Chapter 1 — Overview and Scope
Chapter 1 — Overview and Scope
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 postimplementation review report on FASB Statement 131, which noted:
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.
Segment disclosures have been and are expected to remain an area of focus of the SEC staff because
of their importance to investors. This Roadmap discusses the identification of operating segments and
reportable segments and the corresponding disclosures.
Changing Lanes
The FASB currently has a project on segment reporting on its technical agenda.
The current phase of this project is focused on potential significant
segment expense disclosures. Practitioners should monitor the status of the
project for developments.
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 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
1
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.
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.
1.3 Application of the Guidance
An entity should follow each of the following key steps, all of which are explored in this Roadmap, in
applying the guidance in ASC 280:
- Step 1 — Identify operating segments by using the management approach (see Chapter 2).
- Step 2 — Determine whether two or more operating segments may be aggregated into a single operating segment (see Chapter 3).
- Step 3 — Apply the quantitative thresholds and other criteria to determine reportable segments (see Chapter 3).
- Step 4 — Consider what information should be disclosed for each reportable segment (see Chapter 4).
- Step 5 — Consider what information should be disclosed on an entity-wide basis (see Chapter 5).
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
The segment determinations reached by a public entity that files with the SEC
form the framework for certain other disclosures within the periodic filing,
including the business and MD&A sections. Management should be able to explain
why the entity’s segment reporting is appropriate if other published sources of
information about how the entity is being managed (e.g., its Web site, press
releases, investor presentations, and other parts of its periodic report) are
different from the segment reporting.
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 6.
Example 1-1
Company A has disclosed in its 20X6 Form 10-K filing that it has a single operating segment. However, A’s Web
site discusses A’s three main product lines, and a review of the executive leadership Web page indicates that
A has a senior vice president in charge of each product line. In addition, A’s most recent investor presentation
provides profitability information for each product line.
Company A’s executive leadership Web page and disclosure of profitability information by product line may
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 and reporting of a single operating segment.
1.5 Interaction of ASC 280 With Accounting for 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 operating segments,
reportable segments, and reporting units. ASC 280 addresses operating segments and reportable
segments, while ASC 350 addresses reporting units.
In determining reporting units under ASC 350, an entity would begin with the
definition of an operating segment in ASC 280 and
consider disaggregating that operating segment
into economically dissimilar components to test
for goodwill impairment. Likewise, in determining
reportable segments under ASC 280, an entity would
begin with an operating segment, as defined in
U.S. GAAP, but would be permitted to aggregate
operating segments that meet certain criteria into
a single operating segment. The operating segments
— or aggregated segments — that meet certain
thresholds in ASC 280 represent reportable
segments.
The diagram below gives an overview of the interplay between these concepts.
Operating segments and reportable segments are explored further in this Roadmap. See Appendix B
for additional discussion of the identification of reporting units.
1.5.1 Considerations for Entities That Are Not Within the Scope of ASC 280
Section 1.6 addresses the
scope of ASC 280. Entities that are not within the scope of that guidance but
have goodwill balances that must be tested for impairment will, however, 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.
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, “entities” refers to those public entities that are
within the scope of ASC 280.
While only public entities as defined in ASC 280 must provide the segment
disclosures required by ASC 280, nonpublic 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
1.5.1, 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
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 present operating 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 is a
public entity.
Example 1-3
Company B 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, B is not required to file its financial statements with the
SEC. Company B has been acquired by Company C, which is required to file financial statements with the SEC
because its equity securities are publicly traded. Company B meets the significance tests in SEC Regulation S-X,
Rule 3-05; therefore, C is required to include B’s financial statements in C’s Form 8-K to report the acquisition.
Because B 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 C’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 is a
public entity.
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 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.
1.7 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 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 and aggregation of
operating segments, (2) changes in reportable segments, (3) reporting considerations for
entities with a single reportable segment, and (4) entity-wide disclosures regarding
products, services, or both. See Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry
Insights for 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
6 for a discussion of these SEC reporting considerations.