On the Radar
Segment Reporting
Investors place a high value on segment reporting because it allows them to
understand the performance of different parts of a company’s operations. ASC 280
gives public companies a framework for providing segment disclosures and prescribes
a “management approach” for identifying operating segments. Such approach focuses on
how management has organized the entity to make operating decisions and assess
performance. Its objective 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.
Adoption of Recent Updates to Segment Reporting
In November 2023, the FASB issued ASU 2023-07 to
improve the information that a public entity discloses about its reportable
segments and to address investor requests for additional disclosures about
segment expenses. The ASU does not change existing guidance on the
identification of operating segments, the manner of determining reportable
segments, or the aggregation criteria. Rather, it adds disclosure requirements
that also apply to entities with a single reportable segment, not just those
with multiple reportable segments.
ASU 2023-07 introduces the significant expense principle, which
requires an entity to provide additional disclosure of segment expenses. It also
enhances interim disclosure requirements, clarifies the circumstances in which
an entity can disclose multiple segment measures of profit or loss, and adds
certain other new disclosure requirements.
The ASU became 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 [December 31, 2024, for
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 [the first quarter of 2025 for Form 10-Q]). The enhanced
segment disclosure requirements apply retrospectively to all prior periods
presented in the financial statements.
Calendar-year-end public companies were required to adopt the
ASU’s changes in their 2024 Form 10-K filings. We examined the ASU’s adoption by
Fortune 500 companies that filed their financial statements as of March 3, 2025,
and whose fiscal years began on or after December 15, 2023 (approximately 70
percent of the Fortune 500). As noted above, segment disclosures, including
those related to significant segment expenses, reflect how management views the
business. In the ASU’s Background Information and Basis for Conclusions, the
FASB indicates that “the significant expense principle should be based on the
substance of the segment information that is regularly provided to the CODM
rather than on its form.” Companies have had to apply judgment and consider both
quantitative and qualitative factors when assessing their significant segment
expenses. Such disclosures are therefore based on a company’s unique facts and
circumstances and vary widely among registrants, even those in similar
industries. Not surprisingly, companies’ disclosures have differed in both the
number of significant segment expenses identified and the nature of those
expenses.
The ASU requires an entity to disclose the title and position of the chief
operating decision maker (CODM) along with an explanation of how the CODM uses
the reported segment measure(s). About 86 percent of Fortune 500 filers
indicated that the CODM is the chief executive officer. Companies most
frequently cited “budget to actual variance analyses” when describing how the
CODM uses the measure of performance to allocate resources and make decisions.
Disclosures also noted the CODM’s use of the measure of performance in
forecasting, developing the annual plan, and determining management’s
compensation and incentives.
ASU 2023-07 also permits, but does not require, companies to 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. About 7 percent of Fortune 500
filers disclosed a voluntary additional measure of segment performance that was
also consistent with GAAP (e.g., segment operating income and segment net
income), with 1 percent disclosing a voluntary additional measure of performance
that was a non-GAAP measure (e.g., segment-adjusted operating income and segment
earnings before interest, taxes, depreciation, and amortization [EBITDA]).
The SEC staff has indicated that it would not object if a
registrant voluntarily included, in the segment footnote, additional non-GAAP
performance measures that it discloses in accordance with the ASU. However, any
additional non-GAAP measures of segment profit or loss must meet the
presentation and disclosure requirements of Regulation G and Regulation S-K,
Item 10(e) (collectively, the “SEC's non-GAAP rules”). Such non-GAAP disclosures
may be provided outside the financial statements (e.g., in MD&A). The SEC
has observed that adjustments that render a non-GAAP measure of segment
profitability misleading are inconsistent with Regulation G. A registrant would
use the same SEC guidance it applies to other non-GAAP measures that are used
outside the financial statements (e.g., MD&A, press releases), including the
Compliance and
Disclosure Interpretations (C&DIs) on misleading
measures, to evaluate voluntary additional non-GAAP measures of segment profit
or loss (see Chapter
4 of Deloitte’s Roadmap Non-GAAP Financial Measures and
Metrics for more information).
The SEC staff has also emphasized its expectation that an entity with one
reportable segment whose CODM evaluates the business and makes capital
allocation decisions on a consolidated basis would conclude that consolidated
net income is the measure most consistent with GAAP and is therefore the
required measure (of segment profit or loss).
Registrants are encouraged to consult with their auditors and SEC counsel if they
(1) intend to disclose voluntary additional measures that are not consistent
with GAAP or (2) have a single reportable segment and management concludes that
it does not manage the entity on the basis of a consolidated GAAP measure of
segment profit or loss (e.g., consolidated net income).
Segment reporting remains a significant source of SEC comments, and the SEC staff
has indicated that it is focusing on registrants’ compliance with the ASU’s
disclosure requirements. In addition, recent SEC staff comments have
specifically addressed (1) the identification and aggregation of operating
segments, (2) changes in reportable segments, (3) reporting considerations for
entities with a single reportable segment, (4) entity-wide disclosures, and (5)
the use of multiple measures of segment performance.
Overview of Segment Reporting Framework and Objectives
ASC 280-10-10-1 states that the objective of segment
reporting “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 to help users of financial statements do
all of the following:
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Better understand the public entity’s performance
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Better assess its prospects for future net cash flows
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Make more informed judgments about the public entity as a whole.”
In applying the segment
reporting guidance in ASC 280, an entity should perform each of the
following key steps:
An entity’s first step is to identify its operating
segments. It performs such identification by using the management approach.
As indicated in ASC 280-10-50-1, “[a]n operating segment is a component of a
public entity that has all of the following characteristics:
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It engages in business activities from which it may recognize revenues and incur expenses . . . .
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Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
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Its discrete financial information is available.”
An entity may need to use judgment when evaluating whether a
component has all the characteristics of an operating segment.
Once an entity has identified its operating segments, it
determines which of them to report.
Two or more operating segments may be aggregated into a
single operating segment if the following three criteria are met:
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Aggregation is consistent with the objectives and basic principles of ASC 280.
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The segments have similar economic characteristics.
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The segments are similar with respect to all of the qualitative characteristics.
An entity is not required to aggregate operating segments.
Because ASC 280 does not define the term “similar” or provide extensive
guidance on the aggregation criteria, the determination that two or more
operating segments are similar depends on facts and circumstances and is
subject to judgment.
Once an entity determines which of its operating segments
may be aggregated, it must apply the quantitative threshold guidance (i.e.,
the 10 percent tests that are based on revenue, profit or loss, and assets)
in ASC 280 to determine which segments to report separately. An operating
segment needs to meet only one of the 10 percent tests in ASC 280 to be a
reportable segment, although it may meet more than one.
After identifying which operating segments meet the
quantitative threshold requirements or are otherwise qualitatively material
and must be reported separately, the entity can apply the guidance in ASC
280-10-50-13, which permits the combination of any remaining segments to
produce a reportable segment if all of the following criteria are met:
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Aggregation is consistent with the objectives and principles of ASC 280.
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The segments have similar economic characteristics.
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The segments share a majority of qualitative aggregation criteria outlined in ASC 280.
An entity is not required to aggregate operating segments
and is encouraged to consider whether to separately report information on
them irrespective of whether the segments meet the quantitative requirements
for separate disclosure. The total external revenue disclosed by the
reportable segments should constitute greater than 75 percent of total
consolidated revenue.
Because aggregation is a high hurdle, 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.
After an entity has identified its reportable segments, it
must provide the following types of quantitative and qualitative disclosures
for each of them, generally for each period presented:
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General information.
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Information about segment profit or loss and assets.
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Reconciliations to consolidated amounts.
Entities are required to disclose information about products
and services, geographical operations, and major customers on an entity-wide
basis regardless of how the entity is organized.
These disclosures are intended to ensure some level of
comparability across entities, irrespective of how the entities are managed
or resources are allocated. Accordingly, an entity should carefully consider
the objectives and principles of ASC 280 when evaluating the disclosure
requirements.
SEC Reporting Considerations
An SEC registrant’s reportable segment determination 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 the 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, 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 will often provide disclosures that are
consistent with those of its reportable segments. A registrant should also be
mindful of the SEC’s guidance on the reporting implications of retrospective changes
in reportable segments and changes in significant segment expenses.
For a comprehensive discussion of the requirements in ASC 280
related to identifying and disclosing operating segments,
see Deloitte's Roadmap Segment Reporting.
Contacts
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Christine Mazor
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 212 436
6462
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For information about Deloitte’s offerings
related to segment reporting, please contact:
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Will Braeutigam
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 713 982 3436
|
 |
Jonathan Tambourine
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 203 423
4663
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