4.10 Materiality Considerations in Segment Disclosure
Evaluating materiality with respect to segment information is a key
step in the preparation of segment reporting disclosures. SAB Topic 1.M (SAB 99)
states the following with respect to segment information:
The materiality of a misstatement may turn on where it
appears in the financial statements. For example, a misstatement may involve
a segment of the registrant’s operations. In that instance, in assessing
materiality of a misstatement to the financial statements taken as a whole,
registrants and their auditors should consider not only the size of the
misstatement but also the significance of the segment information to the
financial statements taken as a whole. “A misstatement of the revenue and
operating profit of a relatively small segment that is represented by
management to be important to the future profitability of the entity” is
more likely to be material to investors than a misstatement in a segment
that management has not identified as especially important. In assessing the
materiality of misstatements in segment information — as with materiality
generally —
situations may arise in practice where
the auditor will conclude that a matter relating to segment information is
qualitatively material even though, in his or her judgment, it is
quantitatively immaterial to the financial statements taken as a whole.
[Footnotes omitted]
We believe that information that is not material to the consolidated
financial statements may be material to the segment footnote. Any item of operating
segment information would be considered material if its omission could change a
user’s decisions related to the operating segments so significantly that it could
also change the user’s decisions related to the consolidated entity. When assessing
the materiality of the operating segment amounts, an entity should consider both (1)
the nature of the entity’s operations and the industries in which it operates
(particular amounts may be focused on in certain industries) and (2) whether
management considers the specific item to be important in assessing the company’s
future profitability and prospects for future cash flows. Evaluations of materiality
should be based on each specific set of facts and circumstances.