2.20 Segment Reporting

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.

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:

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.

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.

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

Upon adoption of ASU 2023-07, a public entity that has a single reportable segment should 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. That is, if the measure of a segment’s profit or loss that the CODM uses to allocate resources and assess segment performance is not a consolidated GAAP measure and is not clearly evident from the disclosures provided, such measure would need to be reported and reconciled to consolidated income before income taxes. If these requirements are met, an entity with a single reportable segment also may report additional performance measures that the CODM uses to assess segment performance and determine resource allocation, provided that at least one of the reported measures includes the segment profit or loss measure that is most consistent with GAAP measurement principles.

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 under ASC 280 (before the adoption of ASU 2023-07). 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

ASU 2023-07 permits, but does not require, the disclosure of more than one measure of performance used by the CODM in allocating resources and assessing performance of the entity’s reportable segments. Upon adoption of the ASU, these additional measures should be regularly reviewed and used by the CODM to allocate resources and assess segment performance.

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.

In recent discussions with the SEC staff, the staff communicated the following:

• 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).
• 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 G, and therefore should comply with the presentation 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 of 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.

For more information, see Deloitte’s November 30, 2023 (updated September 10, 2024), Heads Up.

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.

ASC 280 also requires certain reconciliations to consolidated amounts. Reconciliations for income statement amounts should be performed for each period presented. However, as noted in ASC 280-10-50-20, “reconciliations of balance sheet amounts for reportable segments to consolidated balance sheet amounts are required only for each year for which a balance sheet is presented.” The SEC staff has commented on the omission of some or all of the reconciliations required by ASC 280-10-50-30 and 50-31, as well as on reconciliations that do not meet the requirements of ASC 280-10-50-30 and 50-31. For example, ASC 280-10-50-30(a) requires a public entity to reconcile the “total of the reportable segments’ revenues to the public entity’s consolidated revenues,” and ASC 280-10-50-30(b) requires a public entity to reconcile the “total of the reportable segments’ measures of profit or loss to the public entity’s consolidated income before income taxes and discontinued operations.” To meet the requirements of ASC 280-10-50-30(a) and (b), an entity needs to (1) provide subtotals that respectively aggregate the revenues for all reportable segments and the profits or losses for all reportable segments and (2) reconcile such subtotals to the corresponding consolidated amounts. Failure to do so, or the inclusion in a subtotal of amounts unrelated to the segments (e.g., corporate expenses), has been subject to comments from the SEC staff.