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 7.4 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).

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 pension costs to segments whose employees do not participate in the pension plan would not appear to be reasonable. In addition, the nature of any allocations to an operating segment should be disclosed.

Changing Lanes

As stated in paragraph BC84 of ASU 2023-07, the Board “acknowledges that differences between segment measurements and consolidated amounts may be attributable to an entity’s allocation of centrally incurred expenses.” The Board further states that it “observed that the guidance does not specifically require that an entity disclose the methods used to allocate expenses to the segments or the nature of changes in those expense allocation methods from prior periods.”

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.

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

50-28 If the chief operating decision maker uses only one measure of a segment’s assets in assessing segment performance and deciding how to allocate resources, segment assets shall be reported at that measure. If the chief operating decision maker uses more than one measure of a segment’s assets, the reported measure shall be that which management believes is 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.

50-28A If the chief operating decision maker uses only one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, segment profit or loss shall be reported at that measure. If the chief operating decision maker uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) shall be that which management believes 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.

50-28B If a public entity discloses more than one measure of a segment’s profit or loss in the current period, it shall report the additional measure or measures for the prior periods in which the measure or measures were provided to the chief operating decision maker. For example, if a public entity reports an additional measure in the current period for gross profit for a reportable segment, it should disclose gross profit for the reportable segment in the prior comparative periods if gross profit was provided to the chief operating decision maker in those periods. A public entity is not precluded from reporting the additional measure or measures for the prior periods in which the measure or measures were not provided to the chief operating decision maker.

50-28C The disclosure requirements in paragraphs 280-10-50-22 through 50-24, paragraphs 280-10-50-26A through 50-26C, and paragraph 280-10-50-29 apply to each reported measure of a segment’s profit or loss. The reconciliation requirement in paragraph 280-10-50-30(a) applies to the total of the reportable segments’ revenues to a public entity’s consolidated revenues. The reconciliation requirement in paragraph 280-10-50-30(b) applies to the total of the reportable segments’ amount for each measure of profit or loss.

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.

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

55-9 Paragraph superseded by Accounting Standards Update No. 2023-07.

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.

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

55-10 Paragraph superseded by Accounting Standards Update No. 2023-07.

Sometimes the CODM may receive a single profit or loss metric for internal reporting purposes whose measurement basis may be consistent with or different from the basis used in the consolidated financial statements. 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 GAAP operating profit and EBITDA, ASC 280-10-50-28 requires that the disclosed measure be GAAP operating profit since it would be the measure closest to the measures used in the U.S. GAAP–based consolidated financial statements.

Example 4-3

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 the performance of segment operations, A may use LIFO for U.S. GAAP financial reporting and FIFO for operating segment reporting because both FIFO and LIFO methods are both acceptable inventory methods under U.S. GAAP.

Example 4-4

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.

Changing Lanes

Upon the adoption of ASU 2023-07, a public entity is allowed, but not required, to disclose more than one measure of segment profit or loss provided that at least one of the reported measures is the segment profit or loss measure that is most consistent with GAAP measurement principles (the required measure).

In addition to reconciling each reported measure to the consolidated financial statements, ASU 2023-07 requires an entity that discloses multiple measures of a segment’s profit or loss to provide all existing disclosures about the segment’s profit or loss as well as about segment assets, if such information is provided to the CODM. The new requirement to provide significant segment expenses and other segment items also applies to each of these additional reported measures. A public entity that reports an additional measure for a reportable segment in the current period should disclose this additional measure in the prior comparative periods if it was provided to the CODM in those prior periods. Further, as indicated in ASC 280-10-50-28B (added by the ASU), “a public entity is not precluded from reporting the additional measure or measures for the prior periods in which the measure or measures were not provided to the [CODM].”

The graphic below illustrates the ASU’s requirements when a public entity discloses multiple measures of a segment’s profit or loss.

During the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC stated that its staff does not believe that such additional measures are required or expressly permitted by GAAP (since the ASU does not identify specific measures that may be disclosed, such as EBITDA). The SEC indicated that such measures would therefore 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. Further, the SEC encouraged registrants that choose to include additional measures that are not determined in accordance with U.S. GAAP, to reach out to the SEC to discuss their plans.

Additional measures included in the financial statement footnotes would be subject to management’s assessment of internal control over financial reporting and external audit procedures. Registrants are encouraged to consult with their auditors, SEC counsel, or the SEC staff if they intend to disclose additional measures that are not consistent with U.S. GAAP.

The examples below illustrate these concepts for a registrant with more than one reportable segment. Note, however, that the guidance in this area is subject to change and registrants should continue to watch for announcements or further guidance from the SEC staff. See Section 7.4 for further details on non-GAAP measures and SEC reporting implications.

Example 4-5

Facts

Company C has two segments. Its CODM uses the measure(s) discussed in each scenario below to assess segment performance and allocate resources to its segments.

Scenario 1 — One Measure of Segment Profit and Loss

Company C’s CODM regularly reviews segment EBITDA to assess segment performance and allocate resources and does not use other measures of segment profit or loss. Company C identifies segment EBITDA as the required measure of segment profit and loss. Segment EBITDA for each segment would not be considered a non-GAAP measure because it must be disclosed in accordance with ASC 280. However, in a manner consistent with the interpretation in Question 104.04 of the SEC staff’s C&DIs related to non-GAAP financial measures, presentation of total segment EBITDA or consolidated EBITDA “in any context other than the . . . required [segment footnote] reconciliation . . . would be the presentation of a non-GAAP financial measure.”

Scenario 2 — Multiple Measures of Segment Profit and Loss That Are Consistent With GAAP

Company C’s CODM regularly reviews GAAP gross profit and GAAP operating profit to assess segment performance and allocate resources. Company C identifies GAAP operating profit as the required measure of segment profit and loss. Further, C concludes that GAAP gross profit is fully burdened and has been determined in a manner consistent with GAAP measurement principles. Therefore, disclosure of segment gross profit and operating profit would be consistent with ASC 280 (as amended by ASU 2023-07), and neither would be subject to the SEC’s non-GAAP rules and regulations.

Scenario 3 — Multiple Measures of Segment Profit and Loss, Some of Which Are Not Consistent With GAAP

Company C’s CODM regularly reviews GAAP operating profit and segment EBITDA to assess segment performance and allocate resources. Company C identifies GAAP operating profit as the required measure of segment profit and loss. Segment EBITDA would be considered an additional measure that may be disclosed under ASC 280 (upon adoption of ASU 2023-07); however, such a disclosure is not required. Therefore, disclosure of segment EBITDA, total segment EBITDA, or consolidated EBITDA would be subject to the SEC’s non-GAAP rules and regulations. Registrants are encouraged to consult with their auditors, SEC counsel, or the SEC staff if they intend to disclose additional measures that are not consistent with GAAP.

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.

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

50-29 A public entity shall provide an explanation of the measurements of segment profit or loss and segment assets for each reportable segment. A public entity shall disclose all of the following (see Example 3, Cases A through C [paragraphs 280-10-55-47 through 55-50] and Example 4, Cases A through B [paragraphs 280-10-55-53 through 55-55]):

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, including significant changes from prior periods to the measurement methods of expenses, the method for allocating expenses to a segment, or changes in the method for allocating centrally incurred expenses, 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.
How the chief operating decision maker uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

If a public entity discloses a segment performance measure that is not consistent across its segments, the entity should provide a description of how segment performance is measured for each reportable segment. See Appendix B for our comprehensive example of a disclosure of descriptive information about reportable segments.

Changing Lanes

Under ASC 280-10-50-29(f) (added by ASU 2023-07), public entities are required to disclose “[h]ow the [CODM] uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.” This new disclosure must be provided for each reported measure of segment profit or loss used by the CODM to assess a segment’s performance and determine how to allocate resources among segments.

The ASU also amends ASC 280-10-50-29(d) to require public entities to disclose “[t]he nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss, including significant changes from prior periods to the measurement methods of expenses, the method for allocating expenses to a segment, or changes in the method for allocating centrally incurred expenses.”

Example 4-6

Company F’s CODM uses both GAAP gross profit and GAAP operating profit in assessing each segment’s performance and determining how to allocate resources among segments. Company F has early adopted ASU 2023-07 and has decided to provide disclosures for both measures of segments’ profit or loss. To comply with the new requirement in ASC 280-10-50-29(f), F provides the following disclosure:

The CODM uses GAAP gross profit to evaluate segment margin profitability because it provides insight into product pricing.

The CODM uses GAAP operating profit predominantly in the annual budget and forecasting process. The CODM considers budget-to-actual variances on a monthly basis for GAAP operating profit when making decisions about allocating capital and personnel to the segments.

Both GAAP gross profit and GAAP operating profit are regularly reviewed by the CODM in competitive analysis by benchmarking to F’s competitors. The competitive analysis and the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.

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).

Financial information about equity method investments should be disclosed in a manner consistent with the management approach the CODM receives and uses in assessing performance and allocating resources. Proportionate consolidation may be used to account for undivided interests in assets and liabilities as well as investments in unincorporated legal entities, such as partnerships, in certain industries (e.g., construction and extractive) (see Section 2.4.3 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information). ASC 280-10-55-8 requires an entity to disclose the accounting policy it follows 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)).” Entities should also consider whether additional disclosures are necessary to make sure that the financial information they present about the investee is not misleading. Section 2.8 discusses equity method investees and whether an equity method investee can be considered a reportable segment.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.