5.11 Segments

As stated in ASC 280-10-05-3, in identifying operating segments, an entity is required to use the management approach, which is “based on the way that management organizes the segments within the public entity for making operating decisions and assessing performance.” An operating segment possesses the following characteristics: engagement in business activities from which it may recognize revenues and incur expenses, operating results that are regularly reviewed by the chief operating decision maker (CODM) to allocate resources and assess performance, and availability of discrete financial information. An entity may be required to use judgment in evaluating whether a component has all the characteristics of an operating segment. Various information sources may help an entity identify operating segments, including the entity’s organizational structure (which shows who reports directly to the CODM), the CODM’s periodic reporting package, the level at which budgets are reviewed and approved by the CODM, and an understanding of the incentive compensation structure.

To determine which subset of those operating segments to report in the financial statements (i.e., its reportable segments), an entity uses a modified management approach based on aggregation criteria and quantitative requirements. An entity must use reasonable judgment when aggregating two or more operating segments into a single operating segment, and all the aggregation criteria need to be met, including the requirement that aggregation be consistent with the objectives and principles of ASC 280. If a single or aggregated operating segment represents 10 percent or more of revenue, profitability, or total assets, that operating segment represents a reportable segment and separate disclosure is required. An entity may need to disclose additional segments separately to ensure that reportable segments constitute at least 75 percent of reported revenue. An entity may separately report information on material segments, irrespective of whether the segment meets the quantitative requirements for separate disclosure. An entity’s identified reportable segments should “facilitate consistent descriptions” of the entity in its annual report and other published information, such as its earnings release, investor presentations, and the financial information on its Web site.

ASC 280 also requires certain entity-wide disclosures, which are intended to ensure some level of comparability among entities. Accordingly, an entity should carefully consider the objectives and principles of ASC 280 when evaluating the disclosure requirements.

 

Changing Lanes

In October 2022, the FASB issued a proposed ASU that would enhance disclosures about significant segment expenses. The proposed guidance is intended to increase the information disclosed by public entities by requiring disclosure of (1) the significant segment expenses that are regularly provided to the CODM and (2) other segment items. Public entities would also need to provide all required annual segment disclosures on an interim basis. Comments on the proposed ASU were due by December 20, 2022. For more information, see the project page on the FASB’s Web site.

For more information on segment reporting, see Deloitte’s Roadmap Segment Reporting. In addition, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights for the SEC staff’s recent comments on this topic.