Breaking it down
Significant expense information
On Oct. 6, 2022, the FASB issued Proposed Accounting Standards Update (ASU), “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which would amend Accounting Standards Codification (ASC) Topic 280, “Segment Reporting,” to require public entities to disclose significant expense categories and amounts for each reportable segment on both an interim and annual basis. While the proposal does not provide a basis for assessing the significance of segment-level expenses, it does explain that significant expenses would be drawn 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.
Crowe observation: The proposal does not provide a basis for assessing the significance of segment expenses; however, the concept of significance is applied elsewhere in GAAP, including elsewhere in Topic 280 (for example, the disclosure requirement for “significant noncash items”). In its basis for conclusions, the FASB observes that when assessing significance, “entities could consider characteristics that are quantitative, qualitative, or a combination of both, depending on an entity’s facts and circumstances.”
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. The proposal explains that if significant expense categories and amounts are “easily computable” from management reports, the disclosure requirement would still apply. On the other hand, if application of the significant expense principle would result in no significant expense categories and amounts being disclosed, the proposal still would require entities to disclose the nature of the expense information the CODM uses to manage operations (for example, forecasted or budgeted expense information).
Public entities also would be required to disclose an amount for “other segment items,” determined as follows:
Reported segment revenues - significant segment expenses disclosed - reported segment
measure of profit or loss = other segment items
In addition to reporting the amount of other segment items, public entities would have to 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 and any gains or losses included in the measure.
The proposal explains that in the following two circumstances, prior-period segment expense categories would be recast in the current period to conform to current-period expense categories:
- When an entity has new reportable segments in the current period
- When an entity changes the expense categories in its CODM management reports
In contrast, a public entity would not be required to recast prior-period segment expense information in the current period as a result of changes in measurement methods (for example, a change in expense allocation methodologies). However, the proposal suggests it would be preferable for an entity to do so.
Changes and clarifications to existing segment reporting requirements
The proposal also would affect certain existing disclosure requirements. For example, the proposal would require public entities to disclose the information required by ASC 280-10-50-22 and ASC 280-10-50-25 on both an interim and annual basis. Currently, these disclosures are required only annually. Public entities also would be required to disclose the title and position of the CODM.
The proposal would clarify that a public entity is permitted to disclose multiple measures of a segment’s profit or loss as long as at least one of the disclosed measures meets the guidance in ASC 280-10-50-28 – that is, the measure management believes is determined most consistent with those principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. Currently, diversity in opinion exists as to whether public entities are permitted to disclose multiple measures of progress under Topic 280.
Crowe observation: If a public entity presents multiple measures of a segment’s profit or loss, the significant expense principle introduced under the proposal would need to be applied to all measures presented.
Finally, the proposal would clarify that the Topic 280 disclosure requirements apply to entities that have only a single reportable segment.
Transition and effective date
Public entities would be required to adopt the changes retrospectively for each comparative period during which an income statement is presented. To do so, an entity first would apply the significance principle to identify significant segment expense categories and amounts for the current period presented (that is, in the period of adoption). The entity then would disclose the comparative period amounts for those same categories. Finally, an entity would be required to disclose at transition qualitative information about changes to the segment expense categories reported to the CODM that occurred between the date of adoption and any comparative periods presented.
The proposal does not establish an effective date; rather, it includes a question for constituents to understand the expected effort of applying the proposed guidance. Comments on the proposal are due by Dec. 20, 2022.
