Segment Reporting Under ASC 280
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The guidance in ASC 280, Segment Reporting, requires public entities to disclose disaggregated information about their businesses in their financial statements. The objective of segment reporting is to provide information “through management’s eyes” to assist investors in understanding a public entity’s performance and prospects for future cash flows.
Segment disclosures include disaggregated information about a public entity’s revenues, significant expenses, profitability, and other key financial results. ASC 280 also requires entity-wide disclosures about products and services, geographic footprint, and major customers. Although ASC 280 is a disclosure-only standard, its application is complex because of the judgment required to understand an entity’s internal organizational structure and identify its reportable segments.
Since the FASB issued segment reporting guidance in 1997, [FASB Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131)] segment disclosures have consistently been an area of focus for the SEC staff. This continues to be the case now that segment reporting disclosure requirements are changing. In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which introduced new annual and interim disclosure requirements for all public entities and modified some existing disclosures. The ASU responds to investor requests for more detailed segment expense information and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
Segment Reporting – In a Nutshell
An entity applies the management approach to identify and report its segments, including:
- Identifying the chief operating decision maker (CODM)
- Identifying operating segments
- Considering whether to aggregate multiple operating segments
- Determining reportable segments
- Disclosing specific segment information
- Disclosing entity-wide information
Objectives and Scope
The objective of ASC 280 is to provide information about the different types of business activities a public entity engages in and the different economic environments in which it operates to assist investors in understanding and evaluating an entity’s performance.
- All public entities, including those with a single reportable segment, are required to provide segment disclosures in annual and interim financial statements.
- An entity must use the management approach to apply the segment guidance. That approach presents segments based on the way that management organizes and uses information for allocating resources, making operating decisions, and assessing performance.
See Chapter 1 for more guidance on the objectives and scope of ASC 280.
Operating Segments
An operating segment is a component of an entity that has all the following characteristics:
- It engages in business activities from which it may recognize revenues and incur expenses.
- Its operating results are regularly reviewed by the CODM to make resource allocation decisions and assess its performance.
- Its discrete financial information is available.
The three characteristics that identify a component as an operating segment are based on the management approach. Identifying the CODM is the first step in determining the operating segments. Once the CODM has been identified, an entity must determine whether each component individually has the characteristics of an operating segment.
See Chapter 2 for guidance on identifying operating segments.
Reportable Segments
After identifying its operating segments, an entity may consider whether multiple operating segments can be combined and considered a single operating segment. Aggregation is not required. A reportable segment is an operating segment or at least two aggregated operating segments that meets specific quantitative tests. The quantitative tests consider the revenues, profits or losses, and assets of an operating segment compared to the combined revenues, profits or losses, and assets of all operating segments. An operating segment that meets any of the quantitative tests is a reportable segment.
After determining the reportable segments, an entity considers whether the revenues of the reportable segments constitute at least 75% of its total consolidated revenue. An entity may need to disclose additional segments separately so that reportable segments constitute at least 75% of total consolidated revenue.
While there is no explicit limit on the number of reportable segments, an entity may consider a practical limit of 10. Information about other business activities and operating segments that do not constitute reportable segments are combined and disclosed in an “all other” category.
See Chapter 3 for guidance on determining reporting segments.
Segment Disclosures
In accordance with ASC 280, an entity must provide both quantitative and qualitative disclosures for each reportable segment for each period for which an income statement is presented, including disclosures of revenues, significant operating expenses, and measures of profitability. Some disclosures are required on both an annual and interim basis, while others are required only annually. In accordance with the management approach, the information disclosed must be consistent with the information provided to the CODM. The segment reporting disclosures apply to all public entities, including those with a single reportable segment.
See Chapter 4 for guidance on segment disclosures.
Entity-Wide Disclosures
ASC 280 requires an entity to disclose entity-wide information about its:
- Products and services
- Geographic areas
- Major customers.
Entity-wide disclosures are required annually and can be provided either within the required segment disclosures or separately. They are intended to provide some comparability between public entities and are based on information used to prepare the entity’s consolidated financial statements.