June 14, 2024
Segment reporting has always been a focus area of financial reporting for public companies. In November 2023, the FASB issued ASU 2023-07, which improves segment disclosures primarily through enhanced disclosures about segment expenses. Calendar-year public companies will need to adopt the guidance for their 2024 Form 10-K, and apply the guidance to prior years. It is prudent to start thinking about the changes to the footnote early on and implement processes to obtain the new required information.
Background
Segment reporting is the disclosure of a company’s segments and their financial results in the footnotes to the financial statements. Private companies are not required to report segments. Segment reporting is covered under ASC 280, Segment Reporting.
The objective of ASC 280 is to require companies to provide information about their different types of business activities and help financial statement users:
- Better understand the Company’s performance
- Better assess the Company’s for future net cash flows, and
- Make more informed judgments about the Company
While ASC 280 requires the disclosure of a segment’s revenue and measure of profit and loss, there is little transparency about a segment’s expenses. The FASB issued ASU 2023-07 because of stakeholder concern about the lack of segment performance information. ASU 2023-07 did not impact any previous segment disclosures under ASC 280 or affect how a public company identifies its segments. ASU 2023-07 only added incremental disclosures.
New Required Disclosures
The new required disclosures include:
- Significant segment expense (annual and quarterly)
- Other segment items (annual and quarterly)
- Multiple measures of a segment’s profit or loss (annual and quarterly)
- CODM-related disclosures (annual)
Significant segment expense
For each reportable segment, companies are required to disclose the significant expense categories and amounts that are regularly provided to the CODM and included in the measure of profit or loss.
Significance | There is judgment as to what is considered “significant.” Companies should consider quantitative and qualitative factors when determining which expenses are significant. This includes the segment’s importance to the Company as a whole, the size and importance of the expense to the segment’s results, the variability in the expense item, the key expense categories for the segment’s particular industry, and the focus of investors. |
Regularly Provided | Typically, the financial information provided at least on a quarterly basis would be considered “regularly provided.” However, public companies should review all the financial information provided to the CODM to determine what is regularly provided, as that can also be on a frequency less than quarterly. |
Easily Computable | The expenses should be “easily computable” from the information that is regularly provided to the CODM. Examples of easily computable expenses include the cost of revenue if gross margin and revenue are regularly provided to the CODM. |
The significant segment expense information does not need to be reconciled back to the consolidated expense amounts. If a public company doesn’t have any significant segment expense to disclose, it must disclose the nature of the expense information used by the CODM.
The top priority for public companies is to determine which expenses are considered significant. Personnel-related expenses, including stock-based compensation, are typically a considerable expense for companies and are required to be disclosed if regularly provided to the CODM.
Most companies already track expenses at the GL account and cost center levels, which are more granular. However, aggregating those expenses at the reportable segment level may take time or require system/process changes. Companies also need to calculate the same expenses for prior periods.
Other segment items
For each reportable segment, companies are required to disclose the aggregate amount of other segment items. Other segment items are calculated as the reported segment revenues, less significant segment expenses, and less the reported segment profit or loss. This includes other segment expenses that were not disclosed as a significant segment expense and other gains or losses included in the reported segment profit or loss. A qualitative description of the other segment items is required.
Multiple Measures of a segment’s profit or loss
Companies may disclose multiple measures of a segment’s profit or loss if the CODM uses multiple measures to assess segment performance and allocate resources. At a minimum, companies need to disclose the measure of segment profit or loss that is required under the current guidance. If a company decides to add a measure in the current period, it is required to disclose the measure for all prior periods reported. Additional measures of a segment’s profit or loss will also trigger additional disclosures because significant segment expenses and other segment items are required for each measure of segment profit or loss. Each segment’s profit or loss measure must also be reconciled to the consolidated financial statements.
The SEC has stated that additional optional measures of segment profit or loss would be considered a non-GAAP metric if not calculated on a GAAP basis. Therefore, these measures would be subject to the SEC rules and regulations for non-GAAP financial metrics.
CODM-related disclosures
Companies are required to disclose additional qualitative information related to the CODM, including their title and position, and how the CODM uses the reported measures of segment profit or loss to assess segment performance and allocate resources.
Companies with a Single Reportable Segment
Previously, segment disclosures for companies with a single reportable segment were usually on an entity-wide basis. Now, companies with a single reportable segment are required to provide all the disclosures under ASC 280 and ASU 2023-07. Companies with a single reportable segment must now explicitly disclose the measure of a segment’s profit or loss used by the CODM to assess performance and allocate resources, which may or may not be a consolidated GAAP measure. If the measure is non-GAAP, the measure would need to be reconciled to consolidated pre-tax income. Companies may refer to the primary financial statements if the single reportable segment is the entire entity to avoid duplication of information.
Interim Reporting
Beginning in fiscal years after December 15, 2024, companies are required to include the significant segment expenses and other segment items, as well as all the annual segment disclosures (depreciation and amortization, interest revenue and expense, unusual items, equity in income of investees, income tax expense/benefit, and significant non-cash items) required by ASC 280 in their quarterly segment footnote.
Recasting of Previously Reported Segment Information
Companies are required to recast segment information when the composition of reportable segments changes or the identification of significant segment expenses changes unless impracticable. If a company does not recast prior-period segment expense information, they should disclose the segment amounts in the current period under both the old and new significant categories. Companies are also required to disclose significant changes to the measurement of expenses and the method of allocating expenses.
Effective Date and Transition
ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in ASU 2023-07 are required to be applied on a retrospective basis unless it is impracticable.
