On October 6, 2022, FASB issued an exposure draft seeking feedback on additional details and increased frequency on a public entity’s reportable segments to allow financial statement users to understand the expense categories and amounts included within segment profit or loss, including:
- Title and position of the individual or the name of the committee identified as chief operating decision maker (CODM)
- All annual disclosures about a reportable segment’s profit or loss currently required by Topic 280 would now be required in interim periods, e.g., interest revenue and expenses, depreciation, depletion, and amortization expense
- On an annual and interim basis, significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss (details below)
- On an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition (details below)
- A public entity with a single reportable segment would be required to provide all the proposed disclosures and all existing segment disclosures in Topic 280 (details below)
- Clarify that if the CODM uses more than one measure of a segment’s profit or loss, at least one of the reported segment profit or loss measures should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements (details below)
The proposal would not change how an entity identifies or aggregates its operating segments or applies the quantitative thresholds to determine its reportable segments.
Comments are requested by December 20, 2022.
Background & Current Guidance
Investors have long requested greater details on segment reporting. Analysts complained about over-aggregation, which reduces transparency about the mix and quality of business performance.
Segment reporting guidance was last updated in 1997 with the creation of Topic 280, which covers annual and interim operating segment information in financial statements prepared using “the management approach,” i.e., the way that management internally organizes segments when allocating resources and assessing performance. An entity is first required to identify its operating segments based on the CODM perspective. Guidance allows—but does not require—aggregation of operating segments if certain criteria are met. The operating segments, including those that have been aggregated, are then evaluated against quantitative thresholds to determine an entity’s reportable segments.
Current guidance requires that a public entity disclose a measure of profit or loss and a measure of total assets for each reportable segment unless the entity explains the reason for not disclosing a measure of total assets. The reported measures should be those that the CODM uses to make decisions about allocating resources to the segment and assessing its performance. Certain other specified segment items and amounts also are required to be disclosed if those items are included in the reported measures of segment profit or loss and total assets or if they otherwise are regularly provided to the CODM. The guidance also requires that an entity disclose a reconciliation between the total of certain reported segment amounts and the public entity’s corresponding consolidated amounts.
Significant Expense Principle
A public entity would be required to disclose for each reportable segment the significant expense categories and amounts that are regularly provided to the CODM and included in each reported measure of a segment’s profit or loss. When making this determination, a public entity would identify the expenses from the segment level information that is regularly provided to the CODM and then disclose those segment expense categories and amounts that are significant. Regularly provided is not defined and management judgment will be required. An entity also would evaluate for disclosure a segment expense that is easily computable from information that is regularly provided to the CODM. The information that is regularly provided to the CODM may include segment expense information that is expressed in a form other than actual amounts, e.g., a ratio or an expense as a percentage of revenue. The proposal includes two examples:
- If the information that is regularly provided to the CODM includes a segment revenue amount and a segment gross margin amount, segment cost of sales can be easily computed. Therefore, if cost of sales is significant, an entity should disclose the category and amount.
- The information that is regularly provided to the CODM may include a segment revenue amount and segment warranty expense expressed as a percentage of segment revenue. Because segment warranty expense can be easily computed, if warranty expense is significant, the entity should disclose the category and amount.
Other Segment Items
An amount for other segment items would be disclosed for each reportable segment, which would be the difference between reported segment revenues less the significant segment expenses disclosed and reported segment profit or loss. A qualitative description of the composition of other segment items must be disclosed. Other segment items may include:
- The total 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 of a reportable segment’s expenses that are included in the reported measure(s) of a segment’s profit or loss but are not disclosed under the significant expense principle. An entity is not precluded from separately disclosing an expense that is not significant for one reportable segment but is significant for another of its segments. However, if a segment expense that is not significant is not separately disclosed, it would be included as part of other segment items
- The total 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
The amount and qualitative description are required even when a public entity does not separately report significant segment expense categories and amounts for each reportable segment. If a public entity does not disclose significant expense categories and amounts for one or more of its reportable segments, it must explain the nature of the expense information the CODM uses to manage operations. For example, the public entity may explain that the CODM is regularly provided with only budgeted or forecasted segment expense information or uses consolidated expense information. This would not be required if significant expense categories and amounts are disclosed for a reportable segment.
The proposal does not require a reconciliation of the total of the reportable segments’ significant segment expenses to the consolidated amount or a reconciliation of the significant expense categories to the consolidated income statement line items.
Single Reportable Segment Entities
Roughly 33% of public entities have a single reportable segment. Topic 280 currently requires that these entities apply the entitywide disclosures of financial and other qualitative information categorized based on products and services, geographic areas, and customers, if not already provided elsewhere in the segment disclosures. Existing guidance is silent about whether those entities should apply the existing segment disclosures and reconciliation requirements on an annual or interim basis. FASB concluded this proposal should apply to all public entities, which would discourage entities from aggregating operating segments into a single reporting segment to avoid certain disclosures. A single reportable segment entity would disclose a measure of segment profit or loss that the CODM uses to allocate resources and assess performance, which may be different from the profit or loss measure(s) presented on a public entity’s consolidated income statement.
Measurement
If the CODM uses only one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, segment profit or loss would be reported at that measure. If the CODM uses more than one measure of a segment’s profit or loss, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) would be that which management believes is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the public entity’s consolidated financial statements.
The existing profit or loss disclosure requirements and the proposed disclosures about significant expenses and other segment items would apply to each reported measure of a segment’s profit or loss. The reconciliation of the total of the reportable segments’ measure of profit of loss to consolidated income before income taxes and discontinued operations applies to the total of the reportable segments’ amount for each measure of profit or loss.
Recasting Prior Periods
Prior-period information should be recast to conform with current-period presentation in the following cases, if practicable:
- If an entity changes its internal structure so that its reportable segments change
- If an entity changes the segment information that is regularly provided to the CODM that results in a change to the identification of significant segment expenses
Following a change in the composition of its reportable segments, a public entity shall disclose whether it has recast earlier periods.
Recasting prior-period information is not required for a change in measurement methods used to determine reported segment profit or loss.
Public entities also would be required to disclose the nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss, including significant changes from prior periods to the measurement methods of expenses, the method for allocating expenses to a segment, or changes in the policies for allocating centrally incurred expenses, and the effect, if any, of those changes on the measure of segment profit or loss.
Transition & Effective Date
If approved, the changes would be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods would be based on the significant segment expense categories identified and disclosed in the period of adoption. In the period of adoption, a public entity would qualitatively disclose changes in the significant expense categories that are regularly provided to the CODM and included in reported segment profit or loss compared with the most recent comparative period presented in the financial statements.
FASB will determine the effective date after a review of comment letter feedback.
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