Chapter 1 — Overview and Scope
Chapter 1 — Overview and Scope
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:
-
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.
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
-
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.
1.3 Application of the Guidance
In applying the guidance in ASC 280, an entity
should perform each of the following key steps, all of which are discussed in this
Roadmap:
The decision tree below, which is adapted from
ASC 280-10-55-26, illustrates the main steps involved in identifying reportable
segments.
1.4 Interactions With Other Published Information
A public entity’s reportable segments form the framework for certain other
disclosures within the entity’s periodic filing, including the business and MD&A
sections. The SEC staff’s review primarily aims to ensure consistency between the
manner in which an entity’s management presents its business to the public and the
information provided in the entity’s segment footnote disclosures. The SEC staff
frequently requests explanations from registrants if they identify inconsistencies
between the details outlined in the segment footnote and the publicly available
information from sources such as the entity’s Web site, earning calls, press
releases, analyst reports, public comments, social media posts, investor
presentations, and other parts of its periodic report. Moreover, the staff has
emphasized that when determining operating segments, entities should take into
account the totality of information considered by the CODM.
The interaction of segment reporting in the financial statements with
information provided in other parts of the
entity’s periodic report is discussed further in
Chapter 7.
Example 1-1
Management has concluded that Company A has a single operating segment. However,
a review of the executive leadership's Web page indicates
that A has a senior vice president in charge of each of its
three main product lines. Each reports directly to the CEO,
who is A's CODM. In addition, A’s most recent investor
presentation specifies a measure of profitability for each
product line.
Company A’s Web page, executive leadership structure, and investor presentation
that includes a measure of profitability by
product line suggest that the management approach
is based on product line and that a single
operating segment may not properly reflect that
management approach. Company A would be expected
to be able to reconcile this contradictory
evidence to its determination that it is a single
operating segment.
1.5 Interaction With Other GAAP
1.5.1 Goodwill
Under ASC 350-20, goodwill is
generally tested at the level of the reporting
unit, which the ASC master glossary defines as “an
operating segment or one level below an operating
segment (also known as a component).” Therefore,
it is important for entities to clearly
distinguish among its reportable segments,
operating segments, and reporting units. ASC 280
addresses operating segments and reportable
segments, while ASC 350 addresses reporting
units.
In determining its reporting
units under ASC 350, an entity would begin with
the operating segments it identified under ASC 280
and consider disaggregating each operating segment
into economically dissimilar components. Likewise,
in determining reportable segments under ASC 280,
an entity would begin with the operating segments
identified under ASC 280 and is permitted to
aggregate operating segments that meet certain
criteria. The operating segments — or an
aggregation of operating segments — that meet
certain thresholds in ASC 280 represent reportable
segments. See Section 2.6 of
Deloitte’s Roadmap Goodwill and Intangible
Assets for information about
identifying reporting units.
The diagram
below gives an overview of the interplay between
these concepts.
The manner in which an entity determines its
operating and reportable segments is further
explored in other sections of this Roadmap.
1.5.2 Revenue
Under ASC 606-10-50-5, an entity is required to disclose its revenue,
disaggregated into categories “that depict how the
nature, amount, timing, and uncertainty of revenue
and cash flows are affected by economic factors.”
See Section
15.2.2 of Deloitte’s Roadmap Revenue
Recognition for additional
discussion of revenue disaggregation.
One common disclosure is
revenue disaggregated by reportable segment,
although such disclosure alone may not satisfy the
requirements of ASC 606. The SEC staff has stated
that its reviews of filings will include the
assessment of other materials, such as investor
presentations and earnings releases, to determine
whether the appropriate revenue disaggregation is
disclosed.
1.6 Scope
ASC 280-10
15-2 The guidance in the Segment Reporting Topic applies to all public entities, with certain exceptions noted
below. Entities other than public entities are also encouraged to provide the disclosures described in this
Subtopic.
15-3 The guidance in this Subtopic does not apply to the following entities:
- Parent entities, subsidiaries, joint ventures, or investees accounted for by the equity method if those entities’ separate company statements also are consolidated or combined in a complete set of financial statements and both the separate company statements and the consolidated or combined statements are included in the same financial report. However, this Subtopic does apply to those entities if they are public entities and their financial statements are issued separately.
- Not-for-profit entities (regardless of whether the entity meets the definition of a public entity as defined above).
- Nonpublic entities.
ASC 280-10-20 defines a public entity as follows:
A business entity or a not-for-profit entity that meets any
of the following conditions:
-
It has issued debt or equity securities or is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
-
It is required to file financial statements with the Securities and Exchange Commission (SEC).
-
It provides financial statements for the purpose of issuing any class of securities in a public market.
Throughout this Roadmap, the terms “entities” and “public entities” are used
interchangeably to refer to public entities that are within the scope of ASC 280,
including entities that are preparing for the sale of securities in a public market,
such as in an initial public offering (see Section 1.3 of Deloitte’s Roadmap Initial Public
Offerings), and broker-dealers.
While only public entities as defined in ASC 280 must provide the segment
disclosures required by ASC 280, nonpublic and not-for-profit entities are not
precluded from providing them; in fact, ASC 280-10-15-2 states that all entities are
encouraged to do so. In addition, as discussed in Section 1.6.5, entities with recognized goodwill
may need to consider certain elements of ASC 280 when testing goodwill for
impairment under ASC 350.
1.6.1 Financial Statements of Entities With Publicly Traded Debt Only or Conduit Bond Obligors
The requirement to provide segment disclosures is not limited to entities with
publicly traded equity securities. ASC 280-10-15-2 notes that the guidance in
ASC 280 applies to all public entities, which ASC 280-10-20 defines in part as
those entities that have “issued debt or equity securities or [are] conduit bond
obligor[s] for conduit debt securities that are traded in a public market.”
Therefore, such entities would need to consider the segment disclosure
requirements in ASC 280.
Example 1-2
Company A is a wholly owned U.S. subsidiary of a Japan-domiciled entity. Company A does not have any public
equity that is traded in a public market. However, A has medium-term notes that are traded on the New York
Stock Exchange. Because A has debt securities that are traded in a public market, A is required to present
segment information in accordance with ASC 280 when preparing financial statements that comply with U.S.
GAAP.
1.6.2 Segment Disclosures in Financial Statements of Businesses Acquired or to Be Acquired
ASC 280-10-15-2 limits the requirement to disclose segment information to
“public entities” as that term is defined in ASC 280. Financial statements that
are furnished in accordance with SEC Regulation S-X, Rule 3-05 or Rule 3-14, are
not required to include segment information unless the business itself is a
public entity.
Example 1-3
Company C has no publicly traded equity or debt securities and is not providing
financial statements to issue any class of securities in
a public market. In addition, C is not required to file
its financial statements with the SEC. Company C has
been acquired by Company D, which is required to file
financial statements with the SEC because its equity
securities are publicly traded. Company C meets the
significance tests in Regulation S-X, Rule 3-05;
therefore, D is required to include C’s financial
statements in D’s Form 8-K to report the
acquisition.
Because C does not meet the definition of a public entity, it is not required
under ASC 280 to provide segment disclosures in the
financial statements included in D’s Form 8-K.
1.6.3 Separate Financial Statements Included in an SEC Filing
ASC 280-10-15-3 excludes “[p]arent entities, subsidiaries, joint ventures, or
investees accounted for by the equity method if those entities’ separate company
statements also are consolidated or combined in a complete set of financial
statements and both the separate company statements and the consolidated or
combined statements are included in the same financial report.” Accordingly,
equity method investees whose financial statements are included in a
registrant’s filing under SEC Regulation S-X, Rule 3-09, are not required to
include segment information in the filing unless the equity method investee
itself is a public entity.
Example 1-4
Company E has a nonpublic equity method
investee, Company F, which is significant under
Regulation S-X, Rule 3-09, and is not an SEC filer.
Company F’s financial statements are included in E’s
annual report only because of its significance under
Regulation S-X, Rule 3-09.
Because F does not meet the definition of a public
entity, it is not required under ASC 280 to provide
segment disclosures in its financial statements that are
included in E’s annual report.
1.6.4 Competitive Harm
While some respondents to the exposure draft of FASB Statement 131 noted the
potential for competitive harm as a result of disclosing segment information,
the Board decided that a competitive harm exemption was inappropriate “because
it would provide a means for broad noncompliance.” Accordingly, all provisions
of ASC 280 apply to entities that are within its scope. Observations about the
absence of any competitive harm considerations in ASC 280 were made at the 2015
AICPA Conference on Current SEC and PCAOB Developments by Wesley R. Bricker,
then deputy chief accountant in the SEC’s Office of the Chief Accountant (OCA),
whose prepared remarks stated the following:
Some registrants have contended in their consultations,
including on segment reporting, that they should not be required to apply a
GAAP standard because the result would be “competitively harmful” or
“misleading.” These arguments are troubling, since they disregard the
thoughtful balance taken by the accounting standard setters in crafting
reporting standards that provide transparent, useful information to
investors. A better approach starts with identifying what information is
useful to investors, why, and how that information can be appropriately
reported.
1.6.5 Considerations for Entities That Are Not Within the Scope of ASC 280
Entities that are not within the scope of ASC 280 but have
goodwill balances that must be tested for impairment will need to consider the
portions of ASC 280 related to the identification of operating segments unless
the entities (1) are eligible for and have elected the alternative accounting
for the subsequent measurement of goodwill outlined in ASC 350-20-35-62 through
35-82 and (2) elect an accounting policy to test goodwill for impairment at the
entity level, as discussed in ASC 350-20-35-65. See Chapter 3 of Deloitte’s Roadmap Goodwill and Intangible
Assets for a discussion of goodwill accounting
alternatives for private companies and not-for-profit entities.
1.7 ICFR Considerations
Entities need to have effective ICFR to support the judgments they use 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. In prepared remarks, staff from the SEC OCA reminded
registrants and auditors of the importance of effective internal controls related to
segment disclosures by observing the following at the 2015 AICPA Conference on Current
SEC and PCAOB Developments:
The guidance on segment reporting
requires the application of reasonable judgment. Effective [ICFR] supports those
judgments, including the judgments needed in the determination of operating
segments, aggregation, and entity-wide disclosures. Input from, and interaction
with, the [chief operating decision maker (CODM)] may be an important element in the
design of effective ICFR in regard to how the CODM allocates resources and assesses
performance. In addition, documenting the design and effective operation of
management’s controls over these judgments is an integral part of management’s
support for the effectiveness of its ICFR, and will be essential to the auditor’s
ability to evaluate these controls. [Footnote omitted]
1.8 SEC Considerations
Given its importance to investors in presenting insight into
management’s approach to the company and review of key financial results, segment
reporting continues to be a source of SEC comments. In a manner consistent with the
previous year’s trends, comments focus on (1) the identification of operating segments,
(2) the aggregation of operating segments, (3) changes in reportable segments, (4)
entity-wide disclosures, and (5) the use of multiple measures of segment performance
when one or more measure is not consistent with the measurement principles determined in
accordance with GAAP. See Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry
Insights for discussions of SEC comment letter trends observed in
practice.
In addition to the disclosure requirements prescribed under ASC
280-10-50, SEC filers should be cognizant of the relationship between segment reporting
and certain required SEC disclosures and guidance, such as those within the business and
MD&A sections of the registrant’s filing and the SEC’s guidance on non-GAAP
measures. Further, a change in an entity’s segment structure may have certain reporting
implications on historical financial statements, registration statements, and other
nonpublic offerings. See Chapter
7 for a discussion of these SEC reporting considerations.
1.9 Improvements to Reportable Segment Disclosures Under ASU 2023-07
In November 2023, the FASB issued ASU 2023-07 to improve the information
that a public entity discloses about its reportable segments and to address investor
requests for more information about reportable segment expenses. The ASU does “not
change how a public entity identifies its operating segments, aggregates those
operating segments, or applies the quantitative thresholds to determine its
reportable segments.”
The ASU’s amendments are effective for all public entities for
fiscal years beginning after December 15, 2023 (i.e., for calendar-year-end public
entities, annual periods beginning on January 1, 2024 — i.e., December 31, 2024,
Form 10-K), and interim periods within fiscal years beginning after December 15,
2024 (i.e., for calendar-year-end public entities, interim periods beginning on
January 1, 2025 — i.e., Form 10-Q for the first quarter of 2025). Early adoption is
permitted.
The improvements to segment disclosures apply “retrospectively to all prior periods
presented in the financial statements.” The significant segment expense and other
segment item amounts “disclosed in prior periods shall be based on the significant
segment expense categories identified and disclosed in the period of adoption.”
The table below summarizes the ASU’s main provisions
related to reportable segment disclosures.
|
Change
|
Overview and When Disclosure Is Required
|
|---|---|
|
Significant segment expenses
|
Public entities are required to disclose significant segment
expenses by reportable segment if they are regularly
provided to the CODM and included in each reported measure
of segment profit or loss. Disclosures are required on both
an annual and an interim basis.
|
|
Other segment items
|
Public entities are required to disclose other segment items
by reportable segment. Such a disclosure would constitute
the difference between reported segment revenues less the
significant segment expenses (disclosed) less reported
segment profit or loss. Disclosures are required on both an
annual and an interim basis.
|
|
Interim disclosure changes
|
All existing annual disclosures about segment profit or loss
must be provided on an interim basis in addition to
disclosure of significant segment expenses and other segment
items as noted above.
|
|
Multiple measures of a segment’s profit or loss
|
Public entities may disclose more than one measure of segment
profit or loss used by the CODM, provided that at least one
of the reported measures includes the segment profit or loss
measure that is most consistent with GAAP measurement
principles. Disclosures are required on both an annual and
an interim basis.
|
|
CODM-related disclosures
|
Disclosure of the CODM’s title and position is required on an
annual basis, as well as an explanation of how the CODM uses
the reported measure(s) and other disclosures.
|
|
Entities with a single reportable segment
|
Public entities must apply all of the ASU’s disclosure
requirements, as well as all existing segment disclosure and
reconciliation requirements in ASC 280, on an annual and
interim basis.
|
|
Recasting of prior-period segment information to conform to
current-period segment information
|
Recasting is required if segment information regularly
provided to the CODM is changed in a manner that causes the
identification of significant segment expenses to
change.
|