Reporting for business segments
- September 26, 2018
- Posted by: Hood & Strong
- Category: Uncategorized
The Financial Accounting Standards Board (FASB) is looking for public companies to participate in its study about the prospects of improving the guidance for aggregating business segments and the reportable segments process. The study is the first phase of its outreach on segment reporting.
To aggregate or not to aggregate?
The FASB doesn’t want to rewrite FASB Accounting Standards Codification Topic 280, Segment Reporting. Rather, it wants to improve the detail businesses provide about their segments. The existing standard advises businesses to connect the information for reporting segments based on the person or group of people described by the disclosure requirements and implementation guidance as the chief operating decision maker (CODM).
Businesses are required to disclose certain information about their segments if the information is regularly reviewed by the CODM. Segment totals must be reconciled to the consolidated amounts if the segment totals are “significant.”
Under the existing rules, a business must report information about an operating segment if:
- Its revenue — including sales to external customers and intersegment sales or transfers — is 10% or more of the combined internal and external revenue of all operating segments, or
- Its profit or loss is 10% or more of the greater of either the combined reported profit of all operating segments that didn’t report a loss or the combined reported loss of all operating segments that did report a loss.
A segment that includes assets that are 10% or more of the combined assets of all operating segments also has to appear in the financial statements.
Need for change
Investors often complain that the financial reporting that conforms to Topic 280 leaves them with too little information. They say large multinationals often report one or two business segments when other evidence indicates they should report more.
Investors say the problem can be traced to the leeway companies are given to determine when they should aggregate information from several business lines. In addition, the existing disclosure requirements are somewhat limited. Yet businesses are wary about offering too much information that could give competitors information about trade secrets.
Two alternatives the FASB is considering that would address these concerns include:
- Changing the order of the process for determining which segments of a company are reportable. This would involve moving the quantitative thresholds for requiring a segment to be reported to an earlier stage of the process.
- Eliminating the existing criteria for aggregating a segment. Instead, each operating segment in a business would be a candidate for separate reporting unless it’s not considered practical.
The board wants to understand how public companies use the criteria in Topic 280 and how the two alternatives would affect how they present their financial statements to investors, including their disclosures. The study also will help the FASB evaluate the costs and benefits of the different approaches to improving the process for reportable segments.
Wait and see
When the FASB discussed Topic 280 in June 2018, it determined that the study was a necessary step before it proceeded with a standard-setting project. No formal decisions about segment reporting are expected until 2019. However, contact your CPA as soon as possible if your company is interested in participating in the FASB’s study.