1.1 Objectives of Segment Reporting

ASC 280-10-10-11 states that the objective of segment reporting “is to provide information about the different types of business activities in which a public entity engages and the different economic environments in which it operates to help users of financial statements do all of the following:

Better understand the public entity’s performance
Better assess its prospects for future net cash flows
Make more informed judgments about the public entity as a whole.”

The FASB has long recognized the importance of the availability and quality of segment data to users of financial statements. In paragraph 43 of the Background Information and Basis for Conclusions of FASB Statement 131, the Board stated, in part:

Financial statement users observe that the evaluation of the prospects for future cash flows is the central element of investment and lending decisions. The evaluation of prospects requires assessment of the uncertainty that surrounds both the timing and the amount of the expected cash flows to the enterprise, which in turn affect potential cash flows to the investor or creditor. Users also observe that uncertainty results in part from factors related to the products and services an enterprise offers and the geographic areas in which it operates.

The importance of segment disclosures to financial statement users was also articulated in the FAF’s 2012 report on its postimplementation review of FASB Statement 131, which notes:

Investors and other financial statement users view the segment footnote as very important to their investment decisions. Investors use segment information for a variety of analyses, including understanding business activities, making judgments about the company as a whole, and understanding future growth prospects.

In feedback from stakeholders on the report, constituents generally indicated support for the management approach to segment reporting. While the majority of financial statement users expressed their satisfaction with current segment footnote disclosures, about one-third indicated a desire for more disclosures about segment information.

Changing Lanes

After issuance of the FAF’s report on FASB Statement 131 postimplementation review, the FASB continued to seek feedback from stakeholders on ways to improve segment disclosures. This included issuing an invitation to comment in 2016, the responses to which indicated that many investors would prefer more segment information from public entities. As a result, the FASB undertook a project to improve the reporting of such information, part of which included conducting a study in 2018 to explore the possibility of amending its guidance on both the aggregation criteria for reportable segments and the process for identifying segments. However, preparers expressed concerns about the feasibility of that guidance, prompting the Board to conduct a second study in 2019. Consequently, the Board decided to improve its disclosure requirements related to segment expenses and ultimately issued ASU 2023-07 in November 2023. See Section 1.9 for more information about the ASU.

Key Takeaways

ASC 280, which applies to all public entities (with limited exceptions), prescribes a management approach to identifying operating segments that focuses on how management has organized the entity to make operating decisions and assess performance.
An entity’s segment disclosures should be consistent with the broader description of the entity within its financial statement filings and with other published information about the entity, such as its Web site, press releases, and investor presentations.
Goodwill impairment testing under ASC 350 may be affected by an entity’s determination of operating segments under ASC 280.
Effective internal control over financial reporting (ICFR) is necessary to support judgments an entity reaches in applying the segment guidance and to monitor for changes in the management approach or changes to other facts and circumstances that might result in different segment reporting.

Footnotes

For the full titles of standards, topics, and regulations used in this publication, see Appendix C. For a list of abbreviations used in this publication, see Appendix D.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.