Additionally, the ASU also requires:
- All annual disclosures about reportable segment’s P&L and assets be made in interim periods, except for entity-wide disclosures and reconciliation of segment balance sheet amounts.
- Recasting of comparative information (including interim periods), when practical, if changes are made in current period to the information provided to CODM which causes a change in the identification of ‘significant segment expenses’.
- Entities which do not recast comparative information for changes made in the current period to either the method of expense measurement or the method of expense allocation between segments, including centrally incurred expenses, to disclose the nature of change in the measurement method.
The ASU applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.
Key considerations under new guidance
Use of multiple measures
CODM’s use of multiple measures of segment P&L
Guidance in the ASU
- If the CODM uses multiple measures of a segment’s P&L (e.g., operating income and operating income less allocated corporate overheads), entities are now allowed the choice to disclose additional measures in the F-pages as long as one of the disclosed measures is consistent with a GAAP measure.
- Entities electing to disclose multiple measures in the current period will need to disclose such additional measures for the comparative prior periods if it was provided to the CODM.
- Even if the CODM was not provided such additional measure in the prior periods, entities are not precluded from disclosing the additional measures for the comparative periods.
- For each reported measure, disclosure of expenses resulting from application of the Significant Segment Expense principle is required.
- Do entities have a free choice to report ‘any’ additional measure (including non-GAAP) in the F-pages upon adoption of the ASU?
- How should an entity with single reportable segment identify the measure most consistent with GAAP?
- Are all entities required to provide a narrative explanation for how CODM uses the report single or multiple measure(s) in decision making?
Given the apparent disconnect between the guidance in the ASU and the SEC rules in electing non-GAAP measures as an additional measure of segment P&L, we recommend entities to consult with financial accounting experts and consider initiating SEC preclearance. Further, entities with single reportable segments are likely to experience increased scrutiny by the SEC staff in evaluating compliance with Topic 280.
Significant Segment Expenses Principle
The ASU creates a new principle termed ‘Significant Expense Principle’. As per this principle, entities will need to disclose significant segment expense categories and amounts that are regularly provided to the CODM and included within each reported measure(s) of segment P&L for each of its reportable segments. In the below table, we have summarized the application guidance for this principle:
Example : Disclosure of Significant Segment Expenses and Other Segment Items
- ABC Inc. has identified the two reportable segments: Metal products and Paper products. 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 Metal products and Paper products 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 Metal products and Paper products.
- 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), separate disclosure for this item is required. In contrast, Bad-debt expenses despite being easily computable, would be aggregated as part of the “other segment items” caption because ABC Inc. has concluded that it is not significant.
ABC Inc. will have to disclose a qualitative description expense items which make up the “other segment items” category in the segment note, 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.
- Is an entity required to apply the Significant Expense principle for each reported measure(s) of segment P&L?
- How is significance assessed in the application of the Significant Expense principle?
Example: Significant Expense principle for each reported measure(s) of segment P&L
- PQR Inc. has identified the three reportable segments: Metal products,Paper products and Wooden products.
- The CODM uses segment earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and “Net lncome” to assess segment performance and allocate resources for Metal products and Paper products segment.
- Cost of sales and warranty expenses for Metal products and Paper products 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 Metal products and Paper products.
- Bad-debt expenses and marketing expenses are both considered easily computable; however, only marketing expenses are considered significant.
- Application of the ASU would require the Company to apply the Significant Expense principle for both the ‘EBIDTA’ and ’net income’ measures for each of the two reportable segments Metal products and Paper products
Other application matters
- Recasting prior periods
Topic 280 requires that an entity should recast (previously referred to as restatement) priorperiod segment information that is presented in the current-period financial statements on an annual and interim basis when there is a change in the composition of an entity’s reportable segments, unless doing so is impracticable. Amendment in ASU prescribes that the recasting requirements shall also apply to segment expense categories disclosed under the significant expense principle. In other words, if in the current period, the entity changes its internal reports and the segment expense information that is regularly provided to the CODM, an entity shall recast the significant segment expense categories and amounts reported in prior periods to confirm with the segment expense categories in the current period, unless it is impracticable. If the prior period segment information is not recast, a public entity should disclose segment information for the current period under both the old and the new significant expense categories.
- Effective date and transition
The amendments in ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. • A public entity should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements unless it is impracticable to do so. • The segment expense categories disclosed in comparative periods would be those that correspond to the segment expense categories disclosed as a result of applying the significant expense principle in the period of adoption, regardless of whether those segment expense categories were significant or regularly provided to the CODM in the comparative periods.
Comparison to IFRS
Majority of the underlying concepts and the primary principles of using “management approach” in the identification of an entity’s operating segments and in the application of the quantitative thresholds to determine an entity’s reportable segments are substantially converged between Topic 280 and IFRS 8, Operating Segments. However, there exists some minor differences between the two accounting frameworks, for e.g., IFRS 8 requires that an entity disclose a measure of segment liabilities if those amounts are regularly reported to the CODM; Topic 280 does not.
In Para BC87 of the ASU’s Basis of Conclusion, the Board indicates that the improvements introduced in the ASU is responsive to the feedback received from stakeholders while maintaining convergence on the management approach to segment reporting which is likely an indication that there will be no change to the IFRS, as issued by IASB, standards.
This is further supported by IFRS Interpretations Committee (IFRIC)’s recent tentative decisions in November 2023 where IFRIC received a request about Disclosure of Revenues and Expenses for Reportable Segments (Agenda Paper 4). The questions raised to IFRIC was specifically related to disclosure requirements for ‘specified amounts’ included in segment profit or loss reviewed by the CODM for each reportable segment and the meaning of ‘material items of income and expense’ in the context of applying Para 23(f) of IFRS 8. IFRIC reached a tentative conclusion on this matter that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to apply the disclosure requirements in paragraph 23 of IFRS 8. Consequently, the IFRIC decided not to add a standard-setting project to its work plan.
This decision is open for comment until February 5, 2024.
For more information on amendment in ASU, see the press release on the FASB’s Web site.
