Purpose
Entity segment information is critical for investors, lenders, creditors, and others (collectively “investors”) in understanding the entity’s different business activities. The segment information enables investors to better understand an entity’s overall performance, assists in assessing potential future cash flows, and makes judgments about the entity as a whole. Entities usually split their operations into segments by business line or geography and disclose a measure of their profits or losses by operating segment in financial statements.
This publication provides an overview of the key accounting considerations and implementation matters relating to ASC 280 (Segment Reporting). The technical views and accounting positions on the framework keep enhancing.
Background
Segment reporting remains an important element of financial reporting for public entities. The fundamental principle of Topic 280, Segment Reporting, is that a company’s segment disclosures should be consistent with management’s reporting structure. The primary objective is to enable users of financial statements to see an entity’s business performance through the eyes of management.
Segment disclosure made by public entities has also been one of the key focus areas in SEC reviews, which includes determining how entities identify and aggregate operating segments and whether entities have inappropriately included Non-GAAP measures in their segment disclosures. Public entities are encouraged to evaluate their segment reporting practices and maintain consistency in the entity’s management reporting structure and segment disclosures.
FASB, in its continuous efforts to improve the disclosure requirements for segment reporting of public entities, issued ASU 2023-07 to Topic 280 in November 2023. To improve disclosures and to address requests from investors for more detailed information about each reportable segment’s expenses, the amendment requires public entities to disclose incremental information about significant segment expenses and other segment items that are regularly provided to the chief operating decision maker and included in reported segment profit or loss. Further, the update requires all segment reporting information to be provided for an interim period.
Summary of Topic
Scope and Scope Exceptions
The segment reporting requirements apply only to public entities1. Entities other than public entities are not required but are encouraged to provide the segment reporting disclosures.
1. Scope exceptions
2. Flow diagram summarizing the steps for Identification of, “Reportable Segments”
3. Identification of Operating segment and CODM
A. Engagement in business activities
B. Operating results are regularly reviewed by CODM
C. Discrete financial information is available
4. Aggregate operating segments, into reportable segments
5. Identifying reportable segments based on quantitative threshold test
Step 01: 10% Threshhold test
Step 02: Combination of operating segments that do not meet quantitative thresholds
Step 03: 75% of consolidated revenue test
6. Segment disclosure
7. Entity-wide disclosures
8. Interim disclosure requirements
9. Amendment to ASC 280 (ASU 2023-07)
Key challenges in Segment Reporting requirements- Uniqus Perspective
1. Lack of clear definition for CODM
ASC 280 describes CODM as the function responsible for allocating resources and assessing segment performance but provides minimal guidance on specific titles or criteria for identification. This ambiguity may result in subjectivity and inconsistency in CODM identification across companies.
2. Identifying CODM in complex organizational structures
n contemporary organizational structures, roles and responsibilities often overlap or are shared across multiple individuals. Identifying the true decision-maker responsible for segments, particularly in decentralized organizations, becomes intricate.
3. Identifying operating segments in case of diversified operations
Companies engaged in diverse business activities may find it challenging to define clear and distinct operating segments. Determining whether certain activities qualify as separate segments or are integrated into a broader segment can be subjective and complex.
4. Aggregating operating segments
Paragraph 280-10-50-11 states that operating segments are considered similar if they have the same future prospects. Therefore, if the economic characteristics and the aggregation criteria are met, then the segments may be aggregated. However, judgment is required in each case. The SEC frequently investigates segment performance, seeking a detailed analysis spanning 3-5 years (including the current interim period) of segment revenue and profit trends (e.g., gross, operating profit). SEC focuses on evidencing similar economic traits of aggregated segments. The SEC might request data like profitability projections, forecasts, and long-range plans when assessing economic similarity
5. Allocating shared costs among segments accurately
Shared costs, such as administrative expenses or corporate overhead, need to be allocated to individual segments based on reasonable and consistent allocation methodologies. Establish clear allocation methodologies based on objective criteria, such as resource usage, benefits received, or market prices. Regularly review and update allocation methods to ensure they reflect changes in business operations and remain consistent with segment performance.
6. Entity-wide disclosures
As per the guidance, the reporting entity is required to provide information on Entity-wide disclosure geography wise based on materiality. In the absence of explicit guidance on materiality, assessing what is material is a matter of judgment. Drawing reference to the 10% test criteria for reporting entity if an individual country has external revenues or long-lived assets that represent more than 10% of the consolidated totals, the presumption is that the country is material and should be disclosed separately.
Comparison with IFRS
Both ASC 280, Segment Reporting under USGAAP, and IFRS 8, Operating Segments under IFRS, provide guidance on the Segment reporting requirements. While there are similarities between segment reporting requirements under two GAAPs, wherein the key principle for segment reporting is based on information reported to the chief operating decision maker (CODM), the table in the PDF summarizes some of the Key differences
