Mind the Non-GAAP: SEC Staff Clarifies Considerations Related to Segment Disclosures Under ASU 2023-07
Background
In November 2023, the FASB issued ASU 2023-07,1 which amends ASC 2802 to improve the information that a public entity3 discloses about its reportable segments and to address investor requests
for more information about reportable segment expenses by requiring incremental
disclosures for segment reporting. The ASU’s amendments 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. See Deloitte’s Roadmap Segment Reporting for a more
comprehensive overview of the ASU.
Questions regarding the implementation of ASU 2023-07 have
emerged, in part, because of public comments made by the SEC staff. This
publication provides insights into some of these questions based on recent
discussions with the SEC staff.
Multiple Measures of a Segment’s Profit or Loss — Non-GAAP Considerations
The ASU permits, but does not require, the disclosure of more
than one measure of performance used by the chief operating decision maker
(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 Compliance and Disclosure Interpretations (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
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Ignacio Perez
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761
3379
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Pat Gilmore
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 410 843
3242
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Tony Goncalves
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 202 879
4910
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Kathleen Malone
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761 3770
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John Wilde
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 415 783
6613
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Alice Ni
Audit &
Assurance
Senior Manager
Deloitte &
Touche LLP
+1 203 423
4673
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Footnotes
1
FASB Accounting Standards Update (ASU) No. 2023-07,
Improvements to Reportable Segment Disclosures.
2
For titles of FASB Accounting Standards
Codification (ASC) references, see Deloitte’s “Titles of Topics and
Subtopics in the FASB Accounting Standards
Codification.”
3
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.