1.1 Objectives of Segment Reporting
ASC 280-10-10-1 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:
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Better understand the public entity’s performance
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Better assess its prospects for future net cash flows
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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.