3.1 Overview
As discussed in Chapter 2,
an entity determines what information to report under ASC 280 by using the
management approach, which ASC 280-10-05-3 states is “based on the way that
management organizes the segments within the public entity for making operating decisions and assessing performance.” Further, paragraph 72 of the Background Information and Basis for Conclusions of FASB Statement 131 notes that to meet the
objectives of segment reporting without providing overly detailed information, an
entity applies a “modified management approach,” which takes into account
aggregation criteria and quantitative thresholds.
The following steps should be considered in the
identification of reportable segments:
This chapter discusses an entity’s requirements and considerations related to performing each of these
steps. While the steps provide a helpful guide, an entity is encouraged to consider whether to separately
report information on material segments, irrespective of whether the segment meets the quantitative
requirements for separate disclosure. We believe that such an approach is consistent with the objectives
and principles of ASC 280, which aim to help users of financial statements understand an entity’s
performance, assess its prospects for future cash flows, and make more informed judgments about
the entity as a whole. Further, as discussed throughout this Roadmap, an entity’s identified reportable
segments should “facilitate consistent descriptions” of the entity in its annual report and other published
information, such as its earnings release, its investor presentations, and the financial information on its
Web site.
Key Takeaways
- To determine which subset of operating segments to report, an entity uses a modified management approach based on aggregation criteria and quantitative requirements.
- An entity must use reasonable judgment when aggregating two or more operating segments into a single operating segment, and all the aggregation criteria need to be met, including the requirement that aggregation be consistent with the objectives and principles of ASC 280.
- The evaluation of whether two or more operating segments are similar with respect to the aggregation criteria should take into account the range of the entity’s business activities and the economic environments in which it operates.
- When evaluating whether operating segments have similar economic characteristics, an entity cannot solely look to projected economic performance and ignore historical differences (i.e., projected similarity does not overcome past differences).
- If an operating segment represents 10 percent or more of revenue, profitability, or total assets, separate disclosure is required. An entity may need to disclose additional segments separately to ensure that reportable segments constitute at least 75 percent of reported revenue.
- The reportable segment analysis may need to be reconsidered in interim periods if there has been a change in facts and circumstances, including a change in management structure.