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.

5.11.1.1 Disclosure of Significant Segment Expenses

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’).” The ASU requires public entities to “disclose for each reportable segment the significant expense categories and amounts” for such expenses. If a public entity does not separately disclose expenses 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. The ASU focuses on information that is regularly provided to the CODM even if it is not regularly reviewed by the CODM.

The ASU does not define the term “significant” or “regularly provided” or specify how public entities may interpret its meaning. The Board expects that, “when determining whether certain segment items and amounts provided to the CODM must be disclosed,” public entities will be able to use judgment similarly to how they use it under the existing disclosure requirements in ASC 280. In general, we believe that “regularly provided” would mean at least quarterly. However, during the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments (the “AICPA Conference”), the SEC noted that a frequency of less than quarterly could also be considered “regularly provided.”

An entity should consider both quantitative and qualitative factors when assessing its significant segment expenses. 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. An entity should use judgment in determining its significant segment expenses, and there are no bright-line thresholds. 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.

The ASU requires public entities to disclose segment expenses that are “regularly provided” to the CODM or “easily computable from information that is regularly provided.” In addition to easily computable information that is regularly provided to the CODM, required disclosures include information about significant expenses that is “expressed in a form other than actual amounts, for example, as a ratio or an expense as a percentage of revenue.”

For each reportable segment, the ASU also requires public entities to disclose an amount for other segment items that represents “the difference between reported segment revenues less the [significant] segment expenses disclosed . . . and reported segment profit or loss.” In addition, a public entity would need to provide a qualitative disclosure describing the composition of the other segment items, including the nature and type of such items; however, a quantification for each item identified is not required. This disclosure would be required even when a public entity does not separately report any significant segment expenses.

5.11.1.2 Multiple Measures of Segment Profit or Loss

Public entities are now also 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 Conference, 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.

The staff provided further clarification at the 2024 AICPA Conference, communicating the following:

It would not object to the voluntary 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).
Additional non-GAAP measures of segment profit or loss must meet 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).
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), and the financial statement footnotes should not include a cross-reference to other parts of a filing that contain such disclosures.
A registrant’s ICFR applies to the registrant’s disclosures provided in accordance with ASC 280. However, registrants should also ensure that they have the appropriate disclosure controls and procedures in place to address the non-GAAP measures, regardless of their location.

5.11.1.3 Entities With a Single Reportable Segment

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 has reiterated this view but acknowledged that companies with a single operating segment are permitted to present additional voluntary 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.

5.11.1.4 Effective Date of ASU 2023-07

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 additional ASU 2023-07 reporting considerations for entities with a single reportable segment, see Section 4.2.1.1 of Deloitte’s Roadmap Segment Reporting.

For more information about segment reporting, see Deloitte’s Roadmap Segment Reporting, including Appendix C, which contains frequently asked questions (FAQs) related to ASU 2023-07's accounting and reporting requirements. In addition, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights for the SEC staff’s recent comments on this topic.