1.2 Management Approach to Segment Reporting
ASC 280-10
05-3 A public entity could provide complete sets of financial statements that are disaggregated in several
different ways, for example, by products and services, by geography, by legal entity, or by type of customer.
However, it is not feasible to provide all of that information in every set of financial statements. The guidance
in this Subtopic requires that general-purpose financial statements include selected information reported on
a single basis of segmentation. The method for determining what information to report is referred to as the
management approach. The management approach is based on the way that management organizes the
segments within the public entity for making operating decisions and assessing performance. Consequently,
the segments are evident from the structure of the public entity’s internal organization, and financial statement
preparers should be able to provide the required information in a cost-effective and timely manner.
05-4 The 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.
05-5 To provide some
comparability between public entities, this Subtopic
requires that an entity report certain information about the
revenues that it derives from each of its products and
services (or groups of similar products and services) and
about the countries in which it earns revenues and holds
assets, regardless of how the entity is organized. As a
consequence, some entities are likely to be required to
provide limited information that may not be used for making
operating decisions and assessing performance.
As noted in paragraph 60 of the Background Information and Basis for Conclusions of FASB Statement 131, basing segments on the structure of an entity’s internal organization has advantages, including the following:
- “[A]n ability to see an enterprise ‘through the eyes of management’ enhances a user’s ability to predict actions or reactions of management that can significantly affect the enterprise’s prospects for future cash flows.”
- “[B]ecause information about those segments is generated for management’s use, the incremental cost of providing information for external reporting should be relatively low.”
ASC 280-10-05-5 notes that an entity is required to provide certain entity-wide
disclosures regardless of how it is organized. The
Board determined that while the information
gathered may not be used for making operating
decisions and assessing performance, it would
provide some comparability between public entities
and would not be unduly burdensome to obtain.
Key Takeaways
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A key objective of ASC 280 is for an entity to disclose information that enables financial statement users to (1) evaluate the different types of business activities the entity engages in and (2) understand the entity's performance, future cash flows, and overall quality.
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Each entity could be viewed differently as a result of its management approach and how the CODM allocates resources and makes financing decisions.