaggregated expense would not be quantitatively material to all reportable segments. This situation could arise when one or two segments represent a significant portion of the consolidated entity and have identified a number of significant expenses, but certain of those same expense line items are immaterial to the remaining segment(s).

Can expenses that are not material at the consolidated level meet the criteria for significant segment expenses in the segment footnote for each reportable segment?

Yes. Information not quantitively and/or qualitatively material to the consolidated financial statements may be material to the segment footnote as a significant segment expense. When assessing the materiality of the reportable segment expenses, an entity should consider both (1) the nature of the entity’s operations and the industries in which it operates (particular amounts may be focused on in certain industries) and (2) whether management considers the specific item to be important in assessing the company’s and the reportable segment’s future profitability and prospects for future cash flows. Evaluations of materiality should be based on each specific set of facts and circumstances.

Can corporate overhead allocated to reportable segments meet the criteria for significant segment expenses?

Yes. In a manner similar to how any other expense item is considered, corporate overhead amounts allocated to reportable segments should be considered under the significant expense principle. An entity should therefore assess whether such items are significant expenses.

Accordingly, significant segment expenses could include any expenses incurred by, and allocated to, the reportable segment (e.g., direct expenses, shared expenses, allocated corporate overhead, or interest expense) that are included in each segment’s measure of profit or loss. See FAQ 31 for considerations related to the starting point for the reconciliation for the reportable segment disclosures.

Does the significant expense principle apply to the financial information of an equity method investee that meets the reportable segment criteria?

It depends. Unless a full set of financial statements is provided in the entity’s filing for the equity method investee, we do not believe that an entity should be required to disclose significant segment expense information that is not in its consolidated financial statements. An entity could voluntarily disclose significant segment expense if the CODM is regularly provided with the equity method investee’s expenses.

Can an entity conclude that a reportable segment has no significant segment expenses?

Generally, no. We expect it to be uncommon for an entity not to disclose any significant segment expenses by reportable segment. In those limited instances in which an entity does not separately disclose an expense under the significant expense principle, the entity would aggregate expenses included in its segment profit or loss measure into its “other segment items” and would be required to disclose the nature of these expenses. We believe that budgets would typically be prepared on the basis of some expense history, and if a segment performance measure is provided, some expense breakout would form the basis of this segment performance measure. Entities that have concluded that they have no significant segment expenses are encouraged to consult with their accounting advisers.

If a segment expense category is significant for only one reportable segment, does an entity need to disclose the segment expense category for its other reportable segments?

No. Reportable segments may have different categories of significant segment expenses because of their operations and what is regularly provided to the CODM.

However, if an expense category is included in the segment’s measure of profit or loss and not considered a significant expense for the segment, the entity must disclose such items in a separate category referred to as “other segment items.” The other segment items amount that must be disclosed is calculated as the difference between reported segment revenues and the significant segment expenses (disclosed) less reported segment profit or loss.

In addition to disclosing the aggregated amount of other segment items, entities will need to provide a qualitative disclosure describing the composition of such items, including the nature and type of the other segment items. However, entities are not required to quantify each disaggregated item identified. For an illustrative example of what this disclosure could be, see Example 6-4 in Section 6.3.

How are significant segment expenses identified for entities that regularly provide segment expense information to the CODM in more than one way?

ASC 280 takes a “management approach” to segment reporting. As described in ASC 280-10-05-4, “[t]he management approach facilitates consistent descriptions of a public entity in its annual report and various other published information. It focuses on financial information that a public entity’s decision makers use to make decisions about the public entity’s operating matters. The components that management establishes for that purpose are called operating segments.”

Given the management approach used in applying ASC 280, an entity may have more than one way to provide segment expense information to the CODM (e.g., by products and services and also by geographic area). In those instances, an entity may need to use additional judgment to determine what segment expense information is relevant under the significant expense principle, particularly when more than one measure of segment performance is included in the financial statements.2

The decision tree below provides one way of assessing how to determine the segment expense information to evaluate under the significant expense principle when the CODM is regularly provided with information in more than one way.

Is it acceptable for an entity to disclose a segment expense that is not calculated in accordance with GAAP as a significant segment expense category?

Yes. There is no requirement in ASC 280 for significant segment expenses to be calculated in accordance with GAAP. However, the SEC staff noted that other requirements may be applicable. For example, Regulation S-X, Rule 4-01(a), states, in part, that “[t]he information required with respect to any statement shall be furnished as a minimum requirement to which shall be added such further material information as is necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.” Accordingly, if the significant segment expense is not determined in accordance with GAAP, it should be accompanied by narrative disclosure to ensure that it is not misleading. The narrative disclosure could include wording on how the significant segment expense is computed, the purpose of applicable adjustments, and how the significant segment expense is used.

When the CODM has access to the company’s systems through electronic dashboards, does the information in the company’s system constitute information regularly provided under the significant expense principle?

It depends. In the evaluation of what constitutes information regularly provided, it is important to understand what information is being made available for the CODM’s use. If segment expenses are regularly provided to the CODM via electronic dashboards, the company will need to evaluate such expenses for significance to determine which expenses require disclosure under the significant expense principle.

When the CODM is regularly provided with a budget against an actual variance analysis of the required segment performance measure by reportable segment, would expenses that are easily computable from the analysis need to be evaluated under the significant expense principle?

Yes. Entities providing segment expense information to the CODM in the form of variances against segment budgets or prior-year amounts need to evaluate whether there are expenses that are easily computable from information that is regularly provided to the CODM. For example, if segment gross profit is the entity’s selected segment performance measure and the CODM is regularly provided with a variance analysis of budgeted gross profit versus actual gross profit for segment gross profit, segment cost of sales could be easily computed from this information and, if significant, would need to be disclosed as a significant segment expense.

For each significant segment expense category identified, does an entity need to aggregate the reportable segments’ respective amounts disclosed and reconcile the aggregate amount to the amount reported in the consolidated GAAP expense line item?

No. While all significant segment expenses of a reportable segment need to be disclosed, there is no requirement to reconcile each significant expense to the amount reported in the consolidated GAAP expense line item. However, the total of the reportable segments’ performance measure needs to be reconciled 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) in accordance with ASC 280-10-50-30(b).

If a cost is offset against revenue in accordance with ASC 606, could the offset to revenue be considered a significant segment expense to be disclosed under ASU 2023-07?

No. Revenue from external customers under ASC 280-10-50-22 should not deviate from the recognition, measurement, and presentation principles in ASC 606. Certain costs that may be characterized internally as marketing expenses or customer acquisition costs, such as incentive payments, and that are required to be offset against revenue in accordance with ASC 606 are not segment costs or expenses and therefore should be included within revenue from external customers in the segment footnote. Since these “expenses” would be required to be offset against revenue and would not be presented separately or characterized as expenses under ASC 280, these types of costs should not be considered to be significant segment expenses.

See Deloitte’s Roadmap Revenue Recognition for information about consideration payable to a customer and the requirements related to presenting these types of costs or expenses as a reduction of revenue.