FASB issues changes to segment reporting requirements

Sean C. Prince, Chris Behof
| 12/15/2023
FASB issues changes to segment reporting requirements

September 2024 update: Views from SEC staff

At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the Securities and Exchange Commission (SEC) staff provided remarks on the new segment standard, including:

  • While the new segment standard allows the presentation of multiple measures of segment profit or loss, measures that are presented in addition to the one measure most consistent with U.S. GAAP and that are not calculated in accordance with U.S. GAAP would be considered non-GAAP.
  • Consolidated net income is the measure of segment profit or loss required to be disclosed for an entity with a single reportable segment when the entity is managed on a consolidated basis (that is, the entity has a single operating segment).

As stakeholders continued adoption efforts, implementation questions arose about topics addressed in the original article below. In recent discussions, the SEC staff provided certain clarifications:

Non-GAAP measures

  • While Item 10(e) of Regulation S-K generally prohibits presentation of non-GAAP measures on the face of the financial statements or in the accompanying notes, the staff will not object if an entity includes in its segment footnote additional measures of profit or loss that are not calculated in accordance with GAAP provided the entity fully complies with the non-GAAP rules in Item 10(e), Regulation G, and Accounting Standards Codification (ASC) 280.
  • The additional non-GAAP disclosures required by Item 10(e) and Regulation G can be provided in the financial statement footnotes or elsewhere in the filing (for example, in management’s discussion and analysis); however, there should not be a cross-reference in the financial statement footnotes to elsewhere in the filing.

Single reportable segment entities managed on a consolidated basis

  • The staff expects that a single-segment entity will present consolidated net income as its required measure of segment profit or loss, but the entity is permitted to present additional measures that are not consolidated net income.
  • The staff expects that a single-segment entity whose chief operating decision-maker (CODM) is not one of the Form 10-K or Form 10-Q certifying officers (CEO or CFO) will still conclude consolidated net income is the measure of segment profit or loss required to be disclosed.
  • The new segment standard contemplates situations where a single-segment entity is not managed on a consolidated basis (for example, ASC 280-10-55-15D); however, the staff believes the mere exclusion of a corporate headquarters or a functional department from a measure of profit or loss reviewed by the CODM is not determinative, and the entity must carefully evaluate ASC 280-10-50-4.

Other SEC staff observations

Though not directly related to their conference remarks, the staff provided additional thoughts including:

  • ASC 280 does not require significant segment expenses to be calculated in accordance with GAAP. Other SEC rules and regulations might require additional disclosures to provide further context (for example, Rule 4-01(a) of Regulation S-X).
  • An entity can disclose different measures of segment profit or loss for different reportable segments as long as the CODM uses the measures to allocate resources and assess performance.

Public entities should take note of a new FASB ASU that changes segment reporting requirements.

Note to readers

This Take Into Account article was updated on Dec. 15, 2023, to incorporate views expressed by the Securities and Exchange Commission (SEC) staff during the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments.

In under a minute

On Nov. 27, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis.

The final ASU enacts the following notable changes:

  • Public entities are required to disclose significant expense categories and amounts for each reportable segment. Significant expense categories are derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker (CODM) and 2) included in a segment’s reported measures of profit or loss.
  • Public entities must disclose an amount for “other segment items,” representing the difference between 1) segment revenue less significant segment expenses and 2) the reportable segment’s profit or loss measures. A description of the composition of “other segment items” also is required.
  • Public entities are required to disclose the title and position of the CODM and explain how the CODM uses the reported measures of profit or loss to assess segment performance.
  • The ASU requires interim disclosure of certain segment-related disclosures that previously were required only on an annual basis.
  • The ASU clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements under Topic 280. It also clarifies that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met.

The ASU is effective for fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024. Entities must adopt the changes to the segment reporting guidance on a retrospective basis. Early adoption is permitted.

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Breaking it down

Significant expense information

The new ASU requires public entities to disclose significant expense categories and amounts for each reportable segment on both an interim and annual basis. When identifying significant expenses, entities should draw from the population of expenses that meet both of the following criteria:

  • The expense is regularly reported to the entity’s CODM.
  • The expense is included in a reported measure of segment profit or loss.

The guidance specifically notes that allocated corporate overhead expenses could be considered a significant expense category if both criteria are met.

Crowe observation: While the updated guidance calls for a significant segment expense category to meet these two criteria at minimum, it does not provide extensive guidance on how to determine whether a qualifying expense category is significant. However, it does note entities must consider “relevant qualitative and quantitative factors when [assessing significance].”

Crowe observation: At times, an entity’s CODM might not be provided direct information about a segment’s expenses. For example, expense information might be provided to the CODM as a percentage of segment revenues. Per the updated guidance, the disclosure requirement extends to significant expense categories and amounts that are “easily computable” from management reports. On the other hand, if application of the significant expense principle would result in no significant expense categories and amounts being disclosed, an entity must disclose the nature of the expense information the CODM uses to manage operations (for example, forecasted or budgeted expense information).

Other segment items

Public entities must disclose an amount for “other segment items,” determined as follows:

Other segment items = reported segment revenues - significant segment expenses disclosed - reported segment measure of profit or loss

In addition to reporting the amount, public entities also must disclose a description of the composition of other segment items, which could include the remaining expenses included in the segment measure of profit or loss that are not determined to constitute a significant expense category, and any gains or losses included in the measure.

Recasting information from prior periods

Prior-period segment expense categories must be recast in the current period to conform to current-period expense categories under either of the following circumstances:

  • When there is a change in the composition of the entity’s reportable segments in the current period
  • When an entity changes the expense categories in its CODM management reports

In contrast, a public entity is not required to recast prior-period segment expense information in the current period because of changes in measurement methods (for example, a change in expense allocation methodologies). However, the guidance suggests it would be preferable for an entity to do so.

Changes and clarifications to existing segment reporting requirements

The ASU enacts several changes to certain existing disclosure requirements. For example, public entities now must disclose the information required by ASC 280-10-50-22 and ASC 280-10-50-25 on both an interim and annual basis. Previously, these disclosures were required only annually. Public entities also must disclose the title and position of the CODM and describe how the CODM uses the reported measure of segment profit or loss to assess segment performance and allocate resources.

The ASU also clarifies that the Topic 280 disclosure requirements – both new and existing – apply to entities that have only a single reportable segment. The update includes implementation guidance on the disclosed measure of profit or loss for such entities.

Finally, the ASU clarifies that a public entity may disclose multiple measures of a segment’s profit or loss as long as at least one of the disclosed measures is the measure management believes is most consistent with the principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. The clarification represents a change in practice, as previous guidance neither explicitly permitted nor forbade the disclosure of multiple measures of performance.

Crowe observation: If a public entity presents multiple measures of a segment’s profit or loss, the significant expense principle introduced by the ASU would need to be applied to all measures presented.

Crowe observation: At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC staff members discussed their views on an entity with a single reportable segment and an entity that presents multiple segment profit or loss measures.

Single reportable segment: The staff believes that consolidated net income is the measure of segment profit or loss required to be disclosed for an entity with a single reportable segment when the entity is managed on a consolidated basis (that is, the entity has a single operating segment). An entity with a single reportable segment can disclose additional measures in accordance with the ASU.

Multiple segment profit or loss measures: Segment profit or loss measures that are presented in addition to the one measure most consistent with U.S. GAAP and that are not calculated in accordance with U.S. GAAP would be considered non-GAAP. For example, if an entity’s CODM uses segment net income and segment-adjusted EBITDA to allocate resources and assess performance, the entity must disclose segment net income as its measure of segment profit or loss, but it also can disclose segment-adjusted EBITDA as an additional measure. In this fact pattern, the staff believes segment-adjusted EBITDA is a non-GAAP measure. Therefore, registrants need to consider non-GAAP disclosure rules and regulations (for example, Regulation G and Item 10(e) of Regulation S-K). A registrant considering early adoption of ASU 2023-07 that plans to present additional measures not calculated consistent with U.S. GAAP in segment disclosures should consider consulting with the Division of Corporation Finance.

Transition and effective date

The ASU is effective for fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024. Early adoption is permitted.

Public entities are required to adopt the changes retrospectively, recasting each prior-period disclosure for which a comparative income statement is presented in the period of adoption. To do so, an entity first would apply the significance principle to identify significant segment expense categories and amounts for the current period (that is, in the period of adoption). These significant expense categories then must be disclosed for each comparative period presented.

Crowe observation: Public entities should consider whether the expanded requirements of the new ASU will necessitate changes to their internal control environment, including disclosure controls and procedures. For example, public entities likely will need to establish additional controls and procedures for the identification and disclosure of significant segment expenses. Given the likely role of judgment in determining significance, management also might need to evaluate and document policies for determining significant segment expense categories.

Other changes promulgated by the ASU also could necessitate enhancements to controls and procedures. For example, a public entity that consists of a single reportable segment that historically has not provided detailed segment reporting disclosures likely will need to enhance its existing financial reporting controls to comply with these requirements. Additionally, the shift from annual-only disclosures to quarterly disclosures could affect the frequency and precision at which controls operate.

FASB materials reprinted with permission. Copyright 2024 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.

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Sean Prince
Sean C. Prince
Partner, National Office
Chris Behof
Chris Behof
Senior Manager, Accounting Advisory