2.1 Overview
As stated in ASC 280-10-05-3, the method used to determine what information to
report under ASC 280 is called the management approach and is “based on the way that
management organizes the segments within the public entity for making operating
decisions and assessing performance.” Accordingly, the first step for an entity in
applying ASC 280 is the identification of operating segments.
ASC 280-10
50-1 An operating segment is a component of a public entity that has all of the following characteristics:
- It engages in business activities from which it may recognize revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity).
- Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
- Its discrete financial information is available.
Evaluating whether a component has all the characteristics of an operating segment can require
judgment, including the consideration of whether:
- The component engages in business activities from which it may recognize revenues and incur expenses (see Section 2.2).
- The component’s operating results are regularly reviewed by the CODM (see Section 2.3).
- Discrete financial information is available for the component (see Section 2.4).
Key Takeaways
- Identification of operating segments requires the use of the management approach. In accordance with ASC 280-10-05-3, this approach is “based on the way that management organizes the segments within the public entity for making operating decisions and assessing performance.”
- An operating segment possesses the following characteristics: (1) engagement in business activities from which it may recognize revenues and incur expenses, (2) operating results that are regularly reviewed by the CODM to allocate resources and assess performance, and (3) availability of discrete financial information.
- Evaluating whether a component has all the characteristics of an operating segment can require judgment.
- Various information sources may help an entity identify operating segments, including the entity’s organizational structure (i.e., who are the CODM’s direct reports), the CODM’s periodic reporting package, the level at which budgets are reviewed and approved by the CODM, and an understanding of the incentive compensation structure.