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:
-
The combined reported profit of all operating segments that did not report a loss
-
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
eliminations and other amounts that are not
included in the operating segment information.
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, 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.
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[.]
The CODM may use different measures of profitability for different segments
(e.g., EBITDA for some segments and operating
income 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 operating income
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.
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.