What is it, why is it important and what are the additional disclosure enhancements taking effect in 2024?

In this age of combining multiple businesses in different industries into one corporate conglomerate, accountants are especially challenged to convey meaningful financial information to investors, creditors, analysts and other users of financial statements. With that objective in mind, the accounting profession many years ago introduced the concept of segment reporting, which breaks down a company’s financial data into smaller, distinguishable units called segments. These segments are typically divisions or departments within the organization that can be reported separately, providing detailed insights into their revenue, expenses and profitability.

The major objective of segment reporting is to provide information that helps users of financial statements better understand the enterprise’s performance and different types of business activities. It provides insight into how the company is managed and allows users to take a more stratified approach to assess company performance and understand what drives results.

Accounting Standard

Segment reporting guidance has been around for decades and had last been updated in 1997. The current guidance governing segment reporting under generally accepted accounting principles (GAAP) is currently invoked by Accounting Standards Update (ASU) Topic 280. It 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 doing so. The reported measure(s) should be those that the chief operating decision maker (CODM) uses to make decisions about allocating resources to the segment and assessing its performance. Additionally, it requires other specified segment items and amounts to be disclosed under certain circumstances. Segment reporting is required for public companies but not for private entities.

Responding to Concerns

Incidental to the standard-setting process at the Financial Accounting Standards Board (FASB) is continuous interaction with the financial community for dialogue and feedback. Users of financial statements expressed concern that although information about a segment’s revenue and measure of profit or loss was disclosed in an entity’s financial statements, there generally was limited information disclosed about a segment’s expenses.

A disclosure enhancement project was initiated in 2018 in response to calls from investors for greater transparency about business unit financial performance and operations. The comments strongly suggested the need for better information about a company’s business unit costs and insight into public companies’ segment expenses.

Updated & Amended Rules

As a result and with much anticipation, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, to require public entities to disclose incremental segment information on both an annual and interim basis. Companies will be required to disclose segment expense information based on what the CODM deems to be material. These disclosures must be made both quarterly and annually. The updated guidance introduces a disclosure principle based on the significant segment expense categories regularly provided to the CODM and included in the reported measure of segment profit or loss.

The guidance allows companies to report multiple measures of a segment’s profit or loss. The amendments do not change or remove the current disclosure requirements under Topic 280. If more than one measure is used, a company could disclose any of those measures as long as at least one is determined in accordance with the measurement principles most consistent with those used in the consolidated financial statements. If more than one measure is used, consideration should be given to the SEC’s non-GAAP rules. Public entities should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements. Upon transition, significant expense categories and amounts disclosed in prior periods should be based on the significant expense categories identified and disclosed in the period of adoption.

This ASU is applicable to all public entities that report segment information per Topic 280. It will come into effect for annual periods starting after Dec. 15, 2023, necessitating compliance from all public entities from that point onwards. The amendments require incremental segment information—as described in more detail below—on an annual and interim basis for all public entities. Although the ASU increases disclosure requirements for segment expenses and single-segment companies, it does not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.

Key Provisions of the ASU Include:  

• A requirement to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the CODM and are included within each reported measure of a segment’s profit or loss. One of the primary elements of the ASU is the introduction of the significant expense principle. The significant expense principle requires disclosure of segment expenses that are (i) regularly provided to the CODM, (ii) included within the segment’s reported measure of profit or loss and (iii) determined to be significant by management.
• A requirement to disclose, on an annual and interim basis, an amount for “other segment items” for each reportable segment as well as a description of its composition. Other segment items represent amounts that are not included within significant segment expenses as outlined above, but are included in the measure of segment profit or loss.
• A requirement to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently only required annually.
• Clarification that multiple measures of a segment’s profit or loss may be reported if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. However, at least one of the reported measures should be the measure that is most consistent with how corresponding amounts in the consolidated financial statements are measured.
• A requirement to disclose the title and position of the CODM, and an explanation of how the CODM uses reported measures in assessing performance and deciding how to allocate resources.
• A requirement that entities with a single reportable segment provide all segment disclosures required by the ASU and existing segment disclosures in Topic 280.
  

Next Steps

The deadline for calendar year-end public companies to adopt this standard for their 2024 10-Ks is fast approaching. Most of these companies should be well into the process of evaluating their current segment reporting models, identifying the information regularly provided to their CODM, and assessing their ability to prepare disclosures both retrospectively and prospectively for annual and interim periods. In addition, companies should be engaging the guidance of their accounting firm well in advance of the adoption to help support understanding and facilitate compliance.