Chapter 3 — Reportable Segments | DART – Deloitte Accounting Research Tool

Chapter 3 — Reportable Segments

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 (i.e., the business and MD&A sections) 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, 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) or vice versa.
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.

3.2 Step 1: Evaluate Operating Segments for Aggregation

3.2.1 Criteria for Aggregation

ASC 280-10

50-11 Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of this Subtopic, if the segments have similar economic characteristics, and if the segments are similar in all of the following areas (see paragraphs 280-10-55-7A through 55-7C and Example 2, Cases A and B [paragraphs 280-10-55-33 through 55-36]):

The nature of the products and services
The nature of the production processes
The type or class of customer for their products and services
The methods used to distribute their products or provide their services
If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

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

Under ASC 280-10-50-11, two or more operating segments may be aggregated if the following three criteria are met:

Criterion 1 — Aggregation is consistent with the objectives and basic principles of ASC 280 (see Section 3.2.2).
Criterion 2 — The segments have similar economic characteristics (see Section 3.2.3).
Criterion 3 — The segments are similar with respect to the five qualitative characteristics specified in ASC 280-10-50-11(a)–(e) (see Section 3.2.4).

Further, an entity is not required to aggregate similar operating segments. Accordingly, step 1 is optional, and an entity may proceed directly to the quantitative tests in step 2.

3.2.1.1 Evaluation of “Similar”

ASC 280-10

Aggregation Criteria

55-7A Paragraph 280-10-50-11 states that operating segments are considered to be similar if they can be expected to have essentially the same future prospects. Therefore, the similarity of the economic characteristics should be evaluated based on future prospects and not necessarily on the current indicators only. In other words, if the segments do not currently have similar gross margins and sales trends but the economic characteristics and the other five criteria are met and the segments are expected to again have similar long-term average gross margins and sales trends, the two segments may be aggregated.

55-7B Likewise, if segments generally do not have similar economic characteristics, but in the current year have similar gross margins or sales trends and it is not expected that the similar gross margins or sales trends will continue in the future, it should not be presumed that the segments should be aggregated for the current-year segment disclosures just because current economic measures are similar.

55-7C Aggregation of segments should be consistent with the objective and basic principles of this Subtopic — to provide information about the different types of business activities in which a public entity engages and the different economic environments in which it operates in order to help users of financial statements better understand the public entity’s performance, better assess its prospects for future net cash flows, and make more informed judgments about the public entity as a whole. This Subtopic mentions that segments having similar economic characteristics would be expected to have similar long-term average gross margins. That measure is used, only as an example, because gross margin is a measure of profitability that is less likely to be affected by allocations. Evaluating similar economic characteristics is a matter of judgment that depends on specific facts and circumstances.

ASC 280 does not define the term “similar” or provide extensive guidance on the aggregation criteria, and the assessment of whether two or more operating segments are similar depends on facts and circumstances. Therefore, the determination that two or more operating segments should be aggregated is subject to judgment and is a high hurdle to overcome. As a result, we believe that the SEC staff may ask a registrant to provide an analysis on how it determined that its aggregation of operating segments complies with both the quantitative and qualitative requirements of ASC 280. At the 2015 AICPA Conference on Current SEC and PCAOB Developments, staff from the SEC’s OCA noted:

In determining whether two operating segments are “similar” with respect to the economic characteristics and each of the qualitative criteria, the guidance notes the evaluation should be made relative to the range of the entity’s business activities and the economic environments in which it operates. For example, some entities operate within a single industry segment but may have multiple product lines by which it has defined its operating segments. Under the guidance, the entity would need to consider the range of those product lines and the characteristics of each that drive economic performance when evaluating aggregation. In doing so, it may be helpful to consider whether a reasonable investor would consider the two operating segments to be similar. Often, [publicly] available industry reports and other analysis by users will indicate the key characteristics by which a reasonable investor may analyze the entity. [Footnote omitted]

Paragraph 74 of the Background Information and Basis for Conclusions of FASB Statement 131 notes, in part, that “[t]he Board recognizes that determining when two segments are sufficiently similar to justify aggregating them is difficult and subjective.”

When assessing whether operating segments may be aggregated, registrants that have complex business models and reporting structures may find it particularly difficult to determine the basis for economic similarity. Accordingly, we believe that the SEC staff may ask registrants that have aggregated segments how they satisfied the quantitative requirements of ASC 280 and may request historical and projected financial information by operating segment. Further, the staff continues to challenge a registrant’s conclusion that operating segments may be aggregated when the entity provides the CODM with profit measures for a level below the reportable segment. The SEC staff has also emphasized that registrants should focus on the qualitative factors in ASC 280 (e.g., similarity of products and customers) when assessing whether operating segments are similar for aggregation purposes.

3.2.1.2 Application of Reasonable Judgment

When applying the aggregation criteria in ASC 280-10-50-11, an entity must use reasonable judgment. At the 2015 AICPA Conference on Current SEC and PCAOB Developments, staff from the SEC’s OCA observed:

Reasonable judgment with a thorough understanding of an entity’s specific facts and circumstances is required in applying these criteria. This judgment is informed by the starting point in the analysis, which is that management has first determined the information it finds useful (and uses) in managing the business is at a disaggregated operating segment level. [Footnote omitted]

Accordingly, when evaluating whether it has met the aggregation criteria in ASC 280-10-50-11, an entity may find it helpful to first consider why it has identified multiple operating segments for resource allocation and performance assessment purposes. While the CODM’s review and the segment reporting objectives are not identical, both focus on performance and decision-making about the future. Understanding how management runs the business and the usefulness of disaggregated information for the CODM will often help the entity decide whether two or more operating segments are similar.

In its reviews, the SEC staff has routinely requested clarification about whether an entity’s operating segments have been aggregated and, if so, the entity’s analysis resulting in a conclusion that aggregation was appropriate. We believe that an entity should maintain contemporaneous documentation of its aggregation analysis, including the evaluation of ICFR related to its key judgments. This analysis should address each of the aggregation criteria, including whether aggregation is consistent with the objectives and basic principles of ASC 280 and how the entity determined that providing more detailed segment disclosure would detract from these objectives.

3.2.1.3 All Aggregation Criteria Must Be Met

All three of the criteria in ASC 280-10-50-11 must be met for an entity to aggregate two or more operating segments. Paragraph 74 of the Background Information and Basis for Conclusions of FASB Statement 131 states, in part:

[T]he Board rejected recommendations that the criteria be indicators rather than tests and that the guidance require only the expectation of similar long-term performance of segments to justify aggregation because those changes might result in a level of aggregation that would cause a loss of potentially valuable information. For the same reason, the Board also rejected suggestions that segments need be similar in only a majority of the characteristics in [ASC 280-10-50-11] to justify aggregation.

This requirement was reiterated at the 2014 AICPA Conference on Current SEC and PCAOB Developments, when then OCA Deputy Chief Accountant Dan Murdock noted the following:

The underlying principle [to aggregation of operating segments] is that separate reporting of segment information will not add significantly to an investor’s understanding of an entity if its operating segments have characteristics that are so similar they can be expected to have essentially the same future prospects. That said, the aggregation criteria are intended to be a high hurdle, and you need to meet all of the criteria in order to aggregate operating segments. The FASB specifically rejected recommendations that the criteria be indicators rather than tests and that an expectation of similar long-term performance alone would be sufficient to justify aggregation, noting that such relaxed criteria might result in a level of aggregation that would cause a loss of potentially valuable information. [Footnotes omitted and emphasis added]

3.2.1.4 Aggregation Into a Single Reportable Segment

In some situations, an entity may evaluate the aggregation criteria and conclude that all of its operating segments may be aggregated into a single reportable segment. While such a determination may not necessarily be incorrect, it may be subject to heightened regulatory scrutiny given that ASC 280 was intended to elicit useful information about the different types of business activities in which an entity engages. An entity that determines that aggregation into a single reportable segment is reasonable is likely to be challenged by the SEC staff to explain why, if the CODM uses disaggregated information to allocate resources and assess performance, that information would not be meaningful to users of the financial statements.

Changing Lanes

After the adoption of ASU 2023-07, a public entity that has a single reportable segment must provide all the disclosures required by both the ASU and the existing segment guidance in ASC 280. In other words, the measure(s) of segment profit or loss disclosed in the financial statements would need to be reconciled to consolidated income before income taxes and discontinued operations. See Section 4.2.1 for reporting considerations for entities with a single reportable segment.

SEC Considerations

During the OCA session on current accounting issues at the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC Associate Chief Accountant Carlton Tartar discussed considerations related to determining the segment measure of profit or loss for entities with a single reportable segment under ASU 2023-07. Mr. Tartar indicated that when an entity has a single reportable segment and is managed on a consolidated basis, the SEC would expect the entity to conclude under the new guidance in ASC 280-10-55-15D, added by ASU 2023-07, that the measure of segment profit or loss that is most consistent with U.S. GAAP is consolidated net income.

We encourage entities to consider discussing with their auditors, SEC counsel, or the SEC staff how the staff’s view should be applied in cases in which an entity has a single reportable segment and management concludes that (1) it does not manage the entity on a consolidated basis and (2) a measure of segment profit or loss other than consolidated net income prepared in accordance with U.S. GAAP may be appropriate.

See FAQ 13 in Appendix C for further discussion of considerations related to the segment measure of profit or loss for a single reportable segment.

3.2.2 Aggregation Must Be Consistent With the Objectives and Principles of ASC 280 (Criterion 1)

ASC 280-10-50-11 requires the aggregation of operating segments to be consistent with the objectives and basic principles of segment reporting outlined in ASC 280-10-10-1, which are intended to help financial statement users:

Better understand an entity’s different types of business activities, the different economic environments in which it operates, its performance, and its prospects for future net cash flows.
Make more informed judgments about the entity as a whole.

Example 3-1

Company A owns and operates the Best Burger chain of restaurants, with locations across the United States and Europe. Company A has identified two operating segments: the United States and Europe. In evaluating whether aggregation is consistent with the objectives and principles of ASC 280, A notes that, while restaurants in both the United States and Europe offer the same menu, the economic environment in Europe has put significant pressure on sales, and A is not expecting its sales in Europe to grow as much as those in the United States. As a result of the different economic environments of the United States and Europe segments and the different prospects for future cash flows of the Europe segment, aggregation of the United States and Europe operating segments may not be consistent with the objectives and principles of ASC 280.

Example 3-2

Consider Example 2-10, in which Company B is a vertically integrated manufacturer that sells processed food products to external customers. Company B’s operations include a flour mill that sells refined flour to the food processing segments of B. Although the flour mill has no external customers, the financial results of the milling operation are prepared separately, and the CODM regularly reviews them to assess performance and make decisions regarding the allocation of resources. Therefore, the flour mill operation would meet the definition of an operating segment.

Assume that B has identified two operating segments: flour mill and processed food products. The business activity of the flour mill (i.e., to process wheat into flour) may be considered different from that of the processed food products segment (i.e., to process ingredients into prepared foods). Therefore, aggregation of the flour mill and processed food products segments may not be consistent with the objectives and principles of ASC 280.

3.2.3 Similar Economic Characteristics (Criterion 2)

ASC 280-10-50-11 states, in part, that operating segments must have similar economic characteristics to be aggregated:

Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar.

Unlike the quantitative thresholds outlined in ASC 280-10-50-12, there are no defined thresholds or “bright lines” in the evaluation of whether two or more operating segments possess similar economic characteristics. That is, ASC 280 does not define the term “similar” or provide guidance on the time horizon of historical and expected future periods to be evaluated. Rather, an entity must carefully consider the specific facts and circumstances when evaluating whether two or more operating segments have similar economic characteristics.

The SEC considers aggregation a high hurdle to overcome and may focus on differences in performance metrics when assessing whether operating segments meet the criteria to be aggregated. We believe that the SEC staff presumes that investors would prefer to receive disaggregated information about an entity’s operating segments.

3.2.3.1 What Measures to Consider

While ASC 280-10-50-11 specifies that segments with similar economic characteristics would be expected to have similar long-term average gross margins, it does not describe other factors that an entity can use to evaluate economic characteristics. ASC 280-10-55-7C states, in part:

This Subtopic mentions that segments having similar economic characteristics would be expected to have similar long-term average gross margins. That measure is used, only as an example, because gross margin is a measure of profitability that is less likely to be affected by allocations.

As noted above, the measures that will be relevant for an entity will depend on its facts and circumstances. The entity may also decide to examine additional performance metrics (in addition to gross margin as noted above), such as sales growth, operating margins, operating cash flows, return on assets, EBITDA, inventory turnover, and other standard industry measures.

Further, an entity should consider competitive, operating, and financial risks related to each business or industry type in determining whether two operating segments have similar economic characteristics. If operating segments are in different geographic areas, the entity may need to evaluate factors such as economic and political conditions, currency risks, and foreign exchange control regulations.

3.2.3.2 Quantitative Considerations

When evaluating the similarity of measures of profitability used by the CODM, an entity will need to use reasonable judgment. Generally, we believe that as the differences in the ranges of measures of profitability increase among the operating segments evaluated for aggregation, so too will the amount of evidence needed for the entity to assert that the operating segments have similar economic characteristics. In assessing the range of measures, the entity should consider:

The particular measures of profitability used by the CODM (e.g., an acceptable range related to gross profit may be lower than an acceptable range related to pretax income that may incorporate nonrecurring or other one-time charges).
The expected variability of such measures.
The consistency of the measures of profitability throughout the entity’s industry (e.g., an acceptable range related to a measure associated with a relatively stable amount of profitability may be lower than that associated with less stable amounts).

3.2.3.3 Time Horizon for Analysis

As ASC 280-10-50-11 notes, “Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics.” While the guidance does not define “long-term” or the period over which an entity should evaluate economic performance, it does require an entity to consider past, present, and future financial performance when evaluating whether two or more operating segments have similar economic characteristics. Accordingly, an entity cannot solely look to projected economic performance and ignore current or historical differences. The presence of operating segments with historically dissimilar financial performance may indicate that the segments do not have similar economic characteristics, even if management projects that financial performance will converge over time. Therefore, an entity should carefully consider the underlying factors that historically resulted in the segments’ dissimilar financial performance.

We believe that when an entity considers economic performance, its aggregation analysis should take into account historical, current, and projected performance. The SEC staff typically requests an analysis of revenues and profit or loss (e.g., gross profit or operating profit) by operating segment that covers the past three to five years as well as the current interim period and demonstrates that aggregated operating segments exhibit similar economic characteristics (e.g., similar sales trends, similar gross margin percentages). We believe that the SEC staff may also ask a public entity to provide projected profitability for several years into the future; therefore, an entity may want to consider its forecasts and long-range plans when evaluating whether economic characteristics are similar.

Sometimes a newly acquired entity may qualify as an operating segment and may meet all the criteria needed to be aggregated with an entity’s existing operating segment, except that the segments’ measures of profitability used by the CODM are not similar at the time of the acquisition. If the entity forecasts that the measures of profitability will converge in the near term as a result of the realization of synergies and other cost-cutting initiatives, it would not be precluded from aggregating the new operating segment with its existing operating segment provided that all of the other aggregation criteria are met. However, the assumptions and forecasts must be determined to be reasonable and achievable in the short term. The entity should continue to monitor its operating segments to assess whether aggregation continues to be appropriate, especially if some or all of the synergies or other cost-cutting measures are not realized. Alternatively, the entity may elect not to aggregate the operating segments at the time of the acquisition and may instead choose to monitor the performance of the operating segments and elect to aggregate them in the future if all the aggregation criteria are met.

3.2.3.4 Adjustments to Measures of Profitability

Adjustments that are made to the measure of profitability evaluated by the CODM in the determination of whether the operating segments have similar economic characteristics can result in questions about whether the operating segments subject to the adjustments have similar economic characteristics. While adjustments for certain one-time, nonrecurring charges may be appropriate, an entity should be able to demonstrate that the adjustments would not obscure underlying dissimilarities in economic characteristics.

3.2.4 Similar Qualitative Characteristics (Criterion 3)

To be eligible for aggregation under ASC 280-10-50-11, operating segments must be similar with respect to the following five qualitative characteristics:

“The nature of the products and services” (see Section 3.2.4.1).
“The nature of the production processes” (see Section 3.2.4.2).
“The type or class of customer for their products and services” (see Section 3.2.4.3).
“The methods used to distribute their products or provide their services” (see Section 3.2.4.4).
“If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities” (see Section 3.2.4.5).

3.2.4.1 Nature of Products and Services

ASC 280 does not indicate how to determine whether products and services have a similar nature, and there are differences between the concepts of (1) similar products and services and (2) similar economic characteristics. While products and services whose nature is similar tend to have similar economic characteristics, the reverse is not necessarily true.

As described in paragraph 68 of the Background Information and Basis for Conclusions of FASB Statement 131, the assessment of whether products or services are similar may depend, in part, on the nature and breadth of a company’s product lines and overall operations. Paragraph 68 states, in part:

An enterprise with a relatively narrow product line may not consider two products to be similar, while an enterprise with a broad product line may consider those same two products to be similar. For example, a highly diversified enterprise may consider all consumer products to be similar if it has other businesses such as financial services and road construction. However, an enterprise that sells only consumer products might consider razor blades to be different from toasters.

Example 3-3

Company A is a large manufacturer of cleaning solvents and solutions for use by residential homeowners and commercial business entities (e.g., restaurants and hotels). Company A’s environmentally friendly cleaning solutions are geared toward residential homeowners, and its industrial-strength cleaners are geared toward commercial businesses. Company A has identified two operating segments: residential and commercial.

Because the production processes and key ingredients for each segment’s products are similar, they have similar gross margins. However, A is expecting higher growth within the residential segment because customers are increasingly looking for environmentally friendly solutions.

Accordingly, A may conclude that, relative to the range of its business activities and the economic environments in which it operates, the nature of its residential operating segment’s products (environmentally friendly cleaning solutions) is not sufficiently similar to that of its commercial operating segment’s products (industrial-strength cleaners) and that therefore the two operating segments are not similar under ASC 280-10-50-11. However, A would need to carefully consider all relevant facts and circumstances.

Example 3-4

Assume the same facts as in the example above, except that Company A has diversified beyond cleaning solvents to also own and operate the following:

Web solutions — A Web-based application for cleaning services that matches homeowners with housecleaners. The application is free to use for the homeowner. Company A receives a listing fee from the housecleaner and sells advertising in the application to large retailers and manufacturers.
Recycling solutions — Recycling services for large electronics and appliances such as vacuum cleaners, washing machines, and dishwashers. In exchange for a fee, recycling solutions will pick up the electronics or appliances and recycle the materials.

Company A has identified four operating segments: residential cleaning solvents, commercial cleaning solvents, Web solutions, and recycling solutions.

Company A may determine that the products and services for the residential and commercial operating segments have a similar nature given the range of A’s products and services, which include the Web-based application and recycling services. However, as in the previous example, all facts and circumstances should be considered. Company A would need to ensure that all of the aggregation criteria in ASC 280-10-50-11 have been met, including the requirement for operating segments to have similar economic characteristics and for aggregation to be consistent with the objectives and principles of ASC 280, before it could conclude that the residential and commercial operating segments may be aggregated.

3.2.4.2 Nature of Production Processes

Indicators of similarities in the nature of production processes may include the sharing of common or interchangeable production facilities, equipment, labor forces, or service groups as well as similar levels of labor or capital. If operating segments source all or most of the products from external suppliers, entities should evaluate the similarities in the similarity of the production processes of the external suppliers of the outsourced products.

3.2.4.3 Type or Class of Customer for the Entity’s Products and Services

Management should evaluate the type or class of customers on the basis of the same criteria it uses to evaluate the customer for operational purposes. This evaluation may consider marketing and promotional efforts, the existence of common or interchangeable sales forces, average spending per customer, and customer demographics, such as average age and income. Generally, retail and wholesale operations would not be considered similar and therefore would not satisfy this criterion.

An entity should also carefully consider the mix of customers in an operating segment (e.g., a combination of retail and wholesale operations or company-owned and franchised stores). Even if two or more operating segments have similar customers, if one of the segments has an incremental customer base, the two segments will most likely not have a similar class of customer.

Example 3-5

Company A is a retailer of women’s fashion and has identified two operating segments: luxury handbags and budget handbags. The luxury handbag operating segment consists solely of company-owned retail locations across the United States. Company A’s budget handbags are sold at its company-owned retail locations as well as wholesale to large department stores.

Since the budget handbag operating segment contains a customer base (i.e., wholesale to the department stores) that the luxury handbag operating segment does not, A would most likely conclude that the nature or class of customer for the luxury and budget segments is not similar. Company A would also need to consider other factors, such as the type or class of customer for its luxury handbags versus that for its budget handbags.

3.2.4.4 Methods Used to Distribute the Entity’s Products or to Provide Services

An entity should evaluate the methods of distribution on the basis of the nature of the distribution channels used (e.g., retail outlets, mail order, Web site).

3.2.4.5 Nature of Regulatory Environment

An entity should also evaluate the nature of the regulatory environments in which it operates. For example, there may be differences between the operating segments of a diversified entity when those segments are not all subject to the same or similar regulatory environment (e.g., banking, insurance, or public utilities).

3.2.5 Consistent Description of the Entity

As stated in ASC 280-10-05-4, the management approach “facilitates consistent descriptions of a public entity in its annual report and various other published information.” The information presented in the segment footnote of the financial statements should be consistent with (1) the information presented throughout a public entity’s SEC filings, including the annual report to shareholders, Form 10-K (including the description of business and MD&A), and Form 10-Q; and (2) its other external information (including company Web sites, financial analysts’ reports, earning calls, investor decks, interviews and other public statements made by management, and other public information). When evaluating whether two or more operating segments may be aggregated, an entity should consider whether such aggregation would be consistent with the entity’s presentation of its operations in other sources of public information.

Example 3-6

Company A is a large retailer that operates stores that sell two types of products: (1) clothing for men and women and (2) home products (e.g., linens, decorative items, and some clothing). In A’s MD&A in Form 10-K, its discussion of changes in operations of the home product stores was different from that of the clothing stores regarding customer demographics, products offered, and sales and profit margin trends. The president’s letter also stressed important distinctions between the two segments.

Company A is therefore likely to conclude that the home product segment should not be aggregated with the clothing segment because all of the aggregation criteria in ASC 280-10-50-11 are not satisfied. Specifically, on the basis of the discussion in MD&A and in the president’s letter, it does not appear that the two operating segments have similar economic characteristics and similar products and types or classes of customer.

3.2.6 Reassessment of Aggregation Criteria in Interim Periods

While an entity generally will not need to reassess the aggregation criteria in each interim period, if a change in facts and circumstances suggests that aggregation of operating segments in the current or future periods is no longer appropriate, management should reassess the aggregation criteria in the period in which the change occurred. If different reportable segments are identified as a result of this reassessment, the disclosures required under ASC 280-10-50-34 and 50-35 should be provided. See further discussion in Section 4.9.

3.2.7 Disclosure of Aggregated Operating Segments

ASC 280-10-50-21(a) requires disclosure if operating segments have been aggregated. When evaluating an entity’s reported segments, the SEC staff has routinely requested clarification about whether operating segments have been aggregated and, if so, the analysis in which the entity concluded that aggregation was appropriate. See further discussion of ASC 280’s disclosure requirements in Chapter 4.

3.2.8 Economic Performance Measures Differ in a Single Year

ASC 280-10

Case B: Economic Performance Measures Differ From the Prior Year

55-35 Assume that Segments A and B meet all of the five criteria for aggregation and have similar economic characteristics; however, this year certain economic performance measures differ. For example, gross margins differ slightly and sales of the segments, which typically move in tandem, trended slightly differently the current year. Those differences were due to inventory problems caused by the entity’s suppliers, and it is expected that the margins and sales trends of Segments A and B will again be similar next year.

55-36 Even though economic performance measures differ, under this fact pattern Segment A may be aggregated with Segment B for current-year segment disclosures. Paragraph 280-10-50-11 states that operating segments are considered to be similar if they can be expected to have essentially the same future prospects. Paragraph 280-10-55-7A explains that the similarity of the economic characteristics should be evaluated based on future prospects and not necessarily on the current indicators only.

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.

3.4 Step 3: Evaluate Remaining Operating Segments for Aggregation

ASC 280-10

50-13 An entity may combine information about operating segments that do not meet the quantitative thresholds with information about other operating segments that do not meet the quantitative thresholds to produce a reportable segment only if aggregation is consistent with the objective and basic principles of this Topic, the segments have similar economic characteristics, and the operating segments share a majority of the aggregation criteria listed in paragraph 280-10-50-11.

Once an entity has identified those operating segments that meet the 10 percent requirements or are otherwise qualitatively material and must be reported separately, the entity can apply the guidance in ASC 280-10-50-13, which permits the combination of any remaining segments if all of the following criteria are met:

Aggregation is consistent with the objectives and principles of ASC 280 (see Section 3.2.2).
The segments have similar economic characteristics (see Section 3.2.3).
The segments share a majority of qualitative aggregation criteria outlined in ASC 280-10-50-11 (see Section 3.2.4).

Aggregation of any remaining operating segments must be consistent with the objectives and principles of ASC 280. This requirement was discussed by staff of the SEC’s OCA at the 2015 AICPA Conference on Current SEC and PCAOB Developments:

In performing [the analysis in ASC 280-10-50-13], registrants should consider what additional level of detail would be useful to users of the financial statements for purposes of understanding the entity’s performance, assessing its prospects for future cash flows, and making more informed judgments about the entity as a whole.

ASC 280-10

Example 2: Identifying Reportable Segments

55-31 Assume that an entity has identified six operating segments prior to applying the aggregation criteria. Segments B and D have been identified as reportable segments based on the 10 percent threshold criteria in paragraph 280-10-50-12. The revenue from external customers (there are no intersegment transactions) for each of the six segments is as follows.

Case A: Aggregation if Only a Majority of the Aggregation Criteria Is Met

55-33 Segment E is below the 10 percent threshold while Segment D is above the 10 percent threshold. Assume that only a majority of the aggregation criteria is met.

55-34 The aggregation criteria in paragraph 280-10-50-11 (which requires all of the specified criteria to be met) permit aggregation of identified operating segments prior to an evaluation of the significance of the identified operating segments to determine which are reportable. In other words, segments are first identified, then identified segments may be aggregated, if management so chooses, and if the aggregation criteria in that paragraph are met (at this stage all of the specified criteria must be met to be able to aggregate the identified operating segments). Next, an evaluation of the significance of the identified operating segments is performed to determine which are reportable. An operating segment is considered reportable if it meets any one of the threshold criteria. After reportable segments are identified based on the threshold criteria, paragraph 280-10-50-13 permits a public entity to aggregate segments that do not meet the quantitative thresholds (at this stage only a majority of the specified criteria must be met). Therefore, if an operating segment is not a reportable segment because it does not meet any of the 10 percent threshold criteria in paragraph 280-10-50-12 and does not meet all of the aggregation criteria in paragraph 280-10-50-11 with another segment that does meet at least one of the 10 percent threshold criteria, it can only be aggregated with segments that do not meet the 10 percent threshold criteria if a majority of the aggregation criteria are met. In this Case, when only a majority of the criteria is met, Segment E could be aggregated with one or more of Segments A, C, or F but could not be aggregated with Segments B or D. When all of the criteria are met, any segments may be aggregated.

3.5 Step 4: Ensure That 75 Percent of Revenue Is Reported

ASC 280-10

50-14 If total of external revenue reported by operating segments constitutes less than 75 percent of total consolidated revenue, additional operating segments shall be identified as reportable segments (even if they do not meet the criteria in paragraph 280-10-50-12) until at least 75 percent of total consolidated revenue is included in reportable segments.

In step 4, an entity evaluates whether its reportable segments constitute at least 75 percent of total consolidated revenue. Unlike the 10 percent revenue test in step 2, this test takes into account external revenue reported by operating segments and total consolidated revenue, both of which are on a U.S. GAAP basis.

ASC 280 does not specify which of the remaining segments an entity must identify as reportable to meet the 75 percent requirement or that the additional segments need to be the next largest (relative to those already identified) by any of the measures. The entity should therefore use judgment and evaluate each situation on the basis of the individual facts and circumstances. Additional operating segments would be treated no differently from other reportable operating segments (i.e., required disclosures would be the same). Even if a segment does not meet the quantitative requirements, management may elect to separately report the segment if disclosure would be material to financial statement users.

Example 3-9

Assume the same facts as in Example 3-7, in which the basketball, football, and leather plant segments each meet the 10 percent revenue test and are reportable segments. Also assume that soccer and volleyball did not meet any of the quantitative thresholds in ASC 280-10-50-12 (i.e., the absolute amount of the segment’s reported profit or loss or the asset test, where applicable).

The calculation of whether these three reportable segments constitute 75 percent of total consolidated revenue would be performed on the $1,570 of external revenue. The basketball, football, and leather plant revenue segments account for 71 percent of total external revenue. Therefore, either the soccer or the volleyball operating segment would need to be shown as a reportable segment to meet the 75 percent requirement.

3.6 Step 5: Consider Practical Limit of 10 Reportable Segments

ASC 280-10

50-18 There may be a practical limit to the number of reportable segments that a public entity separately discloses beyond which segment information may become overly detailed. Although no precise limit has been determined, as the number of segments that are reportable in accordance with paragraphs 280-10-50-12 through 50-17 increases above 10, the public entity should consider whether a practical limit has been reached.

The guidance acknowledges that there may be a practical limit on the number of reportable segments. For example, an entity might have identified a large number of operating segments that it has elected not to aggregate. Once the number of reportable operating segments exceeds a reasonable amount (e.g., 10), the entity should evaluate the criteria used by management to determine whether aggregation is appropriate. The fact that the number of operating segments exceeds a practical limit may be an indication that either the CODM or the operating segments have not been properly identified. See Chapter 2 for a discussion of the identification of the CODM and operating segments.

3.7 Presentation of Nonreportable Operating Segments

ASC 280-10

50-15 Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items in the reconciliations required by paragraphs 280-10-50-30 through 50-31. The sources of the revenue included in the all other category shall be described.

The “all other” category represents activities that either:

Are not individually reportable and do not meet the criteria to be aggregated with another operating segment.
Do not meet the criteria to be an operating segment.

For components that are not reportable segments (e.g., corporate headquarters or certain functional departments, other business activities, or operating segments), a public entity may not recognize revenues or may recognize revenues that are only incidental to the entity’s activities for these components. Such components should be included in the all other category if they do not qualify as reportable segments. Public entities should exclude the “corporate” or “corporate and all other” category, as applicable, from the total of the reportable segments for segment revenue, segment performance measures, and segment assets in accordance with ASC 280-10-50-15 and ASC 280-10-55-48.

Since the all other category could potentially include an operating segment that does not meet the reportable segment criteria as well as other activities, ASC 280 requires a public entity to describe the sources of revenue that are included in the all other category.

Example 3-10

Company A has three operating segments — X, Y, and Z — and a corporate headquarters that does not constitute an operating segment. Segments X and Y are considered reportable segments and exceed the 75 percent revenue test. Segment Z does not have similar economic characteristics and does not meet the quantitative thresholds to be considered a reportable segment. Company A’s management does not believe that separate disclosures about Z would be useful to financial statement users or investors and does not consider Z to be a reportable segment. Because X and Y meet the 75 percent revenue test, A is not required to identify additional reportable segments. Company A can include its corporate headquarters and Z in the all other category and describe the sources of revenue for this category.

Company A has consolidated GAAP revenue of $8,200. Segments X and Y have revenue from external customers of $3,000 and $5,000, respectively, and intersegment revenue of $500 and $300, respectively.

Company A would present the segment revenue for the corporate and all other category as follows:

Company A would need to provide similar disclosure for the corporate and all other category for its segment performance measure. Similar segment assets would only need to be disclosed if those segment assets were provided to the CODM.

3.8 Reconsideration of Quantitative Thresholds

ASC 280-10

50-16 If management judges an operating segment identified as a reportable segment in the immediately preceding period to be of continuing significance, information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria for reportability in paragraph 280-10-50-12.

50-17 If an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds, prior-period segment data presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment even if that segment did not satisfy the criteria for reportability in paragraph 280-10-50-12 in the prior period unless it is impracticable to do so. For purposes of this Subtopic, information is impracticable to present if the necessary information is not available and the cost to develop it would be excessive.

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

50-17 If an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds, prior-period segment data presented for comparative purposes shall be recast to reflect the newly reportable segment as a separate segment even if that segment did not satisfy the criteria for reportability in paragraph 280-10-50-12 in the prior period unless it is impracticable to do so. For purposes of this Subtopic, information is impracticable to present if the necessary information is not available and the cost to develop it would be excessive.

Changing Lanes

Paragraph BC83 of ASU 2023-07 notes that the FASB “decided to replace the term restatement with recast throughout Topic 280 to avoid potential confusion about its meaning in the context of segment reporting.” The Board indicated that while the term restatement is used in ASC 280 “when referring to the recasting requirements,” ASC 250 “defines that term as the process that an entity undergoes to revise its previously issued financial statements to reflect the correction of an error subsequently identified in those financial statements.” See Section 7.5 for a discussion of the reporting implications of retrospective changes in reportable segments.

An entity should generally consider the 10 percent tests in ASC 280-10-50-12 annually (see the next section for interim reassessment considerations). An operating segment that meets one of the 10 percent tests in the current year should be presented as a reportable segment, and prior periods should be recast unless doing so is impracticable. When there has been a change in reportable segments under the 10 percent tests, an entity will most likely need to reperform the remaining steps to identify its reportable segments as well as determine whether 75 percent of revenue has been reported (see Section 3.5).

3.8.1 Interim Reassessment

The identification of reportable segments under ASC 280-10-50-12 is usually required only for annual reporting periods if an entity’s organizational structure does not change during the interim period. ASC 280-10-55-16 states, in part:

[G]enerally, a public entity need not apply the quantitative tests in each interim period. However, if facts and circumstances change that would suggest that application of the quantitative tests in an interim period would reveal a reportable segment that was previously not reportable, and management expects that the segment will continue to be of significance, the segment should be disclosed as a new, separate reportable segment.

See Section 2.10 for guidance that applies when there has been a change in the structure of an entity’s internal organization during an interim period.

3.8.2 Operating Segment No Longer Meets Quantitative Threshold

An entity is not required to continue to separately disclose an operating segment that no longer meets the quantitative requirements in the current period but qualified as a reportable segment in the prior period if the segment is not considered to be of continuing significance. Prior years’ information should be restated to conform to the current year’s presentation, with appropriate disclosure describing the restatement. An operating segment that no longer meets the quantitative requirements in ASC 280-10-50-12 through 50-14 should continue to be separately reported if management deems the operating segment to be of continuing significance to financial statement users. An entity may also want to continue reporting an operating segment if management expects (e.g., on the basis of budgets for the coming year) that the operating segment will again meet the quantitative requirements in the subsequent year. Doing so would provide comparability and would inform users that the segment is expected to be significant in the future.

An operating segment that has never met the quantitative requirements may also be disclosed if management believes that its disclosure would be relevant to financial statement users.