2.10 Reconsideration of Identified Operating Segments
The identification of operating and reportable segments may be affected by changes in facts and
circumstances. For example, a change in the management approach and resulting segment disclosures
may result from changes in senior management, significant acquisitions, and significant dispositions as
well as changes in the products and services offered by the entity or changes in the entity’s geographic
footprint. As discussed in Section 1.7, effective ICFR is necessary to support an entity’s judgment in
applying 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.
ASC 280 requires a change in reportable segments to be presented in the first period during which the
entity is managed on the basis of the new organizational structure. At times, there may be a transition
period during which changes to the organizational structure are being implemented and the entity
therefore will need to use significant judgment to determine the first period in which it is being managed
under the new structure. It may be helpful for the entity to consider the following in making this
determination:
- When changes to the CODM’s direct reports and their job responsibilities become effective.
- When the CODM begins receiving and reviewing discrete financial information under the new reporting structure.
- Whether the CODM has been managing the business under the new structure.
If there are changes in identified operating segments, the entity will also be
required to perform an updated analysis of the aggregation of operating segments, to
identify reportable segments, and to recast the information presented for each
reportable segment. In addition, such changes may result in a change to the entity’s
reporting units for goodwill impairment testing purposes (see Section 2.9 of Deloitte’s
Roadmap Goodwill and Intangible
Assets). For a discussion of SEC reporting considerations
related to recasting, see Chapter
7.
Example 2-13
Company J manufactures and distributes
windows and siding. It is structured so that decisions are
made and performance is evaluated by region: north and
south. Accordingly, J reports operating segments that are
based on the north and south regions. In the first quarter
of 20X0, J acquires Company K, which manufactures and
distributes doors. Upon completion of the integration of K
in the third quarter, J’s CODM allocates financing resources
and evaluates the operating segments’ performance by
product, rather than region (north and south). For the third
quarter of 20X0, J would need to recast its segments to a
product basis; therefore, windows, siding, and doors would
be the new operating segments. Company J would also need to
consider recasting considerations if it undertakes an
offering of securities after filing its third quarter Form
10-Q, as noted in Chapter 7.