In November 2023, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update (ASU) to improve disclosures related to reportable segments. The amendments in ASU 2023-07 “Segment Reporting—Improvements to Reportable Segment Disclosures” are effective for fiscal years beginning after December 15, 2023, and for interim periods in fiscal years beginning after December 15, 2024. The new guidance applies to all public entities that are following Topic 280 Segment Reporting requirements already, and these entities must apply the new requirements retrospectively to all periods presented in their financial statements.
In this case, public entities are defined as any entity that:
- Has issued debt or equity securities or is a conduit debt obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets),
- Is required to file financial statements with the Securities and Exchange Commission (SEC), such as non-issuer broker-dealers, or;
- Provides financial statements for the purpose of issuing any class of securities in a public market. For the purposes of this ASU, not-for-profit entities are excluded.
The FASB focused on updates in this area based on feedback from investors, lenders and other creditors. Segment information allows users of the financial statements to better understand the activities that comprise a company’s business. It also allows investors to place a company’s overall performance in the context of its operational activities and make important financial assessments.
Topic 280 of Accounting Standards Codification Overview
Currently, Topic 280 of the Accounting Standards Codification (ASC) requires disclosure of certain information about reportable segments. For example, a public entity is required to report the measures of segment profit or loss that the chief operating decision maker (CODM) uses to assess segment performance and make decisions about allocating resources. Additionally, Topic 280 requires other specified segment items and amounts, such as depreciation, amortization, and depletion expense, to be disclosed. The FASB believes the current framework will be enhanced by requiring incremental information to provide more useful information to investors and other stakeholders.
Summary of Amendments
The amendments included in the FASB release require the following items to be disclosed in annual and interim financial statements:
- Significant segment expenses that are regularly provided to the CODM and included within measures of segment profit or loss, termed the “significant expense principle”. Significant expenses could include direct expenses to reportable segments or allocated costs shared across reportable segments. If an entity does not identify any significant segment expenses, then it will need to disclose the nature of expenses considered by the CODM when managing segment operations.
- Amounts for other segment items with descriptions of its components. The “other segment items” category is the difference between segment revenue and the significant expenses disclosed under the significant expense principle. Qualitative descriptions regarding the composition of other segment items must also be included. Disclosure should be made for each reported measure of segment profit or loss.
The new ASU also clarifies that at least one of the reported measures of segment profit or loss should be the one that is most consistent with the principles used in measuring the corresponding amount in the consolidated financial statements. This clarification applies regardless of whether the CODM uses one or more measures of a segment’s profit or loss, so entities that only disclose one reported measure must be consistent with US GAAP. In other words, the financial statements need to include a measure of profitability that most closely resembles the calculation of profit or loss under US GAAP. For example, if the CODM uses gross profit and EBITDA as measures of segment profit or loss, the public entity could 1) disclose only gross profit since it represents the measure most consistent with the amounts included in its consolidated financial statements or 2) disclose both gross profit and EBITDA; however, it may not disclose only EBITDA.
The ASU will now require interim period financial statements to include all annual disclosures currently required by Topic 280. The existing disclosure requirements are not changing. The amendments do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.
Further, companies with only one reportable segment will need to adopt the proposed amendments as well as all existing segment disclosures in Topic 280. The FASB wants to drive consistency and transparency for all public entities following this guidance. Also, public entities must disclose the title and position of the CODM as well as an explanation of how the CODM uses reported measures of profit and loss to assess performance and allocate resources.
Takeaways
Since the new guidance will be effective for impacted entities soon, it is important to start planning now for the eventual disclosure requirements under ASU 2023-07. It will be important to consider how retrospective application will impact financial statement presentation, including how the application of the significant expense principle will be applied to prior periods.
Author: Ben Davenport | [email protected]
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