Print
E-MailCydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.
The FASB has announced a final Accounting Standards Update designed to improve disclosures about public companies’ reportable segments, particularly disclosures about significant segment expenses—information that the FASB says investors frequently request. The ASU indicates that investors and others view segment information as “critically important in understanding a public entity’s different business activities. That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows.” According to FASB Chair Richard R. Jones, the “new segment reporting guidance is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses….It will improve financial reporting by providing additional information about a public company’s significant segment expenses and more timely and detailed segment information reporting throughout the fiscal period.” Previously, at the proposal stage, Jones had referred to the ASU as the “FASB’s most significant change to segment reporting since 1997.” While the extent of new information will vary among entities, the FASB “expects that nearly all public entities will disclose new segment information under the amendments.” It’s worth pointing out here that the financial reporting changes could well lead to changes in MD&A disclosure. The ASU will apply to all public entities required to report segment information (under Topic 280). Compliance with the new guidance will be required starting in annual periods beginning after December 15, 2023.
As summarized in the ASU, below are the principal amendments:
- “Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
- Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.
- Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB Accounting Standards Codification® Topic 280, Segment Reporting, in interim periods.
- Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.
- Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
- Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280.”
Topic 280 requires that financial statements include segment information prepared under the “management approach,” an approach that requires segment reporting “based on how management internally organizes the segments within a public entity for purposes of allocating resources and assessing performance. That approach allowed users to see disaggregated information about the entity through the eyes of management and to assess the performance of the segments in the same way that management reviews them.” Essentially, the entity first identifies its operating segments based on the perspective of the CODM. Then, entities may, but need not, “aggregate their operating segments if certain criteria are met. The operating segments, including those that have been aggregated, are then evaluated against quantitative thresholds to determine an entity’s reportable segments.”
Currently, under Topic 280, a public entity is required to disclose certain information about its reportable segments, such as “a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources,” and, under certain circumstances, other specified segment items, such as depreciation and amortization. Those requirements do not change under the ASU, nor would the ASU change how the entity “identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.” Rather, the amendments would “improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses.”
The ASU notes that the FASB decided to focus on expense information after considering feedback from stakeholders requesting more detailed expense information at the segment level. According to the ASU, additional expense information “helps investors better assess financial trends, perform more precise financial modeling when forecasting the components of an individual segment’s profit or loss, and better evaluate an entity’s business activities. Additionally, some investors indicated that understanding the composition of an entity’s expenses at the segment level and how the related amounts vary over time is helpful in signaling when major changes occur within the business.” In addition, investors believed that additional segment expense information “would complement the data received from other sources (for example, information outside the financial statements within other public filings, earnings releases, and management’s discussion and analysis) and could be used by investors to challenge and confirm explanations provided by management about an entity’s current and expected future performance.”
The amendments in the ASU are 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 ASU is to be applied retrospectively for all prior periods presented in the financial statements. Upon transition, the “segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.”
SideBar
Separately, the FASB is also working on a related project to disaggregate income statement expenses, including separate disclosure of labor costs/employee compensation. As reported by Bloomberg (here and here), there has been a push for disaggregation of expenses on the income statement since at least 2016, but in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It’s been quite a lengthy pause, but, in February 2022—perhaps hearing the call from investors and others—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.”
Currently, companies typically include in their income statements expense captions for selling, general and administrative (SG&A) expenses, cost of services and other cost of revenues, and cost of tangible goods sold. Total compensation costs are rarely disclosed—only about 15% of companies disclose that data, according to testimony at the SEC’s Investor Advisory Committee. The FASB determined to conduct outreach and, in meetings during 2022, the FASB considered several potential approaches to addressing the topic through various disaggregation principles and quantitative thresholds. (See this PubCo post and these tentative decisions.)
In July 2023, the FASB voted to move ahead with new requirements for disaggregation of income statement expenses, issuing a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. According to the press release announcing the proposed ASU, investors have said that more detailed information about a company’s expenses “is critically important to understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies.” The proposed ASU would “require public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. It would provide investors with more detailed information about the types of expenses, including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income statement expense captions such as cost of sales; selling, general and administrative; and research and development.” The FASB press release also indicated that the amendments in the proposed ASU “do not change or remove existing expense disclosure requirements and do not change requirements for presentation of expenses on the face of the income statement. They would require public companies to include certain existing disclosures in the same tabular format disclosure as the other disaggregation requirements set forth in the proposed ASU.” (See this PubCo post.)
