4.4 Measurement of Segment Disclosures
ASC 280-10
50-27 The amount of each segment item reported shall be the measure reported to the chief operating
decision maker for purposes of making decisions about allocating resources to the segment and assessing
its performance. Adjustments and eliminations made in preparing a public entity’s general-purpose financial
statements and allocations of revenues, expenses, and gains or losses shall be included in determining
reported segment profit or loss only if they are included in the measure of the segment’s profit or loss that is
used by the chief operating decision maker. Similarly, only those assets that are included in the measure of
the segment’s assets that is used by the chief operating decision maker shall be reported for that segment.
If amounts are allocated to reported segment profit or loss or assets, those amounts shall be allocated on a
reasonable basis.
Under the management approach prescribed in ASC 280-10-50-27, the amount of each
segment item reported is the measure used by the CODM to assess performance and allocate resources. This notion is further articulated in paragraph 81 of the Background Information and Basis for Conclusions of FASB Statement 131, which states, in part:
The Board decided that the information to be reported about each segment should be
measured on the same basis as the information used by the chief operating decision maker
for purposes of allocating resources to segments and assessing segments’ performance. . .
. The Board does not think that a separate measure of segment profit or loss or assets
should have to be developed solely for the purpose of disclosing segment information. For
example, an enterprise that accounts for inventory using a specialized valuation method
for internal purposes should not be required to restate inventory amounts for each
segment, and an enterprise that accounts for pension expense only on a consolidated basis
should not be required to allocate pension expense to each operating segment.
Note that financial measures that a registrant must disclose under U.S. GAAP are not
considered non-GAAP measures under the SEC’s guidance (see Section 6.4 for further discussion). However, the SEC staff has objected to
the reporting of segment items determined to be based on individually tailored accounting
principles (see Section 4.3.3 of Deloitte’s Roadmap
Non-GAAP Financial Measures and Metrics).
See Section 4.2.1 for a discussion of reporting
considerations for entities with a single reportable segment.
4.4.1 Allocation of Items to Reportable Segments
ASC 280 does not require an entity to allocate to a reportable segment items that are not directly
linked to that segment unless the entity allocates them as part of preparing the reports used by the
CODM. Examples of such items include costs associated with (1) entity-wide employee benefit plans or
(2) income taxes when the entity files a consolidated income tax return. If items are allocated for use by
the CODM, the amounts included in the segment disclosures should reflect these allocations.
For example, an entity that reports interest expense only on a consolidated basis would not include an
interest expense amount in the segment footnote. Conversely, if interest expense were allocated to the
various segments in the reports used by the CODM, such amounts should be included in the segment
footnote. Any unallocated amounts, if material, should be reported in the required reconciliation to the
consolidated amounts.
Although U.S. GAAP does not provide guidance on allocation methods, any allocation made for segment
reporting purposes must be reasonable. For example, allocating computer department costs to a
department that does not use computers, or allocating excessive costs to a particular segment, would
not appear to be reasonable. In addition, the nature of any allocations to an operating segment should
be disclosed.
4.4.2 Multiple Measures Used by the CODM
ASC 280-10
50-28 If the chief operating decision maker uses only one measure of a segment’s profit or loss and only one
measure of a segment’s assets in assessing segment performance and deciding how to allocate resources,
segment profit or loss and assets shall be reported at those measures. If the chief operating decision maker
uses more than one measure of a segment’s profit or loss and more than one measure of a segment’s assets,
the reported measures shall be those that management believes are determined in accordance with the
measurement principles most consistent with those used in measuring the corresponding amounts in the
public entity’s consolidated financial statements.
55-9 If a public entity uses
multiple performance measures in evaluating segment
performance and allocating assets, the reported measures
shall be those that management believes are determined
in accordance with the measurement principles most
consistent with those used in measuring the
corresponding amounts in the public entity’s
consolidated financial statements (see paragraphs
280-10-50-27 through 50-29). Preparing segment
information in accordance with the GAAP used at the
consolidated level would be difficult because some GAAP
are not intended to apply at a segment level. Examples
include accounting for income taxes in a public entity
that files a consolidated income tax return.
55-10 Entities may use multiple performance measures in evaluating segment performance and allocating
resources including both pretax and after-tax measures. Because it may not always be practicable to apply
GAAP relating to income taxes to the segment level, after-tax segment measures are not typically in accordance
with GAAP. Therefore, either a pretax or after-tax measure could be used for reporting segment information,
with disclosure of the difference in measurement principles for determining taxes, if an after-tax measure
is used. However, if the after-tax measures are determined on the same basis as the consolidated financial
statements, the after-tax measure would be the preferable measure of segment profit or loss to report.
Sometimes the CODM may receive a profit or loss metric for internal reporting purposes whose
measurement basis is different from the one used in the consolidated financial statements. For
example, an entity may “add back” deferred revenue in reporting revenue and gross margin to the
CODM for internal reporting purposes. If the measure of profit or loss is the only one reported to the
CODM, that amount would be disclosed for each reportable segment.
In other instances, multiple measures of profit or loss or assets may be used by
the CODM. In such cases, the measures presented should be those that most
closely reflect the measurement principle applied to the consolidated financial
statements. For example, if the CODM receives revenue and gross margin with and
without the deferred revenue adjustment, ASC 280-10-50-28 requires that the
disclosed measure be the one without the deferred revenue adjustment since it
would be the measure closest to the measures used in the U.S. GAAP–based
consolidated financial statements.
Example 4-2
Company A operates a chain of grocery stores and uses the LIFO method to calculate inventory and cost of
goods sold for financial reporting purposes. However, since the reports provided to the CODM use the FIFO
method to evaluate performance of segment operations, A may use LIFO for U.S. GAAP financial reporting and
FIFO for operating segment reporting.
Example 4-3
EBITDA is the measure of segment profit or loss that Company A uses to evaluate performance and make
decisions about the allocation of resources. Company A also provides the CODM with a full reconciliation of
EBITDA to net income by segment.
Accordingly, A would not be permitted to use EBITDA as its sole measure of
profit or loss in its segment disclosures. When the CODM
receives all the reconciling items that separate, by
segment, EBITDA from net income and a total for net
income (i.e., a full reconciliation to net income), it
is assumed that the CODM uses that information to assess
performance and allocate resources. As stated in ASC
280-10-50-28, if more than one measure of a segment’s
profit or loss is reported, the measure that should be
reported in the segment disclosure is the one that is
most consistent with U.S. GAAP. In A’s case, net income
would appear to be that measure.
However, use of EBITDA as the sole measure of segment profit or loss may be appropriate if a full reconciliation
of EBITDA to net income by segment is not provided to the CODM. For example, if the CODM receives a
partial reconciliation that includes only depreciation, amortization, and interest expense, the use of EBITDA for
segment reporting purposes would appear to be appropriate.
4.4.3 Explanation of Segment Profit or Loss and Segment Assets
ASC 280-10
50-29 A public entity shall
provide an explanation of the measurements of segment
profit or loss and segment assets for each reportable
segment. At a minimum, a public entity shall disclose
all of the following (see Example 3, Cases A through C
[paragraphs 280-10-55-47 through 55-49]):
-
The basis of accounting for any transactions between reportable segments.
-
The nature of any differences between the measurements of the reportable segments’ profits or losses and the public entity’s consolidated income before income taxes and discontinued operations (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.
-
The nature of any differences between the measurements of the reportable segments’ assets and the public entity’s consolidated assets (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of jointly used assets that are necessary for an understanding of the reported segment information.
-
The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.
-
The nature and effect of any asymmetrical allocations to segments. For example, a public entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.
4.4.4 Proportionate Consolidation Used to Measure Performance of an Equity Investee
ASC 280-10
55-8 In measuring the
performance of its equity investees, proportionate
consolidation shall be used for reporting segment
information if that is the way in which such information
is reviewed by the chief operating decision maker. . . .
If proportionate consolidation is used for segment
reporting, this Subtopic also requires disclosure of the
accounting policy followed for segment reporting (see
paragraph 280-10-50-29(b)), the elimination of the
investee’s revenues and assets in reconciling to
consolidated results (see paragraphs 280-10-50-30
through 50-31), and the investment in and equity income
from the investee (see paragraphs 280-10-50-22(g) and
280-10-50-25(a)). Even though the proportionate
consolidation method may be used for internal reporting
purposes (and thus for external reporting of segment
information), that method is not permitted for purposes
of preparing general-purpose financial statements in
accordance with generally accepted accounting principles
(GAAP) except where it is established industry practice
(for example, in some oil and gas venture
accounting).