Chapter 2 — Financial Statement Accounting and Disclosure Topics

2.20 Segment Reporting

Segment reporting remains a perennial topic of SEC staff comments. Like those issued in previous years, recent staff comments have specifically addressed (1) the identification of operating segments, (2) the aggregation of operating segments, (3) changes in reportable segments, and (4) entity-wide disclosures. The SEC staff has also begun to issue comments on the use of multiple measures of segment performance.

Changing Lanes

On October 6, 2022, the FASB issued a proposed ASU aimed at improving reportable segment disclosure requirements in ASC 280, primarily by requiring enhanced disclosures about significant segment expenses. The proposed ASU would require, among other provisions, “that a public entity disclose the significant segment expense categories and amounts that are regularly provided to the [chief operating decision maker (CODM)] on a segment basis and included within each reported measure of a segment’s profit or loss.” Comments on the proposed ASU were due by December 20, 2022. Refer to Deloitte’s November 11, 2022, Heads Up for further details. The final ASU is expected in the fourth quarter of 2023.

Segments as defined by ASC 280 provide a basis for an SEC registrant’s required disclosures in the business and MD&A sections of the registrant’s filing. Accordingly, registrants should also be mindful of the SEC’s guidance on non-GAAP measures applicable to the financial information presented in their filings. Financial measures that a registrant must disclose under U.S. GAAP are not considered non-GAAP measures under the SEC’s guidance. The most common examples of such measures are related to segment financial information such as revenue, profit or loss, and total assets for each reportable segment. However, a registrant should ensure that reported amounts are consistent with the measures required to be reported under ASC 280. Any aggregation of individual segment amounts or other segment information voluntarily provided would be within the scope of the SEC’s guidance on non-GAAP measures. For additional considerations, see Section 3.4.

2.20.1 Identification of Operating Segments

Examples of SEC Comments

Please tell us and disclose the factors used in determining you have two operating and reportable segments. Refer to ASC 280-10-50-21. Please explain in detail how the lower-level operating results (e.g., net revenues and gross profit) included in your Monthly Internal Financial Statements provided to the CODM and the revenue information by brand provided in your earnings release are not indicative of your operating segments being at a lower level than your reportable segments.
We note you operate within a single reportable segment. We further note in certain of your earnings calls, you refer to growth among other results in your business in terms of new construction, remodel and made-to-order business. Disclose the basis for your conclusion of having one reportable segment, including a discussion of whether your different revenue streams represent separate operating segments. If operating segments have been aggregated, please tell us the basis for such aggregation and also tell us your consideration of the disclosure requirements in ASC 280-10-50-21. In your response, specifically address how the different information disclosed on your earnings calls impacted your operating and reportable segment assessments.
We note your disclosure . . . that your portfolio of brands is organized into two operating segments which you have determined to be reportable segments: [reportable segment X] and [reportable segment Y]. Please tell us the title and describe the role of the CODM and each of the individuals who report to the CODM. We note from your website that management includes Presidents of certain brands . . . as well as a President of International and President of Global eCommerce. Please explain to us the role of each of these Presidents and how they report to the CODM. Additionally, please provide us the following information:
- Tell us how often the CODM meets with his/her direct reports, the financial information the CODM reviews to prepare for those meetings, the financial information discussed in those meetings, and who else attends those meetings;
- Tell us who is held accountable for [reportable segment X] and [reportable segment Y] and the title and role of the person this individual reports to in the organization;
- Describe the information regularly provided to the CODM and how frequently it is prepared;
- Describe the information regularly provided to the Board of Directors and how frequently it is prepared;
- Explain how budgets are prepared, who approves the budget at each step of the process, the level of detail discussed at each step, and the level at which the CODM makes changes to the budget; and
- Describe the basis for determining the compensation for each of the individuals that report to the CODM.

ASC 280 prescribes the “management approach” for the identification of segments in a public entity’s financial statements. The objective of the management approach is to allow financial statement users to (1) see the entity’s performance through the eyes of management, (2) assess the entity’s prospects for future cash flows, and (3) make more informed judgments about the entity’s performance. Accordingly, the SEC staff will consider a number of factors when evaluating a registrant’s identification of operating segments, including (1) what financial information is regularly reviewed by the CODM (i.e., the “CODM package”) and board of directors, (2) a registrant’s organizational chart and overall management structure, (3) the basis on which budgets and forecasts are prepared and reviewed, and (4) the basis on which executive compensation is determined. A registrant should also expect that the staff will review other publicly available information for consistency with the registrant’s segment disclosures; such information may include the forepart of Form 10-K (i.e., the business section and MD&A), the registrant’s Web site, analysts’ reports, press releases, and investor presentations.

Registrants should also be aware that incorrect identification of operating segments can affect goodwill impairment testing. Goodwill is tested at the reporting-unit level in accordance with ASC 350-20, and reporting units are identified as either operating segments or one level below. If a registrant has not correctly identified its operating segments, it could incorrectly identify its reporting units and, as a result, improperly test goodwill for impairment. See Section 2.11.1.2 for additional information.

2.20.2 Aggregation of Operating Segments

Examples of SEC Comments

Please tell us, if true, how you determined you have a single operating and reportable segment. In particular, clarify why your geographic regions, channels, or product categories do not qualify as separate operating and reportable segments. Ensure you identify for us your chief operating decision maker (“CODM”) and describe the information regularly provided to the CODM and board of directors, including how frequently it is prepared, and the level of information used for budgets and budget-to-actual comparisons. Also tell us the titles and roles of individuals who report to the CODM, how often the CODM meets with his/her direct reports, the financial information the CODM reviews to prepare for these meetings, and the financial information discussed. Refer to ASC 280-10-50-1 through 50-9. As required by ASC 280-10-50-21, ensure you disclose in future filings the factors used to identify your reportable segments, including whether operating segments have been aggregated.
Please tell us and disclose the factors used in determining you have one reportable segment, including whether operating segments have been aggregated. Refer to ASC 280-10-50-21. If you are aggregating operating segments to arrive at your reportable segment, please also tell us in detail the analysis you performed in determining the criteria in ASC 280-10-50-11 were met. If you are not aggregating operating segments, please explain in detail how the lower-level operating results (e.g., net revenues and gross margins) discussed on your earnings calls for [lines of business A, B, and C] are not indicative of your operating segments being at a lower level than your reportable segment.
Please clarify whether the owned and operated properties as well as properties you run on behalf [Company X] represent one reportable segment. That is, explain whether you are aggregating operating segments since they have similar economic characteristic. If so, please provide your analysis of how you considered the aggregation criteria outlined in ASC 280-10-50-11. Further, clarify your disclosures that indicate the chief operating decision maker (“CODM”) of the Company reviews specific financial and operational specific data and other key metrics to make resource allocation decisions and assesses performance by review of profit and loss information on a consolidated basis. That is, confirm that the CODM does not also review similar data based on a disaggregated basis (e.g., owned and operated properties versus [Company X] or [Product A] versus [Product B] businesses). Please advise. In addition, the factors used to aggregate operating segments into one reportable segment should be disclosed, if applicable. We refer you to ASC 280-10-50-21(a).

Under ASC 280-10-50-11, entities may aggregate operating segments into a single operating segment if (1) aggregation is consistent with the objectives and principles of ASC 280, (2) the operating segments exhibit similar economic characteristics (e.g., similar historical and expected future performance, such as through similar long-term average gross margins), and (3) the operating segments are similar with respect to all of the following qualitative characteristics:

The nature of the products and services
The nature of the production processes
The type or class of customer for their products and services
The methods used to distribute their products or provide their services
If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

ASC 280 does not define the term “similar” or provide extensive guidance on the aggregation criteria. Therefore, determination of whether two or more operating segments are similar depends on facts and circumstances and is subject to judgment. As a result, 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.

In the assessment of whether operating segments may be aggregated, determining the basis for economic similarity is particularly difficult for registrants that have complex business models and reporting structures. Accordingly, the SEC staff may ask registrants that have aggregated segments how they satisfied the quantitative requirements of ASC 280 and may request historical and projected financial information by operating segment. Further, the staff continues to challenge a registrant’s conclusion that operating segments should be aggregated when the registrant reports profit measures for a level below the reportable segment.

The SEC staff has also emphasized that registrants should focus on the qualitative factors in ASC 280 (e.g., similar products and customers) when assessing whether operating segments are similar for aggregation purposes.

2.20.3 Changes in Reportable Segments

Examples of SEC Comments

We note . . . you changed your operating segments from six to one to reflect a change in corporate reporting structure to the Chief Executive Officer and chief operating decision maker (CODM). Please provide more information about this change, including how your CODM received and receives information about your different lines of business, how resources are shared or allocated to these different lines of business, and why the change in corporate structure occurred.
We note that during the first quarter . . . , you changed from two reportable segments to one as your chief operating decision maker (CODM) now assesses the company’s performance on a consolidated basis. However, you refer to the “[Business A]” throughout your filings and state that it is evaluated separately. Further, during your [second quarter] earnings call and in the Second Quarter . . . Financial Results Presentation (Q2 Investor Presentation), you provide financial results that [include] GAAP revenue, GAAP gross profit, non-GAAP gross profit and non-GAAP profit margin for total [Business A], [Business B] and [Business C], as well as Adjusted EBITDA for [Business A]. Considering these disclosures and the financial information presented and discussed, please provide us with a detailed analysis of how you considered the guidance ASC 280-10-50 in determining that you have one reportable segment. As part of your response:
- Provide us with an organization chart together with a narrative that describes your management structure.
- Describe the role of each of the individuals who report to the CODM.
- Tell us how often the CODM meets with his direct reports, the financial information he reviews in conjunction with those meetings, the financial information discussed and who else attends such meetings.
- Describe the various forms of discrete financial information regularly reviewed by your CODM, if any, that is at a disaggregated or lower level than your consolidated results.
- Explain how budgets are prepared, who approves the budget at each step of the process, the level of detail discussed at each step, and the level at which the CODM makes changes to the budget.
- Describe the basis for determining the compensation for each individual that reports to the CODM.
- To the extent you have aggregated certain operating segments into a single reportable segment, explain how you determined that aggregation is appropriate.

Registrants should continually monitor any changes in facts and circumstances that may affect the identification or aggregation of operating segments. Changes that may prompt the SEC staff to seek additional information about registrants’ reportable segments include changes in internal reporting after an acquisition or disposition and changes in the CODM.

If a registrant changes the structure of its business in a manner that causes the composition of its reportable segments to change, it is required, in accordance with ASC 280-10-50-34 and 50-35, to restate segment information from prior periods for consistency with current reportable segments unless doing so would be impracticable. If a registrant changes the structure of its business after year-end or quarter-end, the new segment structure should not be presented in financial statements until operating results managed on the basis of that structure are reported (typically in a periodic filing such as a Form 10-K or 10-Q). Paragraph 13310.1 of the FRM indicates that “[i]f annual financial statements are required in a registration or proxy statement that includes subsequent periods managed on the basis of the new organization structure, the annual audited financial statements should include a revised segment footnote that reflects the new reportable segments.” A registrant can include the revised financial statements (1) in the registration or proxy statement or (2) in a Form 8-K, which can be incorporated by reference.

In addition, a change in identified operating segments may also result in a change to a registrant’s reporting units for goodwill impairment testing purposes. See Section 2.11.1.2 for additional information.

2.20.4 Reporting Considerations for Entities With a Single Reportable Segment

Example of an SEC Comment

We note that you provide segment operating income (loss); however, you only report one operating segment. The objective of requiring disclosures about segments of a public entity 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. The footnote does not disclose different types of business activities in which the Company engages, but rather includes a measure for the same set of operations that is presented in the consolidated financial statements. Please explain to us how the presentation of a segment measure for an entity with one single operating segment complies with the objective of ASC 280-10-10.

As a related matter, it appears that your presentation of segment operating income (loss) is a non-GAAP measure. In this regard, please tell us how you considered the prohibition against presenting a non-GAAP financial measure in the footnotes to the financial statements. Refer to [Item 10(e)(1)(ii)(C)] of Regulation S-K.

An entity with one reportable segment should not disclose in the notes to its financial statements financial information whose measurement basis differs from the one used in its consolidated financial statements, even if the measures are reviewed by the CODM or their disclosure is argued to be beneficial to readers (e.g., EBITDA for the entity as a whole or for portions of the entity). Specifically, the SEC staff has challenged single segment entities on their inclusion in the notes to their financial statements of measures whose measurement basis differs from the one used in their consolidated financial statements as being inconsistent with the objective of ASC 280. Further, as noted by the staff at the 2016 AICPA Conference, the presentation of such measures outside of the financial statements (e.g., in MD&A) would be within the scope of the SEC’s guidance on non-GAAP measures since the disclosure is not required by U.S. GAAP. See Section 3.4 for additional discussion of non-GAAP measures.

Changing Lanes

Under the FASB’s October 6, 2022, proposed ASU aimed at improving reportable segment disclosure requirements in ASC 280, a public entity that has a single reportable segment would need to provide all the disclosures required by the proposed amendments in addition to those required by the existing segment guidance in ASC 280.

2.20.5 Multiple Segment Performance Measures

Examples of SEC Comments

We note you disclose operating income, income before income taxes and net income (loss) for each of your reportable segments. Considering you disclose more than one measure of segment profit or loss, please revise to disclose only one measure that you believe is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amount in the consolidated statements of operations. Refer to ASC 280-10-50-28. In addition, to the extent that the measures that are not identified as the segment measure of profit or loss under ASC 280 are presented outside the consolidated financial statements, please label them as non-GAAP financial measures and provide the required disclosures under Item 10(e) of Regulation S-K.
We note your presentation of Gross Adjusted EBITDA and Net Adjusted EBITDA on an individual segment basis . . . . Based on this, it appears you are presenting multiple measures of profit or loss for each reportable segment. However, we note that FASB ASC 280-10-50-22 requires disclosure of a single measure for each reportable segment. Please revise to identify and disclose the single measure of segment profit or loss for each reportable segment.

Sometimes the CODM may receive a profit or loss metric for internal reporting purposes whose measurement basis is different from the one used in the consolidated financial statements. For example, an entity may “add back” depreciation and amortization attributable to cost of revenue in reporting adjusted gross profit to the CODM for internal reporting purposes. If the measure of profit or loss is the only one reported to the CODM, that amount would be disclosed for each reportable segment.

In other instances, multiple measures of profit or loss or assets may be used by the CODM. In such cases, the measures presented should be those that most closely reflect the measurement principle applied to the consolidated financial statements. For example, if the CODM receives both adjusted gross profit (excluding depreciation and amortization) and operating profit (including depreciation and amortization and other applicable expenses), ASC 280-10-50-28 requires that the disclosed measure be the operating profit since it would be the measure closest to the measures used in the U.S. GAAP–based consolidated financial statements.

The SEC staff has noted an increasing number of companies presenting more than one measure of segment profit or loss. Through the comment letter process, the staff has reminded registrants that only one measure of segment profit or loss may be presented in the financial statements. Additional measures of segment profit or loss may be disclosed outside the financial statements (e.g., within MD&A) provided that they comply with non-GAAP rules and regulations.

Changing Lanes

Under the FASB’s October 6, 2022, proposed ASU aimed at improving reportable segment disclosure requirements in ASC 280, if a CODM were to use multiple measures, public entities would be able to disclose “more than one measure of a segment’s profit or loss” provided that at least one of those measures was determined in a manner that was “most consistent with the measurement principles” in U.S. GAAP.

2.20.6 Entity-Wide Disclosures

Examples of SEC Comments

Please disclose revenues from external customers for each product and service or each group of similar products and services in accordance with ASC 280-10-50-40. We note [your] disclosure . . . which refers to various product categories.
Disclose entity-wide information required by ASC 280-10-50-38 to 42.
Please tell us your consideration of providing revenue by geographic location pursuant to ASC 280-10-50-41(a) as it appears from your disclosure . . . that you may have significant revenue attributed to individual foreign countries.

ASC 280 also requires disclosure of revenue by product or service on an entity-wide basis. Therefore, registrants should remember to identify the “[t]ypes of products and services from which each reportable segment derives its revenues” and to report the total “revenues from external customers for each product and service or each group of similar products and services” in accordance with ASC 280-10-50-21 and ASC 280-10-50-40, respectively. The SEC staff has objected to overly broad views of what constitute “similar” products and services.

The staff has also frequently asked registrants to include disclosures about geographic information in accordance with ASC 280-10-50-41 unless it is impracticable to do so.

Other Deloitte Resources

Roadmap, Segment Reporting