5.11 Segments
Public entities are required to disclose certain financial information for
reportable segments under ASC 280. The segment determinations made by a public
entity that files with the SEC are the basis for certain other disclosures in SEC
filings, including the business section and MD&A. Accordingly, it is important
for an entity that is going public to thoroughly consider the identification of its
operating and reportable segments.
In identifying operating segments, an entity is required to use the management
approach, which, according to ASC 280-10-05-3, 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 about 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.
5.11.1 ASU 2023-07 — Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07 to
enhance the reportable segment disclosure requirements for public entities. The
ASU requires disclosure of (1) the significant segment expenses that are
regularly provided to the CODM and included in the determination of the measure
of segment profit or loss, (2) other segment items (i.e., the residual expenses
included in the determination of segment profit and loss that are not
significant and separately disclosed), and (3) the title and position of the
CODM as well as how the CODM uses segment performance measures. Companies are
required to provide all segment disclosures on an interim basis as well. In
addition, public entities are permitted to disclose multiple segment measures of
profit or loss, provided that at least one of the reported measures includes the
segment profit or loss measure that is most consistent with GAAP measurement
principles.
At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments,
the SEC staff discussed the relationship between the non-GAAP rules and ASU
2023-07. The staff communicated its view that additional measures are neither
required nor expressly permitted by GAAP (i.e., the ASU does not identify
specific measures that must be disclosed, such as EBITDA). Accordingly, if
additional performance measures are included in the segment footnote and have
not been computed in accordance with GAAP, such additional measures would be
considered non-GAAP measures.
In recent discussions with the SEC staff, the staff communicated the following:
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It would not object to the inclusion of additional non-GAAP performance measures in the segment footnote that are disclosed in accordance with ASC 280-10-50-28B and 50-28C (added by ASU 2023-07).
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Additional performance measures must comply with SEC rules and regulations. Non-GAAP measures to be included in financial statements should not be misleading, as noted in Regulation S-X, Rule 4-01(a), and should comply with the preparation and disclosure requirements of Regulation G and Regulation S-K, Item 10(e) (see further discussion of non-GAAP measures in Section 4.5).
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The additional disclosures under Regulation G and Regulation S-K, Item 10(e), may be provided within or outside the financial statements (e.g., in MD&A). Further, the financial statement footnotes should not include a cross-reference to other parts of a filing that contain such disclosures.
Under the ASU, public entities with a single reportable segment
must provide all disclosures required by the ASU (e.g., significant segment
expenses and other segment items) as well as those required by the existing
segment guidance in ASC 280. A public entity with a single operating segment
should identify the measure or measures of the segment’s profit or loss that the
CODM uses in assessing segment performance and deciding how to allocate
resources. During the 2023 AICPA & CIMA Conference on Current SEC and PCAOB
Developments, the SEC staff indicated that when an entity with a single
reportable segment is managed on a consolidated basis, the entity would be
expected to conclude, under the new guidance in ASC 280-10-55-15D, that
consolidated net income is the measure of segment profit or loss that is most
consistent with U.S. GAAP. The SEC staff recently reiterated this view but
acknowledged that companies with a single operating segment are permitted to
present additional measures subject to the considerations discussed in the
previous paragraph.
When a consolidated GAAP measure is used, a public entity would have to disclose
the measure of profit or loss used, information about all significant expenses
that are regularly provided to the CODM and included within that measure, and
any other segment items whose line items could differ from those that are
currently presented on the face of the income statement. Further, information
about a single reportable entity, if regularly provided to the CODM and included
in the measure of profit or loss, might need to take into account a category and
amount for allocated corporate overhead expenses as a significant segment
expense. For an example illustrating how an entity with a single reportable
segment would apply the ASU’s disclosure requirements, see ASC 280-10-55-55.
The amendments in ASU 2023-07 are effective for all public entities for fiscal
years beginning after December 15, 2023, and interim periods within fiscal years
beginning after December 15, 2024. Early adoption is permitted. For more
information about ASU 2023-07, see Deloitte’s November 30, 2023 (last updated
September 10, 2024), Heads Up.
For more information about 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.