3.3 Step 2: Perform Quantitative Threshold Tests

ASC 280-10

Reportable Segments

50-10 A public entity shall report separately information about each operating segment that meets both of the following criteria:

Has been identified in accordance with paragraphs 280-10-50-1 and 280-10-50-3 through 50-9 or results from aggregating two or more of those segments in accordance with [ASC 280-10-50-11]
Exceeds the quantitative thresholds in paragraph 280-10-50-12.

Paragraphs 280-10-50-13 through 50-18 specify other situations in which separate information about an operating segment shall be reported. Paragraph 280-10-55-26 and Examples 1 and 2 (see paragraphs 280-10-55-27 through 55-45) illustrate how to apply the main provisions in this Subtopic for identifying reportable operating segments.

Quantitative Thresholds

50-12 A public entity shall report separately information about an operating segment that meets any of the following quantitative thresholds (see Example 2, Cases C, D, and E [paragraphs 280-10-55-39 through 55-45]):

Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.
The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit of all operating segments that did not report a loss
2. The combined reported loss of all operating segments that did report a loss.
Its assets are 10 percent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to readers of the financial statements.

50-18A An entity need not aggregate similar segments, and it may present segments that fall below the quantitative thresholds.

50-19 Public entities are encouraged to report information about segments that do not meet the quantitative thresholds if management believes that it is material. Those who are familiar with the particular circumstances of each public entity must decide what constitutes material.

Once an entity considers the aggregation criteria in ASC 280-10-50-11, it must apply the quantitative threshold guidance (i.e., the 10 percent tests) in ASC 280-10-50-12 to determine which segments should be reported separately. An operating segment needs to meet only one of the criteria in ASC 280-10-50-12 to be a reportable segment, although it may meet more than one.

Under the quantitative threshold guidance, an entity performs the 10 percent tests for each operating segment or aggregated segment. For example, in the structure below, Operating Segments A and B have been aggregated into a single operating segment, Segment 1, while Operating Segments C and D have not been aggregated.

Accordingly, the 10 percent tests would be performed on Segments 1, 2, and 3.

3.3.1 Combined Revenue of All Operating Segments

Under the first of the three 10 percent tests in ASC 280-10-50-12, an entity considers the reported revenue of each operating segment, including sales to external customers and intersegment sales or transfers. To calculate 10 percent of combined revenue, the entity uses as the denominator the sum of revenue reported to the CODM for each identified operating segment. While the combined revenue total represents all operating segments included in the information reviewed by the CODM, the total may be greater than or less than the consolidated amount reported in the financial statements because of intersegment sales or transfers. Although segment revenue and combined revenue may include intersegment sales or transfers, the amounts must be determined in accordance with U.S. GAAP.

Example 3-7

Company A manufactures basketballs, footballs, soccer balls, and volleyballs. In addition, A has a processing plant that produces the leather used in each of its products. Approximately 90 percent of the leather is used internally; the remainder is sold to third parties. Company A records intercompany sales between the leather plant and each of its divisions. The CODM receives and uses the gross revenue and profit margin of the leather plant, inclusive of intercompany sales, to allocate resources and assess performance. Company A has identified five operating segments: basketball, football, soccer, volleyball, and the leather plant. None of the operating segments have been aggregated under ASC 280-10-50-11.

In the current year, the CODM receives the following revenue information:

After performing the 10 percent test on the $2,200 of combined operating segment revenue before intercompany eliminations, A would determine that the basketball, football, and leather plant segments each meet the quantitative requirements in ASC 280-10-50-12 and that therefore each would be a reportable segment. Although the soccer and volleyball segments each account for less than 10 percent of combined revenue, A would still need to consider them under the profit-or-loss and the combined-asset tests (discussed below) to determine whether they would be reportable segments. Although the soccer and volleyball reportable segments may not need to be separately disclosed, management may choose to disclose them separately if such disclosure would be useful to investors.

3.3.2 Reported Profit or Loss

Under the second of the three 10 percent tests in ASC 280-10-50-12, an entity considers the profit or loss reported for each operating segment. An operating segment would be a reportable segment if:

b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:

1. The combined reported profit of all operating segments that did not report a loss

2. The combined reported loss of all operating segments that did report a loss.

See Example 3-8 for an illustration of this calculation.

We believe that the measure of profit or loss to be used for this calculation would be the measure disclosed for each segment; namely, the measure used by the CODM for allocating resources and assessing performance. This is consistent with the guidance in ASC 280-10-55-39, which states:

The intent of the threshold criterion of paragraph 280-10-50-12(b) is to require an evaluation of the magnitude of each segment profit or loss compared with a combined reported profit and loss of all operating segments, assuming profit or loss is determined on a consistent basis. That combined measure of all segment profits and losses should approximate (absent any reconciling items) the consolidated amount.

In some instances, an entity may identify different measures of profit and loss for different segments (see the next section).

3.3.2.1 Different Measures of Profit or Loss

ASC 280-10

55-40 [A]ssume that the measure of segment profit and loss used by the chief operating decision maker is a different measure for each segment (for example, if the chief operating decision maker uses net income for purposes of evaluating the performance of Segments A and F but uses operating income for purposes of evaluating the performance of Segments B, C, D and E). In this Case, the 10 percent of segment profit thresholds should be based on either operating income or net income of the segments. [However,] the amounts reported for segment profit or loss would be net income for Segments A and F and operating income for Segments B, C, D, and E[.]

Pending Content (Transition Guidance: ASC 280-10-65-1)

55-40 [A]ssume that the measure of segment profit or loss used by the chief operating decision maker is a different measure for each segment (for example, if the chief operating decision maker uses net income for purposes of evaluating the performance of Segments A and F but uses operating income for purposes of evaluating the performance of Segments B, C, D, and E). In this Case, the 10 percent of segment profit thresholds should be based on either operating income or net income of the segments. [However,] the amounts reported for segment profit or loss would be net income for Segments A and F and operating income for Segments B, C, D, and E . . . if the public entity discloses only one measure of a segment’s profit or loss. This also would not affect the requirement in paragraph 280-10-50-28A if the public entity discloses more than one measure of a segment’s profit or loss.

The CODM may use different measures of profitability for different segments (e.g., EBITDA for some segments and adjusted EBITDA for others). ASC 280-10-55-40 clarifies that in such instances, the threshold in ASC 280-10-40-12(b) should be applied to a consistent measure of profitability (e.g., the entity would need to select either EBITDA or adjusted EBITDA for the calculation). While a consistent measure is applied for the 10 percent test, an entity would still need to disclose the actual measure of profitability used by the CODM for each segment.

Changing Lanes

Under ASC 280-10-50-28A, added by ASU 2023-07, public entities are not precluded from reporting additional measures of a segment’s profit or loss that are used by the CODM as long as at least one of the reported measures is that which “is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in a public entity’s consolidated financial statements.”

If multiple measures of a segment’s profit or loss are disclosed, a public entity must reconcile each measure to the consolidated financial statements. The guidance in ASU 2023-07 related to significant segment expenses and other segment items also applies to each of these additional measures. If a public entity reports an additional measure in the current period for a reportable segment, it should disclose such additional measure in the prior comparative periods if it was provided to the CODM in those prior periods.

During the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC Deputy Chief Accountant Sarah Lowe and SEC Division of Corporation Finance Chief Accountant Lindsay McCord stated that the SEC staff does not believe that such additional measures are required or expressly permitted by U.S. GAAP (since the ASU does not identify specific measures that may be disclosed, such as EBITDA). The SEC staff indicated that such measures therefore would be considered non-GAAP measures.

We believe that financial statement users may find it difficult to evaluate whether a non-GAAP measure is misleading in the context of Regulation G; Regulation S-K, Item 10; or the Non-GAAP C&DIs. Additional measures included in the financial statement footnotes would be subject to management’s assessment of ICFR and external audit procedures.

Further, the SEC staff encouraged registrants that choose to include additional measures that are not determined in accordance with U.S. GAAP to reach out to the SEC staff to discuss their plans.

3.3.3 Combined Assets of All Operating Segments

Under the third of the three 10 percent tests in ASC 280-10-50-12, an entity considers whether the assets of the operating segment are 10 percent or more of the combined assets of all operating segments. In a manner similar to its performance of the first test in ASC 280-10-50-12, the entity uses the sum of assets reported to the CODM for each identified operating segment as the denominator to calculate 10 percent of the combined assets. This total may be greater or less than the consolidated amount because of eliminations and other amounts not included in the operating segments information. In addition, if the CODM does not review asset information by segment, this test need not be performed. See Example 3-8 for an illustration of this calculation.

3.3.4 Illustrative Example of Quantitative Thresholds

The table in the example below illustrates how an entity would apply the quantitative thresholds in ASC 280-10-50-12 to identify reportable segments.

Example 3-8

Company A has identified the following operating segments: computer hardware, computer software, and customer service. The shaded cells indicate a segment that meets the specific threshold requirements in ASC 280-10-50-12.

Company A performs calculations as follows to determine which segments exceed the 10 percent threshold requirement:

Revenue — Company A combines the revenue for all operating segments, $5,500, and excludes the $500 intersegment revenue elimination. Ten percent of total segment sales of $5,500, or $550, represents the threshold amount.
Profit or loss — Company A uses the greater, in absolute value, of the total of all segments that reported a profit and the total of all segments that reported a loss. Since the absolute value of the total of all segments with profits, $350, is greater than the absolute value of the segment with a loss, $50, 10 percent of the $350, or $35, is the profit or loss threshold amount.
Assets — Company A multiplies $800, which is the total of segment assets identified excluding intersegment amounts, by 10 percent to arrive at the $80 asset threshold amount.

Accordingly, the computer hardware, computer software, and customer service segments would each be presented as a reportable segment because each meets one (or more) of the 10 percent threshold requirements.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.