Chapter 3 — Reportable Segments
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 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.
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 into a
single operating segment 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.
Therefore, the determination of whether two or more operating segments are similar depends on facts
and circumstances and is subject to judgment. 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, publically available industry reports and other analysis by users will indicate the key
characteristics by which a reasonable investor may analyze the entity. [Footnote omitted]
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]
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.
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. In addition, foreign currency changes in Europe have significantly affected A’s current and projected
cash flows for the Europe segment. 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 2-6, 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.
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 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; however, it should consider, at a minimum, the measure(s) of profitability used by the
CODM for allocating resources and assessing performance. The entity may also decide to examine
performance metrics such as sales growth, 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 geographical 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). 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.
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 or sales facilities, equipment, labor forces, or service groups as well as
similar levels of labor or capital.
The production process for two different products may be similar even if the nature of the products
themselves is not similar.
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, interviews and other public statements made by management,
and other public documents). When evaluating whether two or more operating
segments may be aggregated into a single operating segment, 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.
3.3 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.
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.
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.
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 74 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.
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.
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 restated 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 deems that its disclosure would be material to financial statement users.