On the Radar
ASC 280-10-10-1 states that the objective of segment reporting “is 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 to help
users of financial statements do all of the following:
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Better understand the public entity’s performance
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Better assess its prospects for future net cash flows
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Make more informed judgments about the public entity as a whole.”
In applying the segment reporting
guidance in ASC 280, an entity should perform each of the following key steps:
An entity’s first step is to identify its operating segments. It performs such
identification by using the management approach. As indicated in ASC 280-10-50-1,
“[a]n operating segment is a component of a public entity that has all of the
following characteristics:
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It engages in business activities from which it may recognize revenues and incur expenses . . . .
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Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
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Its discrete financial information is available.”
An entity may need to use judgment when evaluating whether a component has all the
characteristics of an operating segment.
Once an entity has identified its operating segments, it determines which of them to
report.
Two or more operating segments may be aggregated into a single operating segment if
the following three criteria are met:
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Aggregation is consistent with the objectives and basic principles of ASC 280.
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The segments have similar economic characteristics.
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The segments are similar with respect to all of the qualitative characteristics.
An entity is not required to aggregate operating segments. Because ASC 280 does not
define the term “similar” or provide extensive guidance on the aggregation criteria,
the determination that two or more operating segments are similar depends on facts
and circumstances and is subject to judgment.
Once an entity determines which of its operating segments may be aggregated, it must
apply the quantitative threshold guidance (i.e., the 10 percent tests that are based
on revenue, profit or loss, and assets) in ASC 280 to determine which segments to
report separately. An operating segment needs to meet only one of the 10 percent
tests in ASC 280 to be a reportable segment, although it may meet more than one.
After identifying which operating segments meet the quantitative threshold
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 to produce a reportable segment if all of the
following criteria are met:
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Aggregation is consistent with the objectives and principles of ASC 280.
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The segments have similar economic characteristics.
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The segments share a majority of qualitative aggregation criteria outlined in ASC 280.
An entity is not required to aggregate operating segments and is encouraged to
consider whether to separately report information on them irrespective of whether
the segments meet the quantitative requirements for separate disclosure. The total
external revenue disclosed by the reportable segments should constitute greater than
75 percent of total consolidated revenue.
Because aggregation is a high hurdle, the SEC staff may ask a registrant to provide
an analysis on how it determined that its aggregation of operating segments complies
with both the quantitative and qualitative requirements of ASC 280.
After an entity has identified its reportable segments, it must provide the following
types of quantitative and qualitative disclosures for each of them, generally for
each period presented:
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General information.
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Information about segment profit or loss and assets.
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Reconciliations to consolidated amounts.
Entities are required to disclose information about products and services,
geographical operations, and major customers on an entity-wide basis regardless of
how the entity is organized.
These disclosures are intended to ensure some level of comparability across entities,
irrespective of how the entities are managed or resources are allocated.
Accordingly, an entity should carefully consider the objectives and principles of
ASC 280 when evaluating the disclosure requirements.
Recent Updates
In November 2023, the FASB issued ASU 2023-07, which
introduces improvements to the information that a public entity discloses about
its reportable segments and addresses investor requests for more information
about reportable segment expenses. The ASU does not change the current guidance
related to the identification of operating segments, the determination of
reportable segments, or the aggregation criteria. Rather, the new guidance
introduces additional disclosure requirements and expands those requirements to
entities with a single reportable segment, not just entities with multiple
reportable segments.
ASU 2023-07 enhances interim disclosure requirements, clarifies
the circumstances in which an entity can disclose multiple segment measures of
profit or loss, and introduces the significant expense principle, which requires
additional disclosure of segment expenses. In addition, the ASU provides new
segment disclosure requirements for entities with a single reportable segment
and contains other disclosure requirements.
The ASU is effective for all public entities for fiscal years beginning after
December 15, 2023 (e.g., for calendar-year-end public entities, annual periods
beginning on January 1, 2024 — i.e., December 31, 2024, Form 10-K), and interim
periods within fiscal years beginning after December 15, 2024 (e.g., for
calendar-year-end public entities, interim periods beginning on January 1, 2025
— i.e., Form 10-Q for the first quarter of 2025). Early adoption is permitted.
The enhanced segment disclosure requirements apply retrospectively to all prior
periods presented in the financial statements.
SEC Reporting Considerations
An SEC registrant’s reportable segment determination provides the basis for its
required disclosures in the business and MD&A sections of its filing. For
example, SEC Regulation S-K, Item 101(c), states that the registrant should provide
a narrative description of the business, “focusing upon the registrant’s dominant
segment or each reportable segment about which financial information is presented in
the financial statements.” In addition, SEC Regulation S-K, Item 303, provides
guidance on MD&A of financial condition and results of operations. It states, in
part:
Where in the registrant’s judgment a discussion of segment information
and/or of other subdivisions (e.g., geographic areas, product lines) of the
registrant’s business would be necessary to an understanding of such business,
the discussion must focus on each relevant reportable segment and/or other
subdivision of the business and on the registrant as a whole.
To comply with this guidance, a registrant will often provide disclosures that are
consistent with those of its reportable segments. A registrant should also be
mindful of the SEC’s guidance on the reporting implications of retrospective changes
in reportable segments and changes in significant segment expenses.
Registrants should also consider the SEC’s guidance on non-GAAP
measures that applies to the financial information presented in their filings and,
if applicable, the manner in which they complied with SEC Regulation G. It may be
difficult to evaluate whether a non-GAAP measure is misleading in the context of
Regulation G; SEC Regulation S-K, Item 10; or the non-GAAP Compliance and Disclosure
Interpretations (C&DIs). Additional measures included in the financial statement
footnotes will be subject to management’s assessment of internal control over
financial reporting and external audit procedures. Registrants are encouraged to
consult with their auditors and SEC counsel if they (1) intend to disclose
additional measures that are not consistent with GAAP or (2) have a single
reportable segment and management concludes that it does not manage the entity on
the basis of a consolidated GAAP measure of segment profit or loss (e.g.,
consolidated net income), or both.
This Roadmap provides a comprehensive discussion of the
requirements in ASC 280 related to identifying and
disclosing operating segments.