2.2 Engagement in Business Activities
One characteristic of an operating segment is that it engages in business
activities from which it may recognize revenues and incur expenses. Because ASC
280-10-50-1 uses the words “may recognize revenues,” the absence of revenues does
not preclude a component from being an operating segment.
In addition, ASC 280-10-55-5 clarifies that “[a] division that recognizes
revenues and incurs expenses but does not have any assets associated with it for
internal reporting purposes could be considered an operating segment, if, under the
specific facts and circumstances being considered, it otherwise meets the definition
in paragraph 280-10-50-1.”
2.2.1 Research and Development Activities
ASC 280-10
50-3 An operating segment may engage in business activities for which it has yet to recognize revenues, for
example, start-up operations may be operating segments before recognizing revenues.
An operating segment can be a component that does not recognize external or
internal revenues but for which the CODM is making resource allocation decisions
and assessing performance on the basis of expenses. This may occur, for example,
when a component is focused on research and development activities and the CODM
is regularly reviewing operating results for that component to assess
performance and allocate resources (see further discussion in Section 2.3).
Example 2-1
Company P, a diversified pharmaceutical company, has allocated a portion of its combined assets to a
component for the research and development of new drugs. Expenses have been incurred; however, the
component has yet to recognize revenues from any of the activities. Discrete financial information is available
for the component, and the CODM reviews that information to allocate resources and assess performance.
Company P’s intent is to allocate resources to the specific business purpose of research and development.
Although revenues potentially will never be recognized from this pursuit, management has made a risk-and-reward determination that the cost of the research will be recovered through future revenues of the
component. Company P therefore determines that the component meets the definition of an operating
segment.
2.2.2 Corporate Headquarters and Functional Departments
ASC 280-10
50-4 Not every part of a public entity is necessarily an operating segment or part of an operating segment. For
example, a corporate headquarters or certain functional departments may not recognize revenues or may
recognize revenues that are only incidental to the activities of the public entity and would not be operating
segments. For purposes of this Subtopic, a public entity’s pension and other postretirement benefit plans are
not considered operating segments.
55-3 A corporate division
that recognizes revenues (for example, a treasury
operation that recognizes interest income) and incurs
expenses could be considered an operating segment, if,
under the specific facts and circumstances being
considered, it meets the definition in paragraph
280-10-50-1. Some believe that corporate divisions could
not be considered operating segments because paragraph
280-10-50-4 indicates that not every part of a public
entity is necessarily an operating segment or part of an
operating segment, for example, a corporate headquarters
or certain functional departments that do not recognize
revenues or that recognize revenues that are only
incidental to the activities of the public entity.
55-4 However, a corporate division that recognizes revenues and that has available discrete financial
information and whose operating results are reviewed regularly by the chief operating decision maker should
be considered an operating segment. Even if the revenues are considered incidental, this Subtopic does not
preclude such a division from being a reportable segment if management believes the additional information
may contribute to a better understanding of the public entity.
To qualify as an operating segment, a component must engage in business
activities. Therefore, functional departments such as corporate divisions,
corporate shared services, or treasury departments typically do not qualify as
operating segments if they either (1) do not earn revenue or (2) earn an amount
of revenue that is only incidental to the entity’s activities. (Although ASC
280-10-55-4 clarifies that “[e]ven if the revenues are considered incidental,
this Subtopic does not preclude such a division from being a reportable segment
if management believes the additional information may contribute to a better
understanding of the public entity.”) By contrast, if a corporate functional
department earns more than an incidental amount of revenue and meets the
other criteria in ASC 280-10-50-1, the component may qualify as an operating
segment.
Some entities may be organized by functional departments that are accountable
for either revenue or costs but not both. Identifying the operating segments of
those entities will require careful consideration. Entities that are organized
by function rather than by products and services or by geography will need to
determine what information the CODM regularly reviews to allocate resources and
assess performance. They should also be particularly mindful of the disclosures
required by ASC 280, including disclosures related to how the entity is
organized (see Section
4.2) and the entity-wide disclosures about products, services,
and geography (see Chapter
5).