FASB Issues Final Standard on Improvements to Reportable Segment Disclosures
This Heads Up has been updated to reflect
recent discussions with the SEC staff (see Appendix B).
Overview
The FASB issued ASU 2023-071 on November 27, 2023. The amendments “improve reportable segment
disclosure requirements, primarily through enhanced disclosures about
significant segment expenses.” In addition, the amendments enhance interim
disclosure requirements, clarify circumstances in which an entity can disclose
multiple segment measures of profit or loss, provide new segment disclosure
requirements for entities with a single reportable segment, and contain other
disclosure requirements. The purpose of the amendments is to enable “investors
to better understand an entity’s overall performance” and assess “potential
future cash flows.”
Background
Under ASC 280, a public entity must report, for each reportable
segment, a measure of the segment’s profit or loss that its chief operating
decision maker (CODM) uses to assess segment performance and make decisions
about resource allocation. However, ASU 2023-07 notes that “although information
about a segment’s revenue and measure of profit or loss is disclosed in an
entity’s financial statements” under the current requirements, “there generally
is limited information disclosed about a segment’s expenses and, therefore,
investors supported enhanced expense disclosures.” Accordingly, the ASU requires
public entities to provide investors with “additional, more detailed information
about a reportable segment’s expenses” and is intended “to improve the
disclosures about a public entity’s reportable segments.”
The final ASU is generally consistent with the proposed ASU issued on October 6,
2022, apart from the qualitative transition disclosure requirement. On the basis
of feedback received during the comment period, the Board removed the
requirement for public entities to describe changes in segment expense
categories between the period of adoption and the most recent comparative
period.
The Board decided to retain all existing segment disclosure requirements in both
ASC 280 and other Codification topics. The ASU’s amendments are incremental to
those requirements and “do not change how a public entity identifies its
operating segments, aggregates those operating segments, or applies the
quantitative thresholds to determine its reportable segments.”
Main Provisions
Summary of Main Provisions
Change
|
Overview and When Disclosure Is Required
|
---|---|
Public entities are required to disclose significant
segment expenses by reportable segment if they are
regularly provided to the CODM and included in each
reported measure of segment profit or loss.
Disclosures are required on both an annual and an
interim basis.
| |
Public entities are required to
disclose other segment items by reportable segment.
Such a disclosure would constitute the difference
between reported segment revenues less the
significant segment expenses (disclosed) less
reported segment profit or loss. Disclosures are
required on both an annual and an interim basis.
| |
All existing annual disclosures
about segment profit or loss must be provided on an
interim basis in addition to disclosure of
significant segment expenses and other segment items
as noted above.
| |
Public entities may disclose more
than one measure of segment profit or loss used by
the CODM, provided that at least one of the reported
measures includes the segment profit or loss measure
that is most consistent with GAAP measurement
principles. Disclosures are required on both an
annual and an interim basis.
| |
Disclosure of the CODM’s title and
position is required on an annual basis, as well as
an explanation of how the CODM uses the reported
measure(s) and other disclosures.
| |
Public entities must apply all of the ASU’s
disclosure requirements, as well as all existing
segment disclosure and reconciliation requirements
in ASC 280, on an annual and interim basis.
| |
Recasting is required if segment information
regularly provided to the CODM is changed in a
manner that causes the identification of significant
segment expenses to change.
|
Significant Segment Expenses
Significant segment expenses are defined in the ASU 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’).” ASU 2023-07 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 then 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.
Connecting the Dots
Under the current guidance in ASC 280-10-50-22,
public entities are only required to disclose certain expenses
(e.g., interest expense and depreciation) if they are “included in
the measure of segment profit or loss [or] otherwise regularly
provided” to the CODM. For example, even though selling expenses may
have been included in an entity’s measure of segment profit or loss,
the previous guidance did not require public entities to disclose
selling expenses. Under the final ASU, if selling expenses are
determined to be a significant segment expense that is regularly
provided to the CODM, public entities must disclose selling
expenses. Reportable segments may have different categories of
significant segment expenses as a result of the nature of their
operations and what is regularly provided to the CODM. For
additional considerations related to significant segment expenses,
see Appendix
B.
Significance Threshold and Regularly Provided Information
The ASU states that an entity should “consider relevant qualitative and
quantitative factors when determining whether segment expense categories
and amounts are significant” and should identify segment expenses on the
basis of “amounts that are regularly provided to the [CODM] and included
in reported segment profit or loss.”
Connecting the Dots
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
AICPA Conference, the SEC noted that a frequency of less than
quarterly could also be considered “regularly provided.”
Public entities should review, both upon
transition and for each reporting period, financial information
(e.g., CODM packages, or segment information regularly provided
to the CODM through different means such as electronically, in
dashboards, or in paper format) and evaluate such information
for significant expenses and for what would be considered
“easily computable.” In addition, public entities should monitor
for changes that occur between periods and consider the
recasting requirements.
Easily Computable Segment Expenses
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.” Examples of such disclosures would include:
-
If the CODM is regularly provided “a segment revenue amount and a segment gross margin amount, segment cost of sales can be easily computed from this information.” Accordingly, “if cost of sales is significant,” it would need to be disclosed as a significant segment expense.
-
If the CODM is regularly provided “a segment revenue amount and segment warranty expense expressed as a percentage of segment revenue . . . segment warranty expense can be easily computed from this information.” Accordingly, “if warranty expense is significant,” it would need to be disclosed as a significant segment expense.
-
Similarly, if bad-debt expense or marketing expense as a percentage of revenue is part of the measure of segment profit or loss and is considered significant, these expenditures would need to be disclosed as significant segment expenses.
Example 1
Easily Computable Segment Expenses
-
Company A has identified the following reportable segments: United States and Europe.
-
The CODM uses segment gross profit to assess segment performance and allocate resources.
-
U.S. and European gross margin percentages are regularly provided to the CODM.
-
Cost of sales is considered both easily computable and significant.
Because cost of sales is determined to be an
easily computable significant segment expense
regularly provided to the CODM and is included in
the segment measure of profit or loss (segment
gross profit), disclosure is required.
The table below shows amounts related to the
disclosure illustrated in this example.
For another example illustrating
the ASU’s disclosure requirements related to
significant segment expenses, see Example
1 in Appendix A.
Other Segment Items
For each reportable segment, the ASU 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.” A public entity would also need
to provide a qualitative disclosure describing the composition of the other
segment items, including the nature and type of the other segment 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.
The following are some examples of other segment items:
-
The total amount of “a reportable segment’s expenses that are included in the reported measure(s) of a segment’s profit or loss but are not regularly provided to the [CODM].”
-
The total amount of a segment’s expenses that are not significant.
-
The total amount of “a reportable segment’s gains, losses, or other amounts that also are included in each reported measure of a segment’s profit or loss.”
-
Segment expense amounts required under ASC 280-10-50-22 (e.g., interest expense, depreciation, and amortization expense), when those specified amounts are included in the reported measure of segment profit or loss but are not considered significant segment expenses.
Example 2
Significant Segment Expenses and Other Segment
Items
-
Company B has identified the following reportable segments: computer hardware and computer software.
-
The CODM uses segment earnings before interest, taxes, depreciation, and amortization (segment EBITDA) to assess segment performance and allocate resources.
-
Cost of sales and warranty expenses for computer hardware and hosting fees for computer software are regularly provided to the CODM.
-
Bad-debt expenses and marketing expenses expressed as a percentage of revenue are regularly provided to the CODM for both the computer hardware and software segments.
-
Bad-debt expenses and marketing expenses are both considered easily computable; however, only marketing expenses are considered significant.
Because marketing expense is determined to be an
easily computable significant segment expense
regularly provided to the CODM and is included in
the segment measure of profit or loss (segment
EBITDA), disclosure is required.
Company B has also disclosed a
qualitative description for other segment items,
which represent “the difference between reported
segment revenues less the [significant] segment
expenses disclosed . . . and reported segment profit
or loss.” The table below shows amounts related to
the disclosure illustrated in this example.
For another example illustrating the
ASU’s disclosure requirements related to significant
segment expenses and other segment items, see
Example 1 in Appendix A.
Interim Disclosures
Under the ASU, public entities must disclose significant
segment expenses and other segment items, as well as all existing segment
information about profit or loss, on an annual and interim basis. Such
disclosures include information that must be disclosed annually in
accordance with ASC 280-10-50-22 through 50-26C (e.g., a measure of a
segment’s profit or loss and total assets, interest revenue and expense,
depreciation and amortization expense). In the ASU’s Basis for Conclusions,
the Board indicates that it expects this new interim disclosure requirement
to “result in more timely decision-useful information for users without
placing significant additional burden on preparers because the interim
segment information is generally expected to be available from an entity’s
existing financial systems and records.”
Disclosures Required on an Interim Basis4
Multiple Measures of a Segment’s Profit or Loss
The ASU permits public entities to disclose more than one
measure of segment 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 (the “required measure”).
Specifically, ASC 280-10-50-28A (added by the ASU) states that “[i]f the
[CODM] uses more than one measure of a segment’s profit or loss in assessing
segment performance and deciding how to allocate resources, a public entity
may report one or more of those additional measures of segment profit [or
loss]. However, at least one of the reported segment profit or loss measures
. . . shall be that which management believes is determined in accordance
with the measurement principles most consistent with those used in measuring
the corresponding amounts in a public entity’s consolidated financial
statements.” (See the SEC
Reporting Considerations section below for clarifications the
SEC staff made at the AICPA Conference.)
In addition to reconciling each reported measure to the
consolidated financial statements, a public entity that discloses multiple
measures of a segment’s profit or loss should provide all existing
disclosures about the segment’s profit or loss as well as about segment
assets if such information is provided to the CODM. The new requirement to
provide significant segment expenses and other segment items would also
apply to each of these additional reported measures. A public entity that
reports an additional measure for a reportable segment in the current period
should disclose this additional measure in the prior comparative periods if
it was provided to the CODM in those prior periods. Further, “a public
entity is not precluded from reporting the additional measure or measures
for the prior periods in which the measure or measures were not provided to
the [CODM].”
The graphic below illustrates the ASU’s requirements when a public entity
discloses multiple measures of a segment’s profit or loss.
CODM-Related Disclosures
Other notable disclosures that the ASU requires public entities to provide include:
-
“The title and position of the individual or the name of the group or committee identified as the [CODM].”
-
“How the [CODM] uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.”
-
The method applied to allocated overhead expenses disclosed as a significant segment expense regularly provided to the CODM, and included within the measure of segment profit or loss.
-
Separate disclosure of interest expense that is a significant segment expense, even if a public entity discloses interest expense as part of net interest income. This requirement will mostly affect highly leveraged public entities and financial services entities.
For an example illustrating the first two disclosure
provisions above, see Example 2 in Appendix
A.
Entities With a Single Reportable Segment
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. In other words, 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, it would need to be reported and reconciled
to consolidated income before income taxes. Provided that 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. (See the SEC Reporting Considerations section below
for clarifications the SEC staff made at the AICPA Conference.)
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. The Board
expects that those measures generally will be apparent from the internal
management reports that are regularly provided to the CODM.
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 the ASU’s disclosure
requirements for an entity with a single reportable segment, see Example 3 in
Appendix A.
Connecting the Dots
Before adopting this ASU, entities with a single
reportable segment were not explicitly required to provide segment
disclosures beyond those provided on an entity-wide basis. Such
entities will now be required to expand their segment footnote
disclosures by providing all the disclosures currently required for
multiple-segment entities as well as those required by the ASU. As
part of this requirement, the entity’s segment revenue and profit or
loss measure should be clearly disclosed and the entity must review
information regularly provided to the CODM for significant segment
expenses and other segment items. For additional considerations
related to entities with a single reportable segment, see Appendix B.
Recasting of Prior-Period Segment Information to Conform to Current-Period Segment Information
The ASU amends ASC 280 to replace the word “restate” with
“recast.” The ASU’s changes related to the recasting of prior-period segment
expense information can be summarized as follows:
-
An entity that “changes the segment information that is regularly provided to the [CODM] in a manner that causes the identification of significant segment expenses to change,” or that “changes its internal reports and the segment expense information that is regularly provided to the CODM changes in the current period,” is required to recast all periods, including interim periods, unless it is impracticable to do so in a manner consistent with the existing recasting requirements related to a change in composition of the entity’s reportable segments.
-
Recasting is not required for an entity that has “significant changes from prior periods to the measurement methods of expenses, the method for allocating expenses to a segment, or changes in the method for allocating centrally incurred expenses.” However, “it is preferable to show all segment information on a comparable basis to the extent it is practicable to do so” in a manner consistent with the existing recasting requirements for reflecting a change in measurement of a segment’s profit or loss.
SEC Reporting Considerations
Segment Disclosure in MD&A
An SEC registrant’s determination of reportable segments provides the basis
for its required disclosures in the business and MD&A sections of its
filing. For example, SEC Regulation S-K, Item 101(c), states that a
registrant should provide a narrative description of the business, “focusing
upon the registrant’s dominant segment or each reportable segment about
which financial information is presented in the financial statements.” In
addition, SEC Regulation S-K, Item 303(b), provides guidance on MD&A of
financial condition and results of operations. It states, in part:
Where in the registrant’s judgment a discussion of segment
information and/or of other subdivisions (e.g., geographic areas,
product lines) of the registrant’s business would be necessary to an
understanding of such business, the discussion must focus on each
relevant reportable segment and/or other subdivision of the business
and on the registrant as a whole.
To comply with this guidance, a registrant should provide
disclosures that are consistent with those of its reportable segments.
Historically, ASC 280 precluded a registrant from disclosing
more than one measure of segment profit or loss in the notes to the
financial statements. Therefore, any additional measures of profit or loss
that were used by the CODM could only be presented as non-GAAP measures
outside the financial statements (e.g., within MD&A), provided that they
comply with the SEC’s non-GAAP rules and regulations. Because the ASU now
permits public entities to disclose multiple measures of profit or loss that
are used by the CODM, it is unclear whether a registrant will be permitted
or otherwise required to discuss more than one segment measure of profit or
loss within MD&A.
Further, the SEC’s rules and regulations5 allow a segment measure to be discussed on a segment-by-segment basis
outside the financial statements in MD&A without being considered a
non-GAAP measure (e.g., segment EBITDA). However, if this same segment
performance measure is discussed on an aggregated segment basis, it is
considered a non-GAAP measure and the registrant would be required to comply
with the SEC’s non-GAAP rules and regulations. The ASU does not change this.
However, under the ASU, a registrant with a single reportable segment may
now report a segment performance measure that was not prepared by using
measurement principles consistent with GAAP (e.g., consolidated segment
EBIDTA). We believe that such a measure would not be considered a non-GAAP
measure for the purpose of discussing the registrant’s performance outside
the financial statements, and the registrant would not be required to comply
with the SEC’s non-GAAP rules and regulations in such circumstances.
In the absence of further interpretive guidance from the SEC, registrants
should consider consulting with their auditors and legal counsel before
adopting the ASU to determine the impact it will have on the discussion of
results of operations in MD&A.
Connecting the Dots
Entities With a Single Reportable Segment
During the AICPA Conference, the SEC indicated that when a single
reportable segment entity is managed on a consolidated basis, the
SEC would expect the entity to conclude under the new guidance in
ASC 280-10-55-15D that the measure of segment profit or loss that is
most consistent with U.S. GAAP is consolidated net income.
We encourage entities to consider discussing, with auditors,
advisers, or the SEC staff, how the staff’s view should be applied
if the entity is a single reportable segment entity and management
concludes that it does not manage the entity on a consolidated basis
and may therefore use a measure of segment profit or loss that is
not consistent with U.S. GAAP.
Multiple Measures of a Segment’s Profit or Loss
During the AICPA Conference, the SEC stated that the SEC staff does
not believe that such additional measures are required or expressly
permitted by GAAP (since the ASU does not identify specific measures
that may be disclosed, such as EBITDA). The SEC indicated that such
measures therefore would be considered non-GAAP measures.
Evaluating whether a non-GAAP measure is misleading in the context of
Regulation G may be complex. Additional measures included in the
financial statement footnotes would be subject to management’s
assessment of internal control over financial reporting and external
audit procedures. Registrants are encouraged to consult with their
advisers if they intend to early adopt ASU 2023-07 and disclose
additional measures that are not consistent with GAAP.
The examples below illustrate these concepts for a
registrant with more than one reportable segment. For additional
considerations related to multiple measures of a segment's profit or
loss, see Appendix B.
Example 3
One Measure of Segment Profit and
Loss
Assume that a registrant’s
CODM regularly reviews segment EBITDA to assess
segment performance and allocate resources and
does not use other measures of segment profit or
loss. The registrant would identify segment EBITDA
as the required measure of segment profit and
loss. Segment EBITDA for each segment would not be
considered a non-GAAP measure because it must be
disclosed in accordance with ASC 280. However, in
a manner consistent with the interpretation in
C&DI Question
104.04,6 presentation of total segment EBITDA or
consolidated EBITDA “in any context other than the
. . . required [segment footnote] reconciliation .
. . would be the presentation of a non-GAAP
financial measure.”
Example 4
Multiple Measures of Segment Profit and Loss
That Are Consistent With GAAP
Assume that a registrant’s CODM regularly
reviews GAAP gross profit and GAAP operating
profit to assess segment performance and allocate
resources. The registrant determines that GAAP
operating profit is the required measure of
segment profit and loss since it represents the
measure of segment performance that is most
consistent with GAAP measurement principles.
Further, the registrant concludes that GAAP gross
profit is fully burdened and has been determined
in a manner consistent with GAAP measurement
principles. Therefore, disclosure of segment gross
profit and operating profit would be consistent
with ASC 280 (as amended by ASU 2023-07), and
neither would be subject to the SEC’s non-GAAP
rules and regulations.
Example 5
Multiple Measures of Segment Profit and
Loss, Some of Which Are Not Consistent With
GAAP
Assume that a registrant’s CODM regularly
reviews GAAP operating profit and EBITDA to assess
segment performance and allocate resources. The
registrant would identify GAAP operating profit as
the required measure of segment profit and loss
since it would represent the measure of segment
performance that is most consistent with GAAP
measurement principles. EBITDA would be considered
an additional measure that may be disclosed under
ASC 280 (as amended by ASU 2023-07); however, such
a disclosure is neither required nor expressly
permitted. Therefore, disclosure of segment
EBITDA, total segment EBITDA, or consolidated
EBITDA would be subject to the SEC’s non-GAAP
rules and regulations.
Retrospective Adoption Considerations
After adopting the ASU, when recasting prior-period segment
information to conform to current-period segment information, a registrant
must consider the impact of retrospective changes on its historical
financial statements included in its reports under the Securities Exchange
Act of 1934 (e.g., Forms 10-K and 10-Q), in registration statements under
the Securities Act of 1933 (e.g., registration statements on Form S-3), and
other nonpublic offerings.
The requirement to retrospectively revise the annual preadoption financial
statements and other affected financial information after the adoption of
this ASU may be accelerated when the preadoption financial statements are
reissued, as discussed in ASC 855-10-25-4 (see Form S-3, Item 11(b)(ii)).
Such reissuance may occur when a registrant:
-
Files a new or amended registration statement. A registrant is generally required to file recasted financial statements that reflect the change for all periods presented if the change is considered material.
-
Files a Form S-8. A registrant is generally not required to update its previously issued financial statements in a new Form S-8 to reflect a change unless it constitutes a “material change in the registrant’s affairs.”
-
Issues a prospectus supplement. A registrant is generally not required to update its previously issued financial statements unless the registrant considers the change to be a fundamental change.
-
Issues securities in a nonpublic offering. If an entity incorporates its financial statements into the nonpublic offering, it should apply the above framework related to a prospectus supplement. If the financial statements are included in the nonpublic offering document, the entity should apply the guidance related to a new or amended registration statement.
Registrants should consider consulting with their auditors and legal counsel
regarding the impact of the retrospective changes when adopting the ASU.
See Section 7.5 of Deloitte’s Roadmap Segment Reporting for further
details on the reporting implications of retrospective changes to reportable
segments.
Effective Date and Transition
Effective Date
The amendments in ASU 2023-07 are effective for all public entities for
fiscal years beginning after December 15, 2023 (e.g., for calendar-year-end
public entities, annual periods beginning on January 1, 2024 — i.e.,
December 31, 2024, Form 10-K), and interim periods within fiscal years
beginning after December 15, 2024 (e.g., for calendar-year-end public
entities, interim periods beginning on January 1, 2025 — i.e., Form 10-Q for
the first quarter of 2025). Early adoption is permitted.
Transition
The enhanced segment disclosure requirements apply “retrospectively to all
prior periods presented in the financial statements.” The significant
segment expense and other segment item amounts “disclosed in prior periods
shall be based on the significant segment expense categories identified and
disclosed in the period of adoption.”
Appendix A — Examples From ASU 2023-07
The examples below are reproduced from the ASU.
Example 1
ASC 280-10
Case B: Information About Reported
Segment Revenue, Measures of a Segment’s Profit or
Loss, Significant Segment Expenses, Measure of a
Segment’s Assets, and Required Reconciliations
55-48 The
following tables illustrate a format for presenting
information about reported segment revenue, measures
of a segment’s profit or loss, significant segment
expenses, and measure of a segment’s assets (see
paragraphs 280-10-50-22, 280-10-50-25, and
280-10-50-26A through 50-26C) for the current
reporting period. The tables do not illustrate
comparative period disclosures. Diversified Company
does not allocate income taxes or unusual items to
segments. In addition, not all segments have
significant noncash items other than depreciation
and amortization in reported profit or loss. The
amounts in this Example are assumed to be the
amounts in management’s reports that are regularly
provided to the chief operating decision maker,
including interest revenue and interest expense. The
following tables also illustrate a format for
presenting the reconciliations of reportable segment
revenues and measures of profit or loss to
Diversified Company’s consolidated totals (see
paragraph 280-10-50-30(a) through (b)).
Example 2
ASC 280-10
Case A: Disclosure of Descriptive
Information About the Reportable Segment
55-54 The
following is an example of the required disclosures
about a public entity’s reportable segment.
-
Description of the types of products and services from which the reportable segment derives its revenues (see paragraph 280-10-50-21(b)).The software segment derives revenues from customers by providing access to cloud computing applications under software-as-a-service arrangements. The most popular cloud computing application is an enterprise resource planning application used primarily by customers to manage functions such as accounting, financial management, project management, and procurement. The service term for the software arrangements is variable, with the median term being approximately five years.
-
Measure of segment profit or loss and assets (see paragraph 280-10-50-29).The accounting policies of the software segment are the same as those described in the summary of significant accounting policies.The chief operating decision maker assesses performance for the software segment and decides how to allocate resources based on net income that also is reported on the income statement as consolidated net income.The measure of segment assets is reported on the balance sheet as total consolidated assets.
- How the chief operating
decision maker uses the reported measure of
segment profit or loss (see paragraph
280-10-50-29(f)). The chief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the software segment or into other parts of the entity, such as for acquisitions or to pay dividends.Net income is used to monitor budget versus actual results. The chief operating decision maker also uses net income in competitive analysis by benchmarking to ABC Company’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.
-
ABC Company does not have intra-entity sales or transfers.
-
Factors that management used to identify the public entity’s reportable segments (see paragraph 280-10-50-21(a)).ABC Company has one reportable segment: software. The software segment provides cloud computing services to customers under software-as-a-service arrangements. ABC Company derives revenue primarily in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single software platform that is deployed to and implemented by customers in a similar manner.
-
The title and position of the individual or the group identified as the chief operating decision maker (see paragraph 280-10-50-21(c)).ABC Company’s chief operating decision maker is the senior executive committee that includes the chief operating officer, chief financial officer, and the chief executive officer.
Example 3
ASC 280-10
Case B: Information About Reported
Segment Revenue, Segment Profit or Loss, and
Significant Segment Expenses
55-55 The following table
illustrates a format for presenting information
about reported segment revenue, segment profit or
loss, and significant segment expenses. The Example
does not separately illustrate all of the
information required by paragraphs 280-10-50-22 and
280-10-50-25.
[7]
See the SEC
Reporting Considerations section above
for clarifications the SEC staff made at the AICPA
Conference regarding entities with a single
reportable segment.
Appendix B — Recent Discussions With SEC Staff
Multiple Measures of a Segment’s Profit or Loss — Non-GAAP Considerations
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.
These additional measures should be regularly reviewed and used by the CODM
to allocate resources and assess segment performance.
Regulation
S-K, Item 10(e)(5), states that “non-GAAP financial measures
exclude financial measures required to be disclosed by GAAP, Commission
rules, or a system of regulation of a government or governmental authority
or self-regulatory organization that is applicable to the registrant.
However, the financial measure should be presented outside of the financial
statements unless the financial measure is required or expressly permitted
by the standard-setter that is responsible for establishing the GAAP used in
such financial statements.”
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:
- 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 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), which are further discussed below.
- 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.
Regulation G states that:
- Non-GAAP financial measures must not be misleading.
- The most directly comparable GAAP measure must be presented.
- A quantitative reconciliation of the non-GAAP financial measure to the most comparable GAAP measure must be presented for (1) a historical non-GAAP measure and (2) forward-looking information (to the extent available without unreasonable effort).
Regulation S-K, Item 10(e), expands on Regulation G to
require a registrant to:
- Present the most directly comparable GAAP measure with prominence equal to or greater than that of the non-GAAP measure.
- Include a statement indicating the reasons why the registrant believes that the non-GAAP measure provides useful information to investors about the registrant’s financial condition and results of operations.
- Provide, to the extent material, a statement disclosing the additional purposes, if any, for which the registrant uses the non-GAAP measure.
The SEC staff’s C&DIs on the use of non-GAAP
measures provide further guidance to registrants on how to apply the
requirements of Regulation G and Regulation S-K, Item 10(e). Specifically,
Section 100
of the C&DIs contains guidance on non-GAAP measures that could mislead
investors, including those that:
-
Exclude normal, recurring cash operating expenses necessary for business operations.
-
Are presented inconsistently between periods, such as by adjusting an item in the current reporting period, but not a similar item in the prior period, without appropriate disclosure about the change and an explanation of the reasons for it.
-
Exclude certain nonrecurring charges but do not exclude nonrecurring gains (e.g., “cherry picking” non-GAAP adjustments to achieve the most positive measure).
-
Are based on individually tailored accounting principles, including certain adjusted revenue measures.
-
Are mislabeled or not clearly labeled as non-GAAP measures or otherwise include adjustments that are not clearly or accurately labeled or described.Connecting the DotsOver the past several years, SEC comments issued to registrants regarding their compliance with non-GAAP measure requirements, particularly the requirements related to the concept of misleading measures, have consistently been near the top of the list of most frequent SEC comments. See Section 4.3 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics for additional information on the SEC’s non-GAAP regulations. Registrants will need to expand their internal control processes over financial reporting with respect to non-GAAP measures if such measures are included in the notes to the financial statements.
In addition to the segment reconciliation requirements of
ASC 280, Regulation G requires a quantitative reconciliation of the segment
non-GAAP measure to the most comparable GAAP measure (e.g., the required
segment GAAP measure). However, since specific guidance on the form of the
Regulation G reconciliation has not been provided, there may be diversity in
practice related to how both types of reconciliation requirements are
satisfied.
When a company elects to show additional non-GAAP
performance measures in the segment footnote, possible alternatives for
presenting the ASC 280 and Regulation G reconciliations may include one of
the following:
- Presentation of the ASC 280 reconciliation in the segment footnote with the Regulation G reconciliation presented in MD&A.
- Separate presentation of the reconciliations required by ASC 280 and Regulation G in the segment footnote.
- A combined presentation of the reconciliations required by ASC 280 and Regulation G in the segment footnote.
Q&As Based on Recent Discussions With the SEC Staff
The Q&As below, which are based on recent discussions
with the SEC staff, reflect our understanding of the staff’s views on five
accounting issues that stakeholders have raised regarding the adoption of
ASU 2023-07.
Q&A 1
Question
Would entities managed on a consolidated basis be
permitted to disclose a segment’s measure of profit or loss other
than consolidated net income?
Answer
Yes. The SEC staff would continue to expect that the
required measure for these entities would be a consolidated GAAP
measure, such as consolidated net income, since ASC 280 requires
disclosure of the measure closest to GAAP (i.e., the measure most
consistent with how amounts are measured in the financial
statements).
As discussed above, a public entity may voluntarily
disclose additional measures of segment profit or loss. However,
such additional measures, if not computed in accordance with GAAP,
would be considered non-GAAP measures subject to the requirements
discussed above.
Q&A 2
Question
Would the SEC staff's views on whether a
consolidated GAAP measure is the required measure to be disclosed
under ASC 280 be different if the CODM were not the CEO or CFO who
certifies the Form 10-Q or Form 10-K for an entity that is managed
on a consolidated basis?
Answer
While certification of the Form 10-Q or Form 10-K is
one of several data points indicating that the certifying officer
receives and reviews information about consolidated net income, it
is not determinative in identifying the measure used to manage an
entity with a single reportable segment on a consolidated basis. The
staff is unaware of instances in which a CODM has managed an entity
with a single reportable segment on a consolidated basis but has not
regularly reviewed a consolidated GAAP measure of profit and loss,
such as consolidated net income.
Q&A 3
Question
Could there be circumstances in which an entity is
organized as a single operating segment but is not managed on a
consolidated basis?
Answer
It depends. ASC 280-10-55-15D (added by ASU 2023-07)
explicitly addresses this question. In a manner consistent with that
guidance, an entity should first look to ASC 280-10-50-4 to
determine whether the entity is managed on a consolidated basis. The
analysis under ASC 280-10-50-4 should take into consideration how
the entity distinguishes the business activities of the single
operating segment from other activities of the entity and whether
there is evidence, beyond just the existence and use of a certain
measure of profit or loss, that the entity is managed on a
consolidated basis. For example, the entity might consider how
budgets are prepared, resources are allocated, and performance is
assessed.
In the SEC staff’s view, the mere exclusion of a
corporate headquarters or a certain functional department from a
measure of profit or loss reviewed by the CODM is not determinative
of whether an entity is managed on a consolidated basis. Entities
should carefully consider all relevant facts and circumstances when
reaching their conclusions and may consider discussing their
specific facts and circumstances with the staff.
Connecting the Dots
The SEC staff cautioned that entities with a
single reportable segment should work through the GAAP
framework to determine the required measure of segment
profit or loss and that the staff would expect such measure
to be consolidated net income in most cases. These entities
could voluntarily disclose non-GAAP performance measures in
addition to consolidated net income as long as they comply
with the non-GAAP SEC rules and regulations.
The evaluation of whether an entity is
managed on a consolidated basis may also be necessary in
circumstances in which the entity is aggregating multiple
operating segments into a single reportable segment.
Although our discussions with the SEC staff did not address
a fact pattern in which an entity has multiple operating
segments that are aggregated into a single reportable
segment, we believe that it may be acceptable for an entity
that aggregates multiple operating segments into a single
reportable segment to use a performance measure other than
consolidated net income. This is because ASC 280-10-50-11
permits, but does not require, an entity to aggregate
operating segments into a reportable segment if their
economic and qualitative characteristics are similar. In
other words, if an entity elected not to aggregate operating
segments, it would have multiple operating and reporting
segments and could apply the multiple-segment reporting
concepts discussed herein.
Q&A 4
Question
Is it acceptable for an entity to disclose a segment
expense that is not calculated in accordance with GAAP as a
significant segment expense category?
Answer
Yes. There is no requirement in ASC 280 for
significant segment expenses to be calculated in accordance with
GAAP. However, the SEC staff noted that other requirements may be
applicable. For example, Regulation S-X, Rule 4-01(a), states, in
part, that “[t]he information required with respect to any statement
shall be furnished as a minimum requirement to which shall be added
such further material information as is necessary to make the
required statements, in the light of the circumstances under which
they are made, not misleading.” Accordingly, if the significant
segment expense is not determined in accordance with U.S. GAAP, it
should be accompanied by narrative disclosure to ensure that it is
not misleading. The narrative disclosure could include wording on
how the significant segment expense is computed, the purpose of
applicable adjustments, and how the significant segment expense is
used.
Q&A 5
Question
Would the SEC staff object to the use of a different
measure of segment profit or loss for different reportable
segments?
Answer
No. In a manner consistent with ASC 280, if the
entity can provide evidence that it allocates resources and assesses
performance by using different measures of segment profit or loss
for different reportable segments, disclosure of different measures
of segment profit or loss for different reportable segments would be
acceptable.
Connecting the Dots
Public entities would need to comply with
the reconciliation requirements of ASC 280-10-50-30, as
amended by ASU 2023-07, for each segment measure of profit
or loss disclosed for each reportable segment.
Contacts
|
Ignacio Perez
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761 3379
|
|
Hero Alimchandani
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 202 220
2834
|
|
Tony Goncalves
Audit &
Assurance
Managing Director
Deloitte &
Touche LLP
+1 202 879 4910
|
|
Kathleen Malone
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761
3770
|
|
Christine Mazor
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 212 436
6462
|
|
Aaron Shaw
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 202 220
2122
|
|
Noemi Coronado
Audit &
Assurance
Senior Manager
Deloitte &
Touche LLP
+1 212 436
7438
|
|
Alice Ni
Audit &
Assurance
Senior Manager
Deloitte &
Touche LLP
+1 203 423
4673
|
Footnotes
1
FASB Accounting Standards Update (ASU) No. 2023-07,
Improvements to Reportable Segment Disclosures.
2
The ASC master glossary defines the term “public
entity,” which includes broker-dealers and entities that only have debt
securities trading in a public market.
3
For titles of FASB Accounting Standards
Codification (ASC) references, see Deloitte’s “Titles of Topics and
Subtopics in the FASB Accounting Standards
Codification.”
4
Reproduced from the FASB and IASB Staff Paper,
Agenda Reference AP34, “Segment Reporting: Improvements to Reportable Segment
Disclosures.”
5
See Question 104.01 of the
SEC’s Compliance and Disclosure Interpretations (C&DIs) on
non-GAAP financial measures.
6
Question 104.04 of the SEC’s
C&DIs on non-GAAP financial measures.
[7]
See the SEC
Reporting Considerations section above
for clarifications the SEC staff made at the AICPA
Conference regarding entities with a single
reportable segment.