Chapter 6 — Significant Expenses and Other Segment Items

6.2 Significant Segment Expenses

ASC 280-10

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

50-26A A public entity shall disclose for each reportable segment the significant expense categories and amounts that are regularly provided to the chief operating decision maker and included in reported segment profit or loss. When determining the segment expense categories and amounts that shall be disclosed, a public entity shall first identify the expenses from the segment level information that is regularly provided to the chief operating decision maker and then disclose those segment expense categories and amounts that are significant. A public entity shall consider relevant qualitative and quantitative factors when determining whether segment expense categories and amounts are significant. When applying this guidance, a public entity shall evaluate for disclosure a segment expense that is regularly provided to the chief operating decision maker as well as a segment expense that is easily computable from information that is regularly provided to the chief operating decision maker. Paragraphs 280-10-55-15A through 55-15B provide additional guidance on determining whether segment expense amounts can be easily computed for purposes of applying the guidance in this paragraph.

For each reportable segment, ASU 2023-07 requires entities to disclose, on an interim and annual basis, those expenses that are (1) considered significant, including categories of expense and amounts; (2) regularly provided to the CODM; and (3) included in each reported measure of segment P&L.

The Board’s decision to introduce a requirement to disclose significant segment expense information is the result of feedback provided by stakeholders, who have requested more detailed expense information at the segment level. In addition, as noted in paragraph BC21 of the ASU, the disclosure of “[a]dditional expense information [will help] investors better assess financial trends, perform more precise financial modeling when forecasting the components of an individual segment’s profit or loss, [and make an overall evaluation of] an entity’s business activities.” In addition, some investors noted “that understanding the composition of an entity’s expenses at the segment level and how the related amounts vary over time [may help them recognize] when major changes have occurred within the business.” This is further indicative of the ASU’s main purpose, which is to provide investors with additional segment information to (1) “better understand an entity’s overall performance” and (2) help them assess “potential future cash flows.”

ASU 2023-07 defines significant segment expenses as expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, collectively referred to as the ”significant expense principle.” For each reportable segment, entities are required to disclose, on an annual and interim basis, the significant expense categories and amounts for such expenses. The ASU focuses on the disclosure of information that is regularly provided to the CODM, even if it is not regularly reviewed by the CODM.

In a manner consistent with ASC 280, the identification of segment expenses by reportable segment is based on the management approach and, therefore, requires that the segment expenses be regularly provided to the CODM. Significant segment expense amounts will not necessarily tie to or be the same as the expense amounts and captions identified on the face of the income statement in accordance with U.S. GAAP.

Connecting the Dots

Entities should monitor the FASB’s July 2023 proposed ASU on the disaggregation of income statement expenses, which would require the disaggregation of five specified expense categories within each relevant caption in the income statement and the disclosure of selling expenses. The proposed ASU differs from ASC 280, which requires entities to use a management approach.

Before the adoption of ASC 2023-07, ASC 280-10-50-22 only requires entities to disclose certain expenses (e.g., interest expense and depreciation) if they “are included in the measure of segment profit or loss [or] otherwise regularly provided to the [CODM].” For example, even though selling expenses may have been included in an entity’s measure of segment profit or loss, it is not required to disclose selling expenses before adopting the ASU. After adopting the ASU, entities are required to disclose selling expenses for a reportable segment if it is (1) determined to be a significant segment expense that is regularly provided to the CODM for a reportable segment and (2) included in the segment measure of profit or loss. Reportable segments may have different categories of significant segment expenses as a result of the nature of their operations.

We believe that the changes to segment information disclosures introduced by ASU 2023-07 could lead to changes in an entity’s MD&A disclosures upon adoption. In the absence of further interpretive guidance from the SEC, registrants should consider consulting with their auditors and SEC counsel before adopting the ASU to determine the impact it will have on the discussion of results of operations in MD&A. See Section 7.3 for MD&A implications.

6.2.1 Significance Threshold and Regularly Provided Information

After the adoption of ASU 2023-07, an entity needs to identify the segment expenses that are regularly provided to the CODM and then evaluate whether those expenses are significant to determine which require further disaggregated disclosure. As indicated in ASC 280-10-50-26A (added by the ASU), an entity should “consider relevant qualitative and quantitative factors when determining whether segment expense categories and amounts are significant” and should identify segment expenses on the basis of “amounts that are regularly provided to the [CODM] and included in reported segment profit or loss.” Paragraph BC59 of the ASU notes that “segment information that if omitted would change a user’s understanding about a segment to such a degree that it would change the user’s capital allocation decisions about an entity as a whole is significant even though an item of a similar magnitude might not be considered significant if it were omitted from the consolidated financial statements.”

Paragraph 78 of the Background Information and Basis for Conclusions of FASB Statement 131 notes the following:

Paragraph 125 of Concepts Statement 2 states that “. . . magnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment.” That guidance applies to segment information. An understanding of the material segments of an enterprise is important for understanding the enterprise as a whole, and individual items of segment information are important for understanding the segments. Thus, an item of segment information that, if omitted, would change a user’s decision about that segment so significantly that it would change the user’s decision about the enterprise as a whole is material even though an item of a similar magnitude might not be considered material if it were omitted from the consolidated financial statements. Therefore, enterprises 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 enterprise must decide what constitutes material.

As a result, we believe that the magnitude of a segment expense item does not conclusively establish its significance. Rather, an entity may determine that an expense item needs to be disclosed as a significant segment expense even if, upon evaluation of other qualitative factors, another expense item of similar magnitude is not considered significant. Significant expenses may vary between reportable segments within an entity, between entities in the same industry, or across different industries and should provide insight into how an entity manages its segments. However, we believe that the more quantitatively material an expense category, the more difficult it will be for entities to avoid disclosure by assessing qualitative factors.

ASU 2023-07 does not define the terms “significant” or “regularly provided” or specify how entities may interpret their meaning. We believe that entities should use judgment when determining whether certain segment items and amounts provided to the CODM should be disclosed. In doing so, they should keep in mind the principle that if an expense is important to the understanding of segment performance or would change an investor or financial statement user’s decision about that segment or the entity as a whole, the expense should generally be disclosed.

At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC discussed the frequency at which financial information is provided to a CODM and indicated that information that is provided quarterly would generally meet the criteria to be considered “regularly provided” and “regularly reviewed.” As noted in Section 2.3.1, in general, we believe that for most public entities, a regular review would be held at least quarterly; similarly, we believe that information provided at least quarterly would be considered regularly provided. Entities should consider their own facts and circumstances in determining which segment expenses are regularly provided to the CODM.

Paragraph BC39 of ASU 2023-07 clarifies that the identification of significant segment expenses should be based on the information that is regularly provided to the CODM rather than the information that is regularly reviewed by the CODM. The Board believes that “basing the significant expense principle on regularly provided information better aligns with the segment expense information that is already being prepared and communicated within internal management reports.”

Upon transition and for each reporting period, entities should review all available financial information (e.g., CODM packages and other published information, such as earnings releases, investor presentations, and the financial information on the entity’s Web site) and evaluate such information for significant expenses. In addition, entities should continue to monitor changes that occur between periods and consider the recasting requirements related to significant segment expenses.

If certain qualitative factors exist, an entity might be able to overcome the expectation that disclosure is required for significant segment expenses that are regularly provided to the CODM; however, we believe that the SEC staff could challenge these qualitative factors given that investors should have access to expense information that is regularly provided to the CODM and would be useful to them.

6.2.2 Easily Computable Segment Expenses

ASC 280-10

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

55-15A The information that is regularly provided to the chief operating decision maker may include segment expense information that is expressed in a form other than actual amounts, for example, as a ratio or an expense as a percentage of revenue. The requirements in paragraph 280-10-50-26A apply to expense amounts that can be easily computed from the information that is regularly provided to the chief operating decision maker.

55-15B For example, if the information that is regularly provided to the chief operating decision maker includes a segment revenue amount and a segment gross margin amount, segment cost of sales can be easily computed from this information. Therefore, if cost of sales is significant, an entity should disclose the category and amount in accordance with paragraph 280-10-50-26A. As another example, the information that is regularly provided to the chief operating decision maker may include a segment revenue amount and segment warranty expense expressed as a percentage of segment revenue. In this example, segment warranty expense can be easily computed from this information. Therefore, if warranty expense is significant, the entity should disclose the category and amount in accordance with paragraph 280-10-50-26A.

Under ASC 280-10-50-26A (added by ASU 2023-07), entities are required to disclose significant segment expenses that are “easily computable from information that is regularly provided to the [CODM].” Although the term “easily computable” is not defined in ASC 280, paragraph BC44 of ASU 2023-07 notes that entities should use judgment in determining whether such expense amounts can be easily computed on the basis of other metrics or information that is regularly provided to the CODM. Such information may be in a form other than an actual amount or a caption, such as a ratio, as described in paragraph BC43 of the ASU:

The Board concluded that the significant expense principle should be based on the substance of the segment information that is regularly provided to the CODM rather than on its form. Additionally, the Board observed that it is useful to include an easily computable concept as part of the amendments in this Update to ensure that the objective of the disclosure is met and that investors receive relevant information about significant segment expenses.

Similarly, for interest expense, Paragraph BC76 of the ASU notes that the guidance regarding easily computable information would require an entity to disclose interest expense in cases in which a CODM is regularly provided with information about interest revenue and net interest margin. As a result, entities should disclose interest expense separately from interest income and not disclose net interest in these circumstances.

Examples of easily computable information could include the following:

If the CODM is regularly provided a segment revenue amount and a segment gross margin amount, the segment cost of sales could be easily computed from this information and, if significant, would need to be disclosed as a significant segment expense.
If the CODM is regularly provided a segment revenue amount and segment warranty expense is expressed as a percentage of segment revenue, segment warranty expense could be easily computed from this information and, if significant, would need to be disclosed as a significant segment expense.
If bad-debt expense or marketing expense as a percentage of revenue is part of the measure of segment profit or loss and is considered significant, such expense would need to be disclosed as a significant segment expense.

Entities will need to use judgment to determine which expenses are easily computable and apply those concepts consistently to identify the segment expense categories provided to the CODM.

Example 6-1

Company A has identified the following reportable segments: United States and Europe. The CODM uses GAAP operating income to assess segment performance and allocate resources.

Gross profit and gross margin percentages are regularly provided to the CODM for each reportable segment.
Marketing expenses are based on the cost per click for each ad. Both cost per click and the number of ad runs are regularly provided to the CODM for each reportable segment.
Research and development costs as a percentage of segment revenue are regularly provided to the CODM for each reportable segment.

An extract of the financial information that is regularly provided to the CODM is listed below:

The calculations for the required significant segment expenses would be as follows:

Cost of sales, marketing expenses, and research and development costs are determined to be significant segment expenses that are (1) easily computable, (2) significant, and (3) included in the segment measure of profit or loss.

The table below shows the proposed significant expense disclosure for each reportable segment.

6.2.3 Corporate Overhead Expense

ASC 280-10

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

55-15C If the information regularly provided to the chief operating decision maker contains a category and amount for allocated corporate overhead expenses by segment that is included in reported segment profit or loss, a public entity should assess that category and amount for disclosure in accordance with paragraph 280-10-50-26A. For example, an entity would disclose allocated corporate overhead if it is a significant segment expense in accordance with paragraph 280-10-50-26A.

Paragraph BC45 of ASU 2023-07 notes that “allocated overhead may be included within the measure of segment profit or loss and presented as a standalone segment expense category and amount in the management reports that are regularly provided to the CODM.” Although those allocated overhead expenses may be quantitatively large, entities may not consider them significant if the CODM does not allocate resources or assess performance on the basis of those expenses. However, the Board indicates that entities should treat corporate overhead amounts allocated to segments in a manner similar to any other expense item when assessing whether such items are significant, easily computable, and therefore not exempt from the significant expense principle. Paragraph BC46 of the ASU notes that “it would be contradictory to the significant expense principle for allocated overhead by segment to be treated differently than all other segment expenses that are regularly provided to the CODM and included the measure of segment profit or loss.”

We believe that significant expenses could include any expenses incurred by the segment (e.g., direct expenses, shared expenses, allocated corporate overhead, or interest expense) that are included in each segment measure of P&L. We also believe that if a segment expense is significant for the current periods presented, it should be disclosed for all prior periods presented for comparability purposes, even if it was not significant for prior periods.

Connecting the Dots

As discussed in Section 2.2.1, an operating segment can be a component that does not recognize external or internal revenues but for which the CODM is making resource allocation decisions and assessing performance on the basis of expenses. Similarly, this also applies to a single operating and reportable segment that does not have any external or internal revenue. Although such an entity may not currently be profitable or have commercial revenue streams, it will still need to comply with the requirements of ASU 2023-07 to report segment information, including disclosure of significant segment expenses.

Example 6-2

Company A has identified two operating and reportable segments: Segment B and Segment C. Company A’s CODM regularly reviews adjusted EBITDA, which is the segment measure of profit or loss that is most consistent with GAAP measurement principles. Below is an extract of the financial information that is regularly provided to the CODM:

Company A has concluded that on the basis on the principles in ASC 280, the expenses below require disclosure under the significant expense principle for both B and C because they are significant, regularly provided to the CODM, and included in each reported measure of segment profit or loss.

The table below shows the proposed significant expense disclosure for each reportable segment.

Company A is required to disclose expense information by segment for depreciation and interest expense under ASC 280-10-50-22.

6.2.4. Disclosures When No Significant Expense Categories and Amounts Are Reported for a Reportable Segment

ASC 280-10

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

55-15G The chief operating decision maker may be regularly provided with segment expense categories and amounts for one segment and no segment expense categories and amounts for another segment. Alternatively, the chief operating decision maker may not be regularly provided with expense information for any of a public entity’s segments. Paragraphs 280-10-50-26A through 50-26C apply to each reportable segment. When no significant expense categories and amounts are disclosed for a reportable segment, a public entity should report an amount and a description of the composition of other segment items in accordance with paragraph 280-10-50-26B and describe the expense information that the chief operating decision maker uses to manage the operations of that segment in accordance with paragraph 280-10-50-26C. For example, when no significant expenses are disclosed for a reportable segment, the public entity may disclose that the chief operating decision maker is regularly provided with only budgeted or forecasted expense information for that segment or uses consolidated expense information. The explanation of the expense information that the chief operating decision maker uses to manage operations is not required when significant expense categories and amounts are disclosed for a reportable segment.

50-26C An amount and qualitative description of the composition of other segment items shall be disclosed for each reportable segment even when a public entity does not separately report significant segment expense categories and amounts in accordance with paragraph 280-10-50-26A for one or more of its reportable segments. Additionally, if a public entity does not disclose significant expense categories and amounts for one or more of its reportable segments, it shall explain the nature of the expense information the chief operating decision maker uses to manage operations (see paragraph 280-10-55-15G).

If an entity does not separately disclose an expense under the significant expense principle, it is required to disclose the nature of the expense information used by the CODM to manage the segment’s operations. For example, the CODM may use consolidated expense information or only use budgeted or forecasted expense information for each reportable segment. We expect it to be rare for an entity not to disclose any significant segment expenses by reportable segment and to use budgeted or forecasted expenses for its reportable segments.

Connecting the Dots

As discussed in Section 2.5, some entities, particularly those organizations structured as a matrix, may provide discrete financial information to the CODM in more than one way, and this may also be the case for the significant expense information. In such instances, these entities may need to use judgment to determine which significant segment expenses must be disclosed. We encourage these types of entities to consider discussing with auditors and advisers the significant expense information that would require separate disclosure.

Example 6-3

Company B is a multinational investment bank. It has identified two operating and reportable segments: Domestic Banking and Global Banking. The CODM regularly reviews GAAP net income as the segment measure of profit or loss that is most consistent with GAAP measurement principles. The CODM is only provided with a provision for credit losses and income tax expense and receives no details for other expenses on a segment basis.

Below is an extract of the financial information that is regularly provided to the CODM:

The table below shows the proposed significant expense disclosure for each 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.