Update on Segment Reporting Disclosures

In December 2021, the Financial Accounting Standards Board (FASB) wrapped up its discussions about what companies would be required to disclose in a future standard about operating segment expenses. This is a topic that accounting and finance professionals have been monitoring with bated breath. A proposal is planned for the second quarter in 2022. 

Changing the rules

The upcoming proposal aims to provide more detailed disclosures about key expenses that CEOs and other operating chiefs typically see involving a company’s core profit making units. Overall, the proposed disclosure package would amend Topic 280, Segment Reporting, guidance that applies only to public companies.

Under the existing rules, segment totals must be reconciled to the consolidated amounts if the segment totals are “significant.” In general, 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 must appear in the financial statements.

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 reveal trade secrets to competitors.

Ironing out the details

Discussions at the December 8 FASB meeting focused on two main issues:

  1. How would companies apply the rules when more than one performance measure is used?
  2. How would companies transition to the disclosures?

Essentially, the proposal would require a company to report significant segment expenses that are both 1) regularly provided to the chief operating decision maker (CODM), and 2) included in the company’s reported measure of segment profit or loss. This is more commonly known as the so-called “management approach” to segment reporting. This approach requires a company to report segment information “in the way that management internally organizes its segments to make operating decisions and assess performance.

The FASB hopes to reduce diversity in practice for those CEOs and finance chiefs that use more than one performance measure to assess profit or loss. The segment expense disclosures would apply across the board. And all significant segment expenses would be reconciled to the corresponding consolidated amount annually and an amount for other items would be disclosed for each measure.

“To the extent that the CODM is regularly provided multiple measures and they’re using that to make resource allocation decisions, my preference would be that the principle applies to all those measures,” said FASB member Susan Cosper.

Adopting the changes

Companies would apply the disclosure rules retrospectively. This approach requires the recasting of three years of prior financial statements so that they’re comparable to investors.

A company would apply the disclosure principle in the period of adoption, identifying the significant expense categories and amounts to disclose. The company would then conform the expense category to the comparative periods with those categories that have been identified in the period of adoption. Companies could also be asked to disclose information the finance chief received that might have changed in the period of transition.

“Without retrospective [application] it would be three years before we have trend line analysis in many cases and I think that would impose a significant cost on users that we need to keep in mind,” said FASB member Fred Cannon.

What’s next?

In the coming months, FASB staff will draft a proposal for external reviewers and hold a follow-up meeting to discuss any miscellaneous issues that are flagged during the review process. Then, the FASB will vote on whether to propose the guidance. Contact your Hood & Strong CPA if you have questions about the latest developments on this topic.