Financial reporting developments: Segment reporting

Financial reporting developments

A comprehensive guide

Segment

reporting

Accounting Standards Codification 280

April 2023

To our clients and other friends

Segment reporting continues to be an important element of financial reporting for public companies. A

fundamental principle of Accounting Standards Codification (ASC or Codification) 280, Segment Reporting,

is that a company’s segment disclosures should be consistent with management’s reporting structure.

The objective is to allow users to “see through the eyes of management” a company’s business. By

highlighting the risks and opportunities that management views as important, the Financial Accounting

Standards Board (FASB or Board) believes that financial statement users will be better positioned to

understand the public entity’s performance, to assess its prospects for future net cash flows and to make

more informed judgments about the entity as a whole.

While the requirements of ASC 280 have been effective for many years, segment disclosures continue

to be a frequent area of emphasis in Securities and Exchange Commission (SEC) staff comment letters.

In these reviews, the SEC staff continues to focus on how companies identify and aggregate operating

segments and whether companies have inappropriately included non-GAAP measures in their segment

disclosures. Companies also are frequently asked about the adequacy of their entity-wide disclosures

with respect to products and services, revenues attributable to individual foreign countries and revenues

from major customers.

We encourage public companies to continue to evaluate their segment reporting practices, especially in

situations in which an entity has undertaken a reorganization or when there are inconsistencies between

an entity’s management reporting structure and its segment disclosures. EY professionals are prepared

to help you identify and understand the issues related to segment reporting.

April 2023

Financial reporting developments Segment reporting  |  i 
Contents 
Scope and overview ................................................................................................... 1 
1  Competitive harm .................................................................................................................. 3 
2   Operating segments ............................................................................................................... 3 
3  Aggregation criteria ............................................................................................................... 4 
4   Reportable segments ............................................................................................................. 5 
5   Annual disclosure requirements .............................................................................................. 5 
5.1  First-level disclosures .................................................................................................... 7 
5.1.1  Segment profit or loss and related information .............................................. 7 
5.1.2  Segment assets .......................................................................................... 7 
5.1.3  Reconciliations ........................................................................................... 8 
5.2  Entity-wide disclosures .................................................................................................. 8 
5.2.1  Information about major customers .............................................................. 8 
6  Interim disclosure requirements ............................................................................................. 8 
7  SEC considerations ................................................................................................................ 9 
8  Transition for initial adoption of ASC 280 .............................................................................. 10 
Operating segments ................................................................................................. 11 
1   Determination of operating segments ................................................................................... 11 
1.1   Engages in business activities ...................................................................................... 12 
1.2   Operating results are regularly reviewed by the CODM to allocate resources 
and assess performance .............................................................................................. 13 
1.3   Discrete financial information is available ..................................................................... 16 
1.4   CODM uses multiple types of segment information ........................................................ 16 
2   Discontinued operations ....................................................................................................... 18 
3   Unconsolidated businesses ................................................................................................... 19 
3.1   Inclusion of separate financial statements of other entities ............................................ 20 
4   Reportable segments of public subsidiaries ........................................................................... 20 
5   Goodwill considerations ........................................................................................................ 21 
Reportable segments ............................................................................................... 22 
1   Aggregation criteria ............................................................................................................. 23 
1.1   Consistent with the objective and basic principles of ASC 280 ....................................... 25 
1.2   Economic characteristics ............................................................................................. 25 
1.3   Qualitative characteristics ........................................................................................... 27 
2   Determining amounts included in segment measures for the quantitative threshold tests ........ 29 
2.1   Operating segment accounting principles ..................................................................... 30 
2.2   Allocations to operating segments ............................................................................... 30 
2.3   CODM uses more than one measure of segment profit/loss or segment assets ............... 31 
2.4   CODM uses different measures for different segments .................................................. 31 
2.5   Changes in segment measurements (updated April 2023) ............................................. 32 

Contents 
Financial reporting developments Segment reporting  |  ii 
3   Quantitative thresholds ........................................................................................................ 33 
3.1   Revenues ................................................................................................................... 33 
3.2   Profit or loss ............................................................................................................... 34 
3.2.1   Use of a consistent measure of profit or loss ............................................... 35 
3.2.2   Aggregation may change reportable segments ............................................ 36 
3.3   Assets ........................................................................................................................ 37 
4   Combination of operating segments that do not meet quantitative thresholds ......................... 37 
5   Meeting the 75% of consolidated revenue test ....................................................................... 38 
6   Determining whether an equity method investment is a reportable segment ........................... 39 
7   The ‘all other’ category ........................................................................................................ 40 
8   Change in the quantitative thresholds from year to year ........................................................ 40 
9   Number of reportable segments ........................................................................................... 41 
Segment disclosure requirements ............................................................................. 42 
1   Disclosure of segment profit or loss and segment assets ........................................................ 43 
1.1   What is required to be disclosed ................................................................................... 45 
1.2   What is not required to be disclosed ............................................................................. 46 
1.3   Non-GAAP measures ................................................................................................... 46 
1.4   CODM uses more than one measure of segment profit/loss or segment assets ............... 47 
1.5   Materiality .................................................................................................................. 49 
1.6   Interest ...................................................................................................................... 50 
1.7   Segment assets .......................................................................................................... 50 
2   Explanation of measurements .............................................................................................. 51 
3   Reconciliations .................................................................................................................... 52 
4   Disclosures and reconciliations related to equity method investments..................................... 54 
5  Interim period information.................................................................................................... 55 
6   Changes in reportable segments ........................................................................................... 56 
6.1   Interim restatement .................................................................................................... 58 
6.2   Timing of a change in segment reporting ...................................................................... 58 
6.3   SEC reporting considerations (added April 2023) .......................................................... 58 
6.3.1   New registration statements and proxy statements...................................... 58 
6.3.2   Effective shelf registration statements ....................................................... 59 
6.4   Non-SEC offerings (added April 2023) .......................................................................... 59 
7   Interaction with other ASC Topics ......................................................................................... 59 
7.1   Goodwill ..................................................................................................................... 59 
7.2   Business combinations ................................................................................................ 61 
7.3   Exit or disposal activities.............................................................................................. 61 
7.4   Discontinued operations .............................................................................................. 62 
7.5   Revenue recognition (updated April 2022) ................................................................... 62 
7.6   Impairment of intangible assets ................................................................................... 63 
7.7   Impairment or disposal of long-lived assets ................................................................... 63 
Entity-wide disclosures ............................................................................................ 65 
1   Information about products and services ............................................................................... 66 
2   Information about geographic areas ..................................................................................... 67 
2.1   Meaning of ‘material’ ................................................................................................... 68 
2.2   Revenues from external customers .............................................................................. 68 
2.3   Long-lived assets ........................................................................................................ 68 

Contents 
Financial reporting developments Segment reporting  |  iii 
3   Information about major customers ...................................................................................... 69 
4   Restatement of entity-wide disclosures ................................................................................. 70 
5   SEC disclosure rules ............................................................................................................. 70 
Industry supplements ............................................................................................... 71 
1   Introduction ........................................................................................................................ 71 
2   Banking and capital markets ................................................................................................. 71 
2.1   Operating segments .................................................................................................... 71 
2.2   Reportable segments .................................................................................................. 72 
2.3   Entity-wide disclosures ................................................................................................ 72 
3   Insurance (updated April 2022) ............................................................................................ 73 
3.1   Operating segments .................................................................................................... 73 
3.2   Aggregation criteria .................................................................................................... 73 
3.3   Measurements used in segment disclosures.................................................................. 75 
3.4   Scope ......................................................................................................................... 75 
4   Retail (updated April 2022) .................................................................................................. 75 
4.1   General considerations ................................................................................................ 75 
4.2   Aggregation considerations ......................................................................................... 76 
4.3   Geographic segments in the same country ................................................................... 77 
4.4   Real estate operations ................................................................................................. 77 
5   Real estate .......................................................................................................................... 77 
6   Health ................................................................................................................................. 78 
6.1   Scope ......................................................................................................................... 78 
6.2   Determining operating segments ................................................................................. 78 
6.3   Segment disclosures ................................................................................................... 78 
6.4   Entity-wide disclosures ................................................................................................ 79 
7   Oil and gas........................................................................................................................... 79 
8   Telecommunications (updated April 2022) ............................................................................ 80 
9   Casinos ............................................................................................................................... 80 
Comprehensive example ........................................................................................... 81 
A  Diagram to determine segments .............................................................................. A-1 
B  Abbreviations used in this publication ...................................................................... B-1 
C  Index of ASC references in this publication ............................................................... C-1 
D  Summary of important changes ............................................................................... D-1 
 

Contents

Financial reporting developments Segment reporting | iv

Notice to readers:

This publication includes excerpts from and references to the Financial Accounting Standards Board

(FASB or the Board) Accounting Standards Codification (the Codification or ASC). The Codification

uses a hierarchy that includes Topics, Subtopics, Sections and Paragraphs. Each Topic includes an

Overall Subtopic that generally includes pervasive guidance for the Topic and additional Subtopics, as

needed, with incremental or unique guidance. Each Subtopic includes Sections that in turn include

numbered Paragraphs. Thus, a Codification reference includes the Topic (XXX), Subtopic (YY),

Section (ZZ) and Paragraph (PP).

Throughout this publication references to guidance in the Codification are shown using these reference

numbers. References are also made to certain pre-Codification standards (and specific sections or

paragraphs of pre-Codification standards) in situations in which the content being discussed is excluded

from the Codification.

This publication has been carefully prepared, but it necessarily contains information in summary form

and is therefore intended for general guidance only; it is not intended to be a substitute for detailed

research or the exercise of professional judgment. The information presented in this publication should

not be construed as legal, tax, accounting, or any other professional advice or service. Ernst & Young

LLP can accept no responsibility for loss occasioned to any person acting or refraining from action as a

result of any material in this publication. You should consult with Ernst & Young LLP or other

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Financial reporting developments Segment reporting | 1

1 Scope and overview

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Scope and Scope Exceptions

280-10-15-2

The guidance in the Segment Reporting Topic applies to all public entities, with certain exceptions

noted below. Entities other than public entities are also encouraged to provide the disclosures described

in this Subtopic.

280-10-15-3

The guidance in this Subtopic does not apply to the following entities:

a. Parent entities, subsidiaries, joint ventures, or investees accounted for by the equity method if

those entities’ separate company statements also are consolidated or combined in a complete set

of financial statements and both the separate company statements and the consolidated or

combined statements are included in the same financial report. However, this Subtopic does apply

to those entities if they are public entities and their financial statements are issued separately.

b. Not-for-profit entities (regardless of whether the entity meets the definition of a public entity as

defined above).

c. Nonpublic entities.

Glossary

280-10-20

Public Entity

A business entity or a not-for-profit entity that meets any of the following conditions:

a. It has issued debt or equity securities or is a conduit bond 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).

b. It is required to file financial statements with the Securities and Exchange Commission (SEC).

c. It provides financial statements for the purpose of issuing any class of securities in a public market.

Conduit Debt Securities

Certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued

by a state or local governmental entity for the express purpose of providing financing for a specific third

party (the conduit bond obligor) that is not a part of the state or local government's financial reporting

entity. Although conduit debt securities bear the name of the governmental entity that issues them, the

governmental entity often has no obligation for such debt beyond the resources provided by a lease or

loan agreement with the third party on whose behalf the securities are issued. Further, the conduit

bond obligor is responsible for any future financial reporting requirements.

The segment reporting requirements apply only to public entities, as defined above, which includes

companies making filings with a regulatory agency in preparation for the sale of securities in a public

market (e.g., an initial public offering). Although they are not required to apply ASC 280, certain

nonpublic entities and not-for-profit entities are encouraged to provide the disclosures described therein.

1 Scope and overview

Financial reporting developments Segment reporting | 2

In addition to the consolidated financial statements, some entities present in their annual reports

additional information such as “separate company” financial statements of the parent entity, subsidiaries,

joint ventures or equity method investees. ASC 280 does not apply to those entities’ separate company

financial statements. However, if the subsidiaries are public entities themselves (as defined in ASC 280),

ASC 280 still applies to the separate financial statements of the public subsidiaries. See section 2.3 for

further discussion of unconsolidated businesses.

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Objectives

General

280-10-10-1

The objective of requiring disclosures about segments of a public entity and related information is to

provide information about the different types of business activities in which a public entity engages

and the different economic environments in which it operates to help users of financial statements do

all of the following:

a. Better understand the public entity’s performance

b. Better assess its prospects for future net cash flows

c. Make more informed judgments about the public entity as a whole.

Overview and Background

General

280-10-05-3

A public entity could provide complete sets of financial statements that are disaggregated in several

different ways, for example, by products and services, by geography, by legal entity, or by type of

customer. However, it is not feasible to provide all of that information in every set of financial

statements. The guidance in this Subtopic requires that general-purpose financial statements include

selected information reported on a single basis of segmentation. The method for determining what

information to report is referred to as the management approach. The management approach is based

on the way that management organizes the segments within the public entity for making operating

decisions and assessing performance. Consequently, the segments are evident from the structure of

the public entity’s internal organization, and financial statement preparers should be able to provide

the required information in a cost-effective and timely manner.

ASC 280 requires public entities to disclose certain information about reportable operating segments

in complete sets of financial statements of the entity and in condensed financial statements of interim

periods. It also requires public entities to present certain “entity-wide” information, including revenues

related to products and services and geographic areas in which they operate. Information about major

Other Presentation Matters

General

280-10-45-1

This Subtopic does not require that a public entity report segment cash flow. However, paragraphs

280-10-50-22 and 280-10-50-25 require that a public entity report certain items that may provide an

indication of the cash-generating ability or cash requirements of an entity’s operating segments.

280-10-45-2

Nothing in this Subtopic is intended to discourage a public entity from reporting additional information

specific to that entity or to a particular line of business that may contribute to an understanding of the entity.

ASC 280 requires certain “first-level” disclosures (e.g., revenue by segment, a measure of profit or loss

and assets by segment) for reportable segments (see chapter 4 for a discussion of these disclosure

requirements) and additional “entity-wide” disclosures (e.g., revenues for the entire entity, organized

by products and services and by geographic area) if such information is not subject to the first-level

disclosures. Entity-wide disclosures are required regardless of whether that information is provided to or

used by the CODM (see chapter 5 for a discussion of these disclosure requirements).

ASC 280 requires segment information to be reported for each period for which a complete set of

financial statements is provided and in condensed financial statements of interim periods. Also, to ensure

comparability, if there are changes in the composition of reportable segments in the current period, those

changes are required to be retrospectively applied to earlier periods. However, restatement is not required

when it is impracticable (i.e., when the necessary information is not available and the cost to develop it

would be excessive). For example, restatement might not be practicable when a public entity undergoes a

fundamental reorganization and redesigns its internal financial reporting system. Disclosure is required if

an entity has changed its segment presentation as a result of a change in the composition of reportable

segments. Furthermore, if the segment information for earlier periods is not restated because it is impractical,

the entity must disclose its current year segment information under both the old basis and new basis of

segmentation unless such information is not available and is impracticable to maintain. We note that the

SEC staff views “impracticable” as a very high standard and often challenges registrants that do not recast

the prior year’s segment information consistent with its segment reporting in the current year. As a result,

companies should carefully evaluate whether it is impracticable to present comparable segment information

for earlier periods as the SEC staff has an expectation that the information will be disclosed.

1 Scope and overview

Financial reporting developments Segment reporting | 7

1.5.1 First-level disclosures

ASC 280 requires that a public entity disclose the factors that management considers most significant in

determining its reportable segments, such as differences in products or services, geographic areas of

operations or regulatory environments. A public entity also must disclose the types of products and

services generating revenues for each reportable segment. In addition to these general requirements,

first-level disclosures include reported segment profit or loss and related information and segment assets.

Adjustments and eliminations made in preparing a public entity’s general-purpose financial statements

and allocations of specific revenues, expenses, gains, losses and assets are included in the determination

of segment amounts only if those items are included in the information provided to the CODM. For

example, an entity that accounts for interest expense only on a consolidated basis (i.e., it is not included

in the segment information) would not report interest expense for each reportable segment. Rather, the

unallocated amount of interest expense, if material, would be separately reported in the reconciliation to

consolidated amounts.

1.5.1.1 Segment profit or loss and related information

Under ASC 280, a public entity reports segment profit or loss for each reportable segment based upon

the performance measure provided to and used by the CODM for purposes of making decisions about

allocating resources to the segment and assessing its performance. Therefore, the performance measure

is company specific and may vary by company.

ASC 280 requires certain components of segment profit or loss that are reported to the CODM to be

separately reported for each reportable segment, including revenue, depreciation, interest revenue and

expense, income taxes, and significant noncash items.

The segment information reporting in the footnotes should follow the same accounting policies used in

generating the information used in the reports reviewed by the CODM, even if those accounting policies

are different from the ones used to prepare the consolidated financial statements. For example, first-in,

first-out (FIFO) basis may be used in reporting to the CODM and in the segment disclosures even though

last-in, first-out (LIFO) is used in consolidation. Segment information also is not required to comply with

GAAP. For example, pension expense might be reported on a cash basis to the CODM and in the segment

disclosures though appropriate pension accounting would be required in the consolidated financial

statements. However, an entity is required to make certain disclosures regarding how it has measured

segment profit or loss and segment assets if these measures differ from the basis used in the preparation

of the consolidated financial statements.

If the CODM uses more than one measure of a segment’s profit or loss and more than one measure of a

segment’s assets, the reported measures should be those that management believes are determined in

accordance with the measurement principles most consistent with those used in measuring the corresponding

amounts in the consolidated financial statements. See section 3.2.3 for further discussion when there is

more than one measure of segment profit/loss or segment assets.

1.5.1.2 Segment assets

Under ASC 280, a public entity reports a measure of assets for each reportable segment for those assets

that are included in the measure of the segment’s assets provided to the CODM. If no asset information is

provided for a reportable segment, disclosure of segment assets is not required, but that fact and the

reason for its exclusion should be disclosed. In addition, an entity is required to disclose its equity

investments and capital expenditures if these items are included in the measure of segment assets

reviewed by the CODM.

1 Scope and overview

Financial reporting developments Segment reporting | 8

1.5.1.3 Reconciliations

Under ASC 280, a public entity is required to provide a reconciliation of:

• The total of the reportable segments’ profit or loss to the consolidated income before income taxes

and discontinued operations (if an entity allocates these items to segments, the entity may reconcile

to income or loss after these items)

• The total of the reportable segments’ revenues to the entity’s consolidated revenues

• The total of the reportable segments’ assets to the entity’s consolidated assets

• The total of the reportable segments’ amounts for every other significant item of information

disclosed to the corresponding consolidated amount

Significant reconciling items should be disclosed separately.

1.5.2 Entity-wide disclosures

Although ASC 280 requires a management approach, certain additional information must be disclosed,

even if that information is not provided to or used by the CODM to manage the public entity. For example,

if an entity is not managed based on differences in products or services (e.g., a geographical approach is

used), certain information about products or services is nonetheless required to be disclosed. On the

other hand, if a public entity manages its worldwide operations based on differences in products or

services, certain geographic information nonetheless must be disclosed. The amounts reported should be

based on the financial information used to produce the public entity’s general-purpose financial statements.

If providing entity-wide disclosures is impracticable (which is expected to be rare), the disclosures are not

required, but that fact and the reason should be disclosed.

1.5.2.1 Information about major customers

ASC 280 requires all public entities to provide information about reliance on major customers

(i.e., external customers that represent 10% or more of the public entity’s revenue), even if such entities

operate in only one segment.

To the extent the disclosures coincide with disclosures required in other ASC Topics (e.g., ASC 275) the

disclosures could be combined. For example, the disclosures under ASC 275 on the description of

products and services and concentration in volume of business transacted with a particular customer

could be integrated with the disclosures regarding segments.

1.6 Interim disclosure requirements

 Proposed amendment to the standard

In October 2022, the FASB issued an exposure draft that would require public entities to disclose

more segment information, including significant segment expenses and other segment items, on an

annual and interim basis and provide in interim periods all disclosures about a reportable segment’s

profit or loss and assets that are currently required annually. The proposal would also permit public

entities to disclose multiple measures of segment profit or loss, and public entities with a single

reportable segment would have to provide all the disclosures required by ASC 280, including the

proposed disclosures.

Readers should monitor developments.

1 Scope and overview

Financial reporting developments Segment reporting | 9

ASC 280 requires selected segment information to be reported on an interim basis. The disclosures

include information on revenues, profit or loss, total assets for which there has been a material change

from the amount disclosed in the last annual report, differences since year end in the measurement of

segment profit or loss, and a reconciliation of combined segment profit or loss to consolidated income

(before income taxes and discontinued operations, unless these items are already allocated to individual

segments). This information must be disclosed in the condensed financial statements included in a

registrant’s Form 10-Q.

Entity-wide disclosures are not required for interim reporting purposes. Consistent with annual reporting,

segment information for earlier periods is restated (unless impracticable) when an entity changes the

composition of its reportable segments.

1.7 SEC considerations

The SEC staff has continued to focus on segment disclosures and the application of ASC 280. SEC staff

members have discussed

their approach in their review of segment disclosures and encouraged registrants

to adopt a similar mindset when evaluating the appropriateness of segment disclosures. Some of the

areas highlighted by the SEC staff have included (1) the identification of the CODM, (2) the identification

of operating segments, (3) the aggregation or combination of operating segments, (4) internal controls

over segment reporting, (5) use of non-GAAP measures and (6) entity-wide disclosures. SEC representatives

said that segment reporting continues to be a critical focus area because investors continue to identify it

as the most important disclosure area in SEC filings.

The SEC staff

has emphasized the objectives and principles outlined in the guidance on segment

reporting, including whether the design and operation of internal controls over the segment reporting

judgments are appropriate. The SEC staff highlighted that the guidance on segment reporting requires

the application of reasonable judgment and that input from, and interaction with, the CODM may be an

important element in the design of effective internal controls over financial reporting, specifically how the

CODM allocates resources and assesses performance. Documenting the design and effective operation of

management’s controls over these judgments is an integral part of management’s support for the

effectiveness of its internal controls over financial reporting and will be essential to the auditor’s ability

to evaluate these controls.

The following sections highlight remarks from the SEC staff:

• Identification of the CODM — see section 2.1.2

• Identification of operating segments — see section 2.1

• Aggregation of operating segments — see section 3.1

• Non-GAAP measures — see section 4.1.3

• Entity-wide disclosures — see section 5

Remarks by Dan Murdock, SEC Deputy Chief Accountant, Office of the Chief Accountant, at the 2014 AICPA National Conference

on Current SEC and PCAOB Developments, 8 December 2014; remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow,

Office of the Chief Accountant, at the 2015 AICPA National Conference on Current SEC and PCAOB Developments, 9 December 2015;

comments by Nili Shah, SEC Deputy Chief Accountant, Division of Corporation Finance, at the 2016 AICPA National Conference on

Current SEC and PCAOB Developments; comments by Patrick Gilmore, SEC Deputy Chief Accountant, Division of Corporation Finance, at

the 2020 AICPA Conference on Current SEC and PCAOB Developments; comments by Melissa Rocha, SEC Deputy Chief Accountant,

Division of Corporation Finance, at the 2021 and 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments.

Remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA

National Conference on Current SEC and PCAOB Developments, 9 December 2015.

1 Scope and overview

Financial reporting developments Segment reporting | 10

We continue to see the SEC staff review publicly available information about registrants beyond the

information included in public filings, including content from earnings calls, registrant websites and

industry or analyst presentations. The review of additional information is often focused on identifying

any potential inconsistencies between the way that management describes its business to the public

(e.g., in its earnings releases) and the information contained in the company’s segment footnote. The

SEC staff often requests that registrants explain any potential inconsistencies between the information

that is available elsewhere in the public domain and the information included in the segment footnote.

The staff also has said that entities should consider the total mix of information that is reviewed by the

CODM when determining its operating segments.

In light of the SEC staff’s continued focus on segment reporting, we encourage public companies to

continue to challenge their segment reporting practices, including the design and operation of their

internal controls over financial reporting.

1.8 Transition for initial adoption of ASC 280

For entities that have not previously applied the provisions of ASC 280 (that is, non-public entities or not-

for-profit entities that voluntarily adopt or become required to adopt ASC 280), the segment disclosures

are required for all years presented in the entity’s financial statements, unless it is impracticable to

prepare prior year information.

Financial reporting developments Segment reporting | 11

2 Operating segments

2.1 Determination of operating segments

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Operating Segments

280-10-50-1

An operating segment is a component of a public entity that has all of the following characteristics:

a. It engages in business activities from which it may recognize revenues and incur expenses

(including revenues and expenses relating to transactions with other components of the same

public entity).

b. Its operating results are regularly reviewed by the public entity’s chief operating decision maker to

make decisions about resources to be allocated to the segment and assess its performance.

c. Its discrete financial information is available.

280-10-50-2

An operating segment shall include components of a public entity that sell primarily or exclusively to

other operating segments of the public entity if the public entity is managed that way. Information

about the components engaged in each stage of production is particularly important for understanding

vertically integrated public entities in certain businesses, for example, oil and gas entities. This

information is also important because different activities within the entity may have significantly

different prospects for future cash flows.

280-10-50-3

An operating segment may engage in business activities for which it has yet to recognize revenues, for

example, start-up operations may be operating segments before recognizing revenues.

280-10-50-4

Not every part of a public entity is necessarily an operating segment or part of an operating segment.

For example, a corporate headquarters or certain functional departments may not recognize revenues

or may recognize revenues that are only incidental to the activities of the public entity and would not

be operating segments. For purposes of this Subtopic, a public entity’s pension and other

postretirement benefit plans are not considered operating segments.

280-10-50-5

The term chief operating decision maker identifies a function, not necessarily a manager with a

specific title. That function is to allocate resources to and assess the performance of the segments of a

public entity. Often the chief operating decision maker of a public entity is its chief executive officer or

chief operating officer, but it may be a group consisting of, for example, the public entity’s president,

executive vice presidents, and others.

2 Operating segments

Financial reporting developments Segment reporting | 12

The determination of an entity’s operating segments is the first step in determining what segment

information needs to be reported in the entity’s financial statements and is often the primary focus of

the SEC staff in the review of an entity’s segment disclosures. ASC 280 says individual business

components are operating segments if they meet all of the following criteria:

• It engages in business activities from which it may recognize revenues and incur expenses (section 2.1.1).

• Its operating results are regularly reviewed by the public entity’s CODM to allocate resources and

assess performance (section 2.1.2).

• Its discrete financial information is available (section 2.1.3).

Sometimes, application of the guidance will result in identification of a single operating segment. In such

circumstances, management should carefully evaluate whether its conclusion is consistent with the guidance

and the way in which the company presents itself to investors. For example, the SEC staff has cautioned that

it would seem counter to the objectives of segment reporting if the entity’s business description indicates the

entity is diversified across businesses or products but is not managed in a disaggregated way.

See chapter 4

for disclosure considerations when an entity is organized as a single operating segment.

2.1.1 Engages in business activities

To be an operating segment, a component engages in business activities from which it may recognize

revenues and incur expenses (including revenues and expenses relating to transactions with other

components of the same public entity).

Certain functional departments that do not recognize revenues or that recognize revenues that are incidental

to the entity’s activities would not be operating segments. Corporate headquarters, corporate shared services

and centralized treasury operations generally would not qualify as operating segments. Conversely, a

division that earns revenues, even if its revenues are all intercompany revenues, as might be the case in

a vertically integrated operation (such as in the extractive industry) might be an operating segment.

In certain circumstances, a division that only performs research and development activities might be

considered an operating segment if there is discrete financial information available and the operating

results are reviewed regularly by the CODM (as discussed further below). Even a startup operation that

has not yet earned revenues may meet the requirement of engaging in business activities. Further,

ASC 280 does not preclude such a division from being a reportable segment if management believes the

additional information may contribute to a better understanding of the entity, even if the revenues are

considered incidental (ASC 280-10-55-3 and 55-4).

Components that recognize revenues and incur expenses are not required to have assets to be considered

operating segments. The focus of the criterion is whether the component engages in business activities

from which it may recognize revenues and incur expenses provided it otherwise meets the definition of

an operating segment. For example, Division A, which meets the ASC 280 definition of an operating

segment, leases assets from Division B. The leased assets are presented in the internal financial reports

of Division B. In this case, Division A is an operating segment despite the fact that no assets are allocated

to it. However, if no asset information is provided for a reportable segment, that fact and the reason for

it should be disclosed (ASC 280-10-55-5 and 55-6).

Remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA

National Conference on Current SEC and PCAOB Developments, 9 December 2015.

2 Operating segments

Financial reporting developments Segment reporting | 13

2.1.2 Operating results are regularly reviewed by the CODM to allocate resources

and assess performance

To be an operating segment, the operating results of the component are regularly reviewed by the public

entity’s CODM in order to assess the performance of the individual segment and make decisions about

resources to be allocated to the segment. That is, the CODM makes key operating decisions based on

financial information for the component.

Identification of the CODM

The term “chief operating decision maker” defines a function rather than an individual with a specific

title. The function of the CODM is to allocate resources to and assess the operating results of the

operating segments of an entity and may not necessarily be the individual responsible for strategic

decisions or the individual who has ultimate decision-making authority. It is important to think about what

the key operating decisions are and who is making those decisions for the entity to properly identify the

CODM. Often, an entity’s CODM is its chief executive officer or chief operating officer, but the CODM also

could be a group consisting of top executives (e.g., a management committee or the executive committee

of the board of directors). The SEC staff has encouraged registrants to take a fresh look at their CODM

determination and not default to the entity’s CEO.

Identifying the CODM is critical to the evaluation of operating segments because it is the information

used by the CODM for purposes of allocating resources and assessing performance that would provide

the basis for determining the operating segments.

The function of the CODM is to allocate resources and assess performance for each segment but not

necessarily how these resources are allocated within the individual segments. For example, the CODM

may assess the performance of and allocate resources to an operating segment but delegate the

allocation of those resources within the operating segment to the segment manager.

In most circumstances, the identification of the CODM is rather straightforward based upon clearly defined

operational and reporting protocols of the organization. However, the determination of an entity’s CODM may

be more difficult when the organizational structure of the entity is complex. Consider the following illustration:

Illustration 2-1: Identification of the CODM

Assume that a public entity has a president, a chief executive officer and a chief operating officer and

that these positions are held by different individuals. Also assume that all three of these individuals serve

on a management committee, which exists to make operating decisions related to the operating

segments of the entity, and that each has an equal vote in decisions made by the committee. In this case,

the CODM would be the management committee because the committee, which is evenly controlled by

its members, makes the operating decisions rather than any individual executive. Thus, the internal

financial information that is provided to the members of the management committee in order to make

operating decisions and assess performance would constitute the operating segment information.

While the CODM may be a committee, it is important to note that the mere existence of a management

committee does not necessarily mean that the management committee is the CODM. We believe the

FASB intended to include the management committee concept for situations in which executives were,

in effect, sharing decision-making authority in an entity. When a management committee is used as a

mechanism to provide input to the chief executive officer, the chief executive officer would be the CODM

if they are responsible for assessing performance and making the key operating decisions. However,

if the management committee is the level at which the key operating decisions are made, then the

management committee may be the CODM. In these circumstances, it’s important to understand the

relationship and interaction between the management committee and the level at which the key

operating decisions are being made.

2 Operating segments

Financial reporting developments Segment reporting | 14

The CODM’s assessment of performance and allocation of resources

The periodic financial reporting package provided to the CODM provides insight into how management

has organized the company for purposes of making operating decisions and assessing performance.

Historically, the SEC staff has placed emphasis on the financial information included in the reporting

package reviewed by the CODM, with the presumption that if information was included in the reporting

package provided to the CODM, it must be used by the CODM to assess performance and allocate

resources. However, a company must assess how that financial information is being used by the CODM in

making key operating decisions, and the SEC staff has stated that inclusion of information in a reporting

package should not be the only factor considered in the analysis.

Although it’s important to consider the financial information available and used by the CODM when

identifying an entity’s operating segments, the level in which financial information is presented on a

disaggregated basis in the reporting package given to the CODM is just one data point to consider in the

determination of operating segments. That is, the lowest level of disaggregation presented in the CODM

reporting package would not be determinative. Other factors to consider include the overall management

structure (i.e., the organizational chart, including the roles and responsibilities of those who report

directly to the CODM), how an organizational structure may have changed in recent years due to

acquisitions, dispositions or changes in business strategy, the basis on which budgets and forecasts are

prepared, and the basis for how executive compensation is determined (e.g., performance criteria

underlying compensation plans). However, the SEC staff may continue to request the reporting package

reviewed by the CODM, as well as the company’s organizational structure, to understand how

management makes operating decisions and assesses performance. Consider the following example:

Illustration 2-2: Process for making key operating decisions

Below is the reporting structure for a public entity:

Assume that the six operating units (shoes, pants, shirts, watches, equipment and souvenirs) are

grouped into three divisions (clothing, accessories and sporting goods) and that each of the three

divisions has a segment manager who reports directly to the CODM. The CODM receives discrete

financial information at both the division and component level every month. Even though the CODM

receives discrete financial information for the six components, the company must assess how the

CODM makes key operating decisions and at what level those decisions are made.

Remarks by Dan Murdock, SEC Deputy Chief Accountant, Office of the Chief Accountant, at the 2014 AICPA National

Conference on Current SEC and PCAOB Developments, 8 December 2014; and remarks by Courtney D. Sachtleben, SEC

Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA National Conference on Current SEC and

PCAOB Developments, 9 December 2015.

Souvenirs

Pants

Shirts

Watches

Equipment

Shoes

Clothing Division

Segment Manager

Accessories Division

Segment Manager

Sporting Goods

Segment Manager

CODM

2 Operating segments

Financial reporting developments Segment reporting | 15

The company determines that operating decisions are made at the division level by the CODM. For

example, marketing strategies are determined by the CODM for each division, and each segment

manager is responsible for deploying that strategy at the component level. Also, quarterly financial

information is presented to the board of directors and investors at the division level, which is consistent

with the level at which the CODM makes decisions. In addition, the company determines the following:

• Budgets and forecasts are prepared at the division level, and the CODM reviews budget-to-actual

variances at that level on a monthly basis.

• The segment managers are compensated in accordance with the company’s bonus plan, which

sets targets for each division.

Therefore, the company concludes that while the CODM receives financial information for the

components, performance is assessed and resources are allocated at the division level so the three

divisions are the operating segments.

Some registrants have asserted that the component (the operating units in the example above) could not

be an operating segment because the operating unit managers do not report directly to the CODM. The

SEC staff has historically rejected such assertions when the CODM bases their decisions on the information

provided at the component level (operating unit level) despite the absence of segment managers at that

level. Rather, the registrant must demonstrate that the CODM does not use the individual component

information received, but instead uses information at the more aggregated level (the division level in the

example above) to assess performance and allocate resources. Therefore, it is important to understand

the operating decisions made by the CODM and what information is used to make those decisions.

It is also important to understand the key metrics (e.g., gross margin, EBITDA, operating margin, return

on investment) on which the CODM bases their evaluation of performance and allocation of resources.

In some circumstances, the CODM may emphasize one or two metrics in making their decisions. In

other circumstances, the CODM may use a suite of metrics or performance indicators. Consider the

following example:

Illustration 2-3: Metrics used in key operating decisions

Assume the CODM receives a monthly financial results package that includes metrics for three product

lines and also includes metrics for five geographical areas. The package includes certain metrics for

each product and each of the geographical areas (e.g., revenues, operating margins). However, the

package includes only a measure of earnings before interest, taxes, depreciation and amortization

(EBITDA) for each product line. Although the CODM receives multiple metrics, they assess performance

and allocate resources of the components based on EBITDA results for each product line. This is

corroborated by the existence of a performance bonus plan (i.e., bonuses are based on EBITDA

targets) and is further evidenced by the existence of three product segment managers that report to

the CODM. In this case, although the CODM receives information for the five geographical areas, the

three product lines would appear to be the operating segments.

Registrants should be able to provide verifiable evidence supporting the level at which operating

decisions are made. An analysis of the information presented to the board of directors, the budgeting

process (including the level at which the budget is approved and reviewed), the performance objectives

and criteria underlying compensation plans, the level of autonomy given to segment managers and

recent actions taken by segment managers based on their authority are important factors that will

contribute to the determination of operating segments and support that conclusion.

2 Operating segments

Financial reporting developments Segment reporting | 16

2.1.3 Discrete financial information is available

To be an operating segment, the CODM must have discrete financial information available about the

component in order to assess performance and make resource allocation decisions. It is not necessary

that assets be allocated to a component for it to have discrete financial information. Discrete financial

information can constitute as little as operating information. This financial information must be sufficiently

detailed to allow the CODM to make decisions. At the 2015 AICPA National Conference on Current SEC and

PCAOB Developments, the SEC staff stated that a company shouldn’t conclude that discrete financial

information is not available simply because certain costs are shared and not allocated specifically to each

component. Gross profit information, or other operating measures, provided to the CODM and used to assess

performance and make resource allocation decisions could be considered discrete financial information.

A question that can arise is whether a component for which the CODM receives only revenue information

can be defined as an operating segment. For example, a CODM may receive revenue information by

product line as part of the package of information that the CODM uses to make operational decisions

relating to the entity. In general, the fact that a CODM receives revenue information provided by

component (e.g., by product line, by major customer) would likely mean that the component isn’t an

operating segment because this information isn’t sufficient for the CODM to make decisions about

allocating resources to the component and to assess its performance. However, the facts and

circumstances of each entity should be carefully considered when operating segments are being

determined. We believe it is important for all entities to evaluate how the CODM uses the revenue-only

information in the CODM package, as well as what factors influence the operational decisions the CODM

makes with regard to the allocation of resources and the assessment of each component’s performance.

Illustration 2-4: Discrete financial information

Assume the CODM of an entity receives information that shows revenue for three different products

produced by an operating unit. Operating expense information is not available for each of the products.

Because the CODM does not have a measure of profit or loss by product, they likely would not have

enough information to assess the performance or make resource allocation decisions regarding the

individual products. In this case, the operating segment would need to be at a level where discrete

financial information is available and provided to the CODM for use in making operational decisions.

2.1.4 CODM uses multiple types of segment information

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Operating Segments

280-10-50-6

For many public entities, the three characteristics of operating segments described in paragraph

280-10-50-1 clearly identify a single set of operating segments. However, a public entity may produce

reports in which its business activities are presented in a variety of different ways. If the chief operating

decision maker uses more than one set of segment information, other factors may identify a single set

of components as constituting a public entity’s operating segments, including the nature of the

business activities of each component, the existence of managers responsible for them, and

information presented to the board of directors.

280-10-50-7

Generally, an operating segment has a segment manager who is directly accountable to and maintains

regular contact with the chief operating decision maker to discuss operating activities, financial

results, forecasts, or plans for the segment. The term segment manager identifies a function, not

necessarily a manager with a specific title.

2 Operating segments

Financial reporting developments Segment reporting | 17

280-10-50-8

The chief operating decision maker also may be the segment manager for certain operating segments.

A single manager may be the segment manager for more than one operating segment. If the

characteristics in paragraphs 280-10-50-1 and 280-10-50-3 apply to more than one set of

components of a public entity but there is only one set for which segment managers are held

responsible, that set of components constitutes the operating segments.

280-10-50-9

The characteristics in paragraphs 280-10-50-1 and 280-10-50-3 may apply to two or more overlapping

sets of components for which managers are held responsible. That structure is sometimes referred to

as a matrix form of organization. For example, in some public entities, certain managers are responsible

for different product and service lines worldwide, while other managers are responsible for specific

geographic areas. The chief operating decision maker regularly reviews the operating results of both

sets of components, and financial information is available for both. In that situation, the components

based on products and services would constitute the operating segments.

Many entities, particularly multinational companies with diverse operations, report financial information

to the CODM in more than one way. For instance, the CODM of an entity might get one report that

combines all of the entity’s products for review purposes and breaks down the entity’s business

components geographically, while another report may break down the entity by product, without regard

to geography. Often, both types of reports will reflect business components that could be considered

operating segments under the management approach. In this case, when more than one set of segment

information is used in assessing performance and allocating resources, it becomes necessary to consider

other factors to determine the entity’s operating segments. Factors to consider include:

• The nature of the business activities of each component. The nature of activities of some entities and

the composition of a company’s business may be organized and reported more logically one way than

another. For example, assume that a public entity has a majority of its operations in the US and the

CODM of an entity gets financial information that is organized both by country and by product.

Generally, we would expect the entity to distinguish its business activities by product for segment

reporting purposes. Geography would be less relevant because most of the business is done in the US.

• The existence of segment managers responsible for the components. An operating segment typically

has a segment manager who is directly accountable and maintains regular contact with the CODM to

discuss operating activities, financial results, forecasts or plans for the segment. A segment manager

is not a specific title but rather a function. In certain circumstances, the CODM may be the segment

manager. If the CODM is also a segment manager and that segment has multiple divisions or businesses

that individually (1) constitute components that engage in business activities and, (2) have discrete

financial information available, the entity should carefully consider whether those components are

regularly reviewed by the CODM to assess performance and make resource allocation decisions such

that the multiple divisions or businesses are, in fact, the entity’s operating segments. See section 2.5

for further discussion of the existence of a segment manager and considerations for the

determination of reporting units.

If ASC 280’s three operating segment characteristics apply to more than one set of components of

an organization but there is only one set that has segment managers, generally, the set of

components with segment managers constitutes the operating segments.

Some entities use a matrix form of organization, whereby business components are managed in

more than one way. For example, a public entity may have certain segment managers that are

responsible for geographic regions and other segment managers that oversee the product and

service lines worldwide. The CODM may regularly review the operating results of both sets of

2 Operating segments

Financial reporting developments Segment reporting | 18

components and makes key operating decisions at both levels. In this situation, ASC 280 requires

that the components that are based on products and services be considered the operating segments.

An entity that can demonstrate that its CODM uses only the geographic information to assess

performance and allocate resources can use geographic segments as operating segments.

• Information presented to the board of directors. If only one type of financial information is presented to

the board of directors, that type of data generally is indicative of how management views the entity’s

activities. Accordingly, the business components that make up that type of financial information are

likely the operating segments. If the board of directors receives overlapping information, the business

components distinguished by products and services generally would constitute the operating segments.

When there are multiple types of segment information, judgment will be necessary to evaluate the above

factors in order to determine operating segments.

2.2 Discontinued operations

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Implementation Guidance and Illustrations

Operating Segments—Discontinued Operations

280-10-55-7

If a reportable segment meets the conditions in paragraphs 205-20-45-1A through 45-1G to be

reported in discontinued operations, an entity is not required to also disclose the information required

by this Subtopic. Paragraph 280-10-55-19 addresses whether there is a need to restate previously

reported information if there is a disposal of a component that was previously disclosed as a

reportable segment.

280-10-55-19

Segment information for prior periods for disposal of a component that was previously disclosed as a

reportable segment is not required to be restated. However, if the income statement and balance

sheet information for the discontinued component have been reclassified in comparative financial

statements, the segment information for the discontinued component need not be provided for those

years. Paragraph 280-10-55-7 addresses disclosure requirements if a component of a public entity

that is reported as a discontinued operation is a reportable segment.

ASC 205 provides guidance on the accounting and reporting of discontinued operations. Discontinued

operations may include a “component of an entity,” which is defined in ASC 205-20-20 as comprising

“operations and cash flows that can be clearly distinguished, operationally and for financial reporting

purposes, from the rest of the entity. A component of an entity may be a reportable segment or an

operating segment, a reporting unit, a subsidiary, or an asset group.”

If a component of an entity to be disposed of meets the criteria to be accounted for as a discontinued

operation, ASC 205 provides the guidance on the appropriate financial statement disclosures that would

be required, subsequent to the measurement date, for that component. If the discontinued operation is a

reportable segment, an entity would not be required to also disclose the information required by ASC 280

for that reportable segment. Further, segment information for periods prior to the measurement date of

a discontinued operation previously disclosed as a reportable segment is not required to be restated.

2 Operating segments

Financial reporting developments Segment reporting | 19

If the discontinued operation is part of a reportable segment but not the entire reportable segment (that is,

an aggregated or combined operating segment or a component of an operating segment), the reportable

segment would not include the discontinued operation in the disclosure of segment information for the

period in which the component is classified as a discontinued operation. Further, segment information for

periods prior to the measurement date of a discontinued operation that is part of a reportable segment is

required to be restated to reflect the discontinued operation classification.

As discussed in section 3.2.2, reasonable allocations of costs to operating segments are permitted.

However, allocations of costs to a discontinued operation are limited to those costs that are directly

related to the discontinued operation or that will be eliminated as a result of the discontinued operation.

As a result, there may be costs allocated to operating segments that will not be allocated to the

discontinued operation and that will be reallocated to other operating segments on a go-forward basis.

We believe that if a discontinued operation is a reportable segment and the entity elects to restate prior

years, or the discontinued operation is part of a reportable segment but not the entire reportable

segment (in which case the entity is required to restate prior years), the restatement should include a

reallocation of costs previously allocated to a discontinued operation to the remaining operating segments.

Interpretative guidance on determining what constitutes a component of an entity along with additional

guidance on the accounting and reporting of discontinued operations is provided in our Financial reporting

developments (FRD) publication, Discontinued operations.

2.3 Unconsolidated businesses

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Implementation Guidance and Illustrations

Operating Segments — Equity Method Investees

280-10-55-2

An equity method investee could be considered an operating segment, if, under the specific facts and

circumstances being considered, it meets the definition in paragraphs 280-10-50-1 and 280-10-50-3.

An investee accounted for by the equity method could be considered an operating segment even

though the investor has no control over the performance of the investee. Paragraph 280-10-50-1(b)

provides that an operating segment is one whose operating results are regularly reviewed by the

public entity’s chief operating decision maker to make decisions about resources to be allocated to the

segment and assess its performance. Management may regularly review the operating results and

performance of an equity method investee for purposes of evaluating whether to retain the investor-

investee relationship. This Subtopic does not require that the chief operating decision maker be

responsible for making decisions about resources to be allocated within the segment. That is, this

Subtopic does not require that the chief operating decision maker be responsible for making decisions

at the investee operating level that affect its operations and performance. Therefore, control over the

investee is not a criterion for the investee to be considered an operating segment. For information

relating to equity method investees, see Topic 323.

An equity method investee, joint venture, or any other unconsolidated business could be considered an

operating segment, if it meets the definition of operating segment in ASC 280-10-20, even if the investor

does not control the investee. The CODM may regularly review the operating results and performance of

an equity method investee for purposes of making resource allocations (for example, additional investments

or advances), evaluating financial performance or evaluating whether to retain the investor-investee

relationship. The CODM is not required to be responsible for making decisions at the investee operating

level that affect the investee’s operations and performance in order for the investee to be identified as an

operating segment. Therefore, control over the investee is not a criterion for the investee to be

considered an operating segment.

2 Operating segments

Financial reporting developments Segment reporting | 20

2.3.1 Inclusion of separate financial statements of other entities

In certain situations, a registrant may be required to file audited financial statements of significant

acquired businesses or real estate operations separately in accordance with Rules 3-05 and 3-14 of

Regulation S-X. Refer to our Technical Line, Applying the SEC’s requirements for significant acquired

businesses, for more guidance.

A registrant may also be required to include in its annual reports separate financial statements of an

unconsolidated business (e.g., an equity method investee, joint venture) in accordance with Rule 3-09 of

Regulation S-X. Refer to section 6.4 of our SEC Financial Reporting Series publication, 2022 SEC annual

reports — Form 10-K, for more information.

If registrants are required to file separate financial statements of other entities with the SEC, those

financial statements are not required to include segment disclosures, unless the other entities meet the

definition of a public entity in ASC 280-10-20 as discussed in section 1.

2.4 Reportable segments of public subsidiaries

If a public entity has a subsidiary that is also public, the subsidiary is required to apply ASC 280 in its

separate financial statements. The parent should not automatically assume that the reportable segments of

the subsidiary also are reportable segments to be disclosed in the parent company’s consolidated financial

statements. Determining the number of operating segments of an entity depends on the specific facts and

circumstances and should be separately evaluated for each public entity based on the information provided

to the CODM for that entity. In many cases, the operating segments of the subsidiary also may be

determined to be operating segments of the parent. However, the CODM of the parent may be provided

information on a different basis or the parent may consider aggregating certain of these operating

segments with other operating segments (e.g., divisions of a parent) and then must determine that the

remaining operating segments meet the quantitative threshold to be considered reportable segments.

Illustration 2-5: Public subsidiaries

Consider the following example involving Public Company:

Further assume that Subsidiary C is a public entity and discloses three reportable segments (Dept. Y,

Dept. Z and Division 7) in its separate financial statements. Dept. Y, Dept. Z and Division 7 should not

automatically be considered reportable segments for Public Company because they are reportable

segments for Subsidiary C. Determining the number of operating segments of an entity depends on

the specific facts and circumstances and should be separately evaluated for each public entity.

Example is adapted from ASC 280-10-55-27 through 55-30.

Subsidiary A

Div. 1 Div. 2

Dept. W

Div. 3 Div. 4 Div. 5 Div. 6 Div. 7

Subsidiary B Subsidiary C

Public Company

Dept. X Dept. Y Dept. Z

2 Operating segments

Financial reporting developments Segment reporting | 21

2.5 Goodwill considerations

The proper identification of operating segments affects more than just segment disclosures. That is, the

determination of operating segments also can affect the recognition and measurement of goodwill impairment.

ASC 350 requires goodwill to be assessed for impairment at the reporting unit level, which is defined as

an operating segment (i.e., before aggregation or combination), or one level below an operating segment

(i.e., a component). ASC 350-20-35-34 states, “A component of an operating segment is a reporting unit

if the component constitutes a business or a nonprofit activity for which discrete financial information is

available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews

the operating results of that component.”

The existence of a segment manager is important not only for the determination of operating segments

but also for the identification of reporting units. In instances where there is a single operating segment,

careful consideration should be given to the determination of reporting units. For example, an entity with

a single operating segment but no segment manager reporting to the CODM may determine that the

CODM is the segment manager. When the CODM is the segment manager, an entity should carefully

consider whether the operating segment is the reporting unit or whether more than a single operating

segment exists.

If a segment manager is responsible for the single operating segment (e.g., the chief operating officer)

and reports to the CODM, an entity will need to evaluate the discrete information that is provided to

the segment manager for each component to determine whether the components are reporting units.

See sections 2.1.2 and 2.1.4 for further discussion of the existence of segment managers responsible

for components.

When the operating segment is a reporting unit, an entity may not aggregate the operating

segment/reporting unit with any other reporting units (regardless of whether the other reporting units

are operating segments or components of operating segments) for purposes of testing goodwill for

impairment. When two or more components of an operating segment are identified, ASC 350-20-35-35

requires aggregation of the components within the same operating segment if certain criteria are met.

states that “two or more components of an operating segment shall be aggregated and deemed a single

reporting unit if the components have similar economic characteristics.” Refer to our FRD, Intangibles —

Goodwill and other, for additional considerations related to the determination of whether components of

an operating segment have similar economic characteristics and are therefore required to be aggregated

for the purposes of goodwill impairment testing.

The SEC staff frequently challenges the aggregation of components into a reporting unit. Companies

should be able to clearly explain their determinations of reporting units in relation to their operating

segments. When a registrant concludes that it previously had not properly identified its operating

segments, or that it had incorrectly aggregated reporting units, the registrant should assess its goodwill

for impairment on the basis of the appropriate reporting units. A reassessment based on a greater

number of reporting units could lead the registrant to conclude that it should have recognized a goodwill

impairment charge. In such circumstances, the registrant’s historical financial statements may need to be

restated if the effects are material.

Reporting units that are components of different operating segments should not be aggregated.

Financial reporting developments Segment reporting | 22

3 Reportable segments

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Reportable Segments

280-10-50-10

A public entity shall report separately information about each operating segment that meets both of

the following criteria:

a. Has been identified in accordance with paragraphs 280-10-50-1 and 280-10-50-3 through 50-9 or

results from aggregating two or more of those segments in accordance with the following paragraph

b. Exceeds the quantitative thresholds in paragraph 280-10-50-12.

Paragraphs 280-10-50-13 through 50-18 specify other situations in which separate information about

an operating segment shall be reported. Paragraph 280-10-55-26 and Examples 1 and 2 (see

paragraphs 280-10-55-27 through 55-45) illustrate how to apply the main provisions in this Subtopic

for identifying reportable operating segments.

280-10-50-18A

An entity need not aggregate similar segments, and it may present segments that fall below the

quantitative thresholds.

280-10-50-19

Public entities are encouraged to report information about segments that do not meet the quantitative

thresholds if management believes that it is material. Those who are familiar with the particular

circumstances of each public entity must decide what constitutes material.

Once a public entity has identified its operating segments, the next step is to determine which of those

operating segments will be reported in the notes to the financial statements. ASC 280 allows individual

operating segments to be aggregated for reporting purposes if certain criteria are met. In addition, an

operating segment (or two or more operating segments that collectively meet all of the aggregation

criteria) is required to be separately reported if it meets certain quantitative thresholds. Aggregation of

operating segments is optional — an entity is not required to aggregate similar segments, and it may

separately report an operating segment that falls under the quantitative thresholds. Entities are

encouraged to report information about segments that do not meet the quantitative thresholds if

management believes that separate disclosure is material.

Following is a summary of the steps that a public entity should follow to determine its reportable segments:

• Step 1: If the entity elects to aggregate some or all of its identified operating segments, the entity

would determine which operating segments meet all of the aggregation criteria and, if so, whether

aggregation is consistent with the objective and basic principles of ASC 280 (i.e., aggregation helps

We believe the term “following paragraph” refers to ASC 280-10-50-11 (see section 3.1).

3 Reportable segments

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users better understand the entity’s performance and assess its prospects for future net cash flows).

The operating segments that meet all of the aggregation criteria can be aggregated for purposes of

determining whether the aggregated segment meets the quantitative thresholds.

• Step 2: Determine which operating segments (either individually or those that are aggregated, based

upon Step 1 above) meet the quantitative thresholds (i.e., the 10% tests discussed in section 3.3).

Operating segments or those aggregated together that meet the quantitative thresholds constitute

reportable segments.

• Step 3: For operating segments (either individually or aggregated based upon Step 1 above) that do

not meet the quantitative thresholds and that the entity might elect to combine, assess whether the

operating segments have similar economic characteristics and share a majority of the five other

aggregation criteria. If these criteria (similar economic characteristics and sharing of a majority of

the five other aggregation criteria) are met and combination is consistent with the objective and

basic principles of ASC 280 (i.e., aggregation helps users better understand the entity’s performance

and assess its prospects for future net cash flows), the operating segments can be combined for

reporting purposes and be reported as a single reportable segment.

• Step 4: Determine whether the external revenue of the reportable segments contribute at least 75%

of total consolidated revenue. If they do not, additional operating segments (either individually,

aggregated or combined) that do not individually meet the quantitative thresholds must be reported

separately to reach 75% of consolidated revenue.

• Step 5: Group remaining segments that are not individually reportable and do not share a majority

of the aggregation criteria with another operating segment in the “all other” category, along with

business activities that are not considered operating segments.

3.1 Aggregation criteria

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Aggregation Criteria

280-10-50-11

Operating segments often exhibit similar long-term financial performance if they have similar

economic characteristics. For example, similar long-term average gross margins for two operating

segments would be expected if their economic characteristics were similar. Two or more operating

segments may be aggregated into a single operating segment if aggregation is consistent with the

objective and basic principles of this Subtopic, if the segments have similar economic characteristics,

and if the segments are similar in all of the following areas (see paragraphs 280-10-55-7A through

55-7C and Example 2, Cases A and B [paragraphs 280-10-55-33 through 55-36]):

a. The nature of the products and services

b. The nature of the production processes

c. The type or class of customer for their products and services

d. The methods used to distribute their products or provide their services

e. If applicable, the nature of the regulatory environment, for example, banking, insurance, or

public utilities.

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Implementation Guidance and Illustrations

Aggregation Criteria

280-10-55-7A

Paragraph 280-10-50-11 states that operating segments are considered to be similar if they can be

expected to have essentially the same future prospects. Therefore, the similarity of the economic

characteristics should be evaluated based on future prospects and not necessarily on the current

indicators only. In other words, if the segments do not currently have similar gross margins and sales

trends but the economic characteristics and the other five criteria are met and the segments are

expected to again have similar long-term average gross margins and sales trends, the two segments

may be aggregated.

280-10-55-7B

Likewise, if segments generally do not have similar economic characteristics, but in the current year

have similar gross margins or sales trends and it is not expected that the similar gross margins or sales

trends will continue in the future, it should not be presumed that the segments should be aggregated

for the current-year segment disclosures just because current economic measures are similar.

280-10-55-7C

Aggregation of segments should be consistent with the objective and basic principles of this Subtopic —

to provide information about the different types of business activities in which a public entity engages

and the different economic environments in which it operates in order to help users of financial

statements better understand the public entity's performance, better assess its prospects for future

net cash flows, and make more informed judgments about the public entity as a whole. This Subtopic

mentions that segments having similar economic characteristics would be expected to have similar

long-term average gross margins. That measure is used, only as an example, because gross margin is

a measure of profitability that is less likely to be affected by allocations. Evaluating similar economic

characteristics is a matter of judgment that depends on specific facts and circumstances.

Under ASC 280, a public entity is required to both determine its operating segments and report operating

segment financial information in accordance with the management approach. However, reporting separate

information about every operating segment that the CODM reviews separately may not enhance the

financial statement user’s understanding of the business, particularly when two or more of the operating

segments are so similar that they “can be expected to have the same future prospects.” As such, operating

segments are permitted (but not required) to be aggregated for reporting purposes if the operating

segments meet the aggregation criteria described below. ASC 280 requires companies that elect to

aggregate operating segments to disclose that they have aggregated segments (ASC 280-10-50-21(a)

and Q&A 131, Question 12).

Specifically, ASC 280 allows an entity to aggregate two or more operating segments into a single

operating segment (for purposes of determining whether the aggregated operating segment meets any

of the quantitative threshold tests) only if the operating segments meet the following aggregation

criteria, each of which can require judgment. In assessing whether the aggregation criteria are met, it is

important to note that the aggregation criteria are tests, not indicators, of similarity between operating

segments. The SEC staff has said that the aggregation criteria are intended to be a high hurdle.

Each of

the following criteria must be met for aggregation to be permitted:

• Aggregation must be consistent with the objective and basic principles of ASC 280 (section 3.1.1).

• The operating segments have similar economic characteristics (section 3.1.2).

Remarks by Dan Murdock, SEC Deputy Chief Accountant, Office of the Chief Accountant, at the 2014 AICPA National

Conference on Current SEC and PCAOB Developments, 8 December 2014.

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Financial reporting developments Segment reporting | 25

• The operating segments are similar in all of the five qualitative characteristics, including the nature

of the products and services, the nature of the production processes, the type or class of customer

for their products and services, the methods used to distribute their products or provide their

services and, if applicable, the nature of the regulatory environment (section 3.1.3).

Reasonable judgment with a thorough understanding of the entity’s specific facts and circumstances is

required in applying these criteria. This judgment is informed by the starting point in the analysis, which

is that management has already determined the level of disaggregation that it finds useful in managing

the business.

3.1.1 Consistent with the objective and basic principles of ASC 280

Aggregation must be consistent with the objective and basic principles of ASC 280, which are to help users

better understand the entity’s performance and assess its prospects for future net cash flows. Aggregation is

appropriate only when the operating segments are so similar that presenting the information separately

would not significantly add to an investor’s understanding of the future prospects of the company and its

operating segments. Although the identification of operating segments is based on the management

approach, the aggregation of operating segments should be viewed from the perspective of investors. This

is consistent with the basis for conclusions of Statement 131 (the predecessor to ASC 280) and has been a

focus area of the SEC staff in its review of segment disclosures.

The SEC staff has stated that, in considering

similarity, it is important to consider information such as industry reports and other analyses by users of the

financial statements that may provide evidence of how a reasonable investor would analyze the company.

In reviewing periodic filings, the SEC staff has indicated that it presumes that investors would prefer

information on a more disaggregated basis. As a result, the SEC staff often questions whether it is

consistent with the objective and basic principles of ASC 280 for a company to report just one reportable

segment or a limited number of reportable segments. In addition, the SEC staff may want to understand

the underlying reasons for the company’s organizational structure that resulted in the identification of

separate operating segments and whether those reasons provide evidence that the operating segments are

not similar. Companies that choose to aggregate operating segments should be prepared to explain why an

operating segment is important enough to be individually reported to the CODM, but similar enough to

other segments to be aggregated when reported to investors.

3.1.2 Economic characteristics

Operating segments must have similar economic characteristics to be aggregated. ASC 280 specifically

mentions that segments with similar economic characteristics would have similar long-term average

gross margins.

While ASC 280 includes long-term gross margin as an example of similar economic

characteristics, if the CODM uses a different measure of profit or loss (e.g., EBITDA) to assess performance

and allocate resources to each operating segment, that measure of profit or loss should also be considered

when assessing whether operating segments possess similar economic characteristics. In addition, if

other economic measures are provided to the CODM, the similarities of those economic measures should

also be considered. For example, if the CODM uses sales metrics, return on investment or other standard

industry measures, those metrics may also be relevant in determining economic similarity.

In assessing whether long-term average gross margins (or the appropriate measure of operating

performance used by the CODM to assess performance and allocate resources, such as EBITDA) of

operating segments are sufficiently similar, companies should look to past and present performance as

See paragraph 73 of Statement 131.

Remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA

National Conference on Current SEC and PCAOB Developments, 9 December 2015.

Gross margin is defined as sales minus cost of goods sold.

3 Reportable segments

Financial reporting developments Segment reporting | 26

indicators that segments are expected to have the same future prospects. In other words, if operating

segments do not currently have similar gross margins and sales trends but are expected to again have

similar long-term average gross margins and sales trends, it may be appropriate to aggregate the two

operating segments (provided all other criteria are met). Conversely, if operating segments happen to

have similar gross margins or sales trends in a given year but it is not expected that the similar gross

margins or sales trends will continue in the future, the operating segments should not be aggregated for

the current-year segment disclosures just because current economic measures happen to be similar

(ASC 280-10-55-7A through 55-7C, 55-35, and 55-36).

Illustration 3-1: Changes in economic characteristics in current year

Assume Segments A and B meet all of the five criteria for aggregation and have similar economic

characteristics; however, in the current year, certain economic performance measures differ. That is,

gross margins differ and sales of the segments, which typically move in tandem, displayed a slightly

different growth trend in the current year. Those differences were due to inventory problems caused

by the company’s suppliers and it is expected that the margins and sales trends of Segments A and B

will again be similar next year. In this circumstance, the differences identified in the current-year

results would not preclude these two segments from meeting the similar economic characteristics

criteria and, therefore, being eligible for aggregation (provided all other criteria have been met).

The SEC staff’s objections to aggregation often have been based on its determination that the operating

segments in question do not have similar economic characteristics. The SEC staff looks closely at sales

growth, gross margins, operating margins or other measures of operating performance provided to the CODM

(e.g., EBITDA). The SEC staff has noted that the types of metrics considered and the acceptable level of

differences in those metrics among the segments being evaluated for aggregation may differ across

industries. Additionally, the SEC staff has stated that an expectation that operating segments will have

similar economic characteristics (e.g., long-term average gross margins) in the future does not take

precedence over the lack of similarity in current and past performance.

In addition, the SEC staff may request that the registrant provide an analysis of gross margins or other

economic measures that the CODM uses to assess performance and allocate resources. The SEC staff

carefully reviews the gross margin (or similar) analysis when considering a company’s assertion that operating

segments are similar and, therefore, justify aggregation. In assessing whether aggregation is appropriate, one

factor to consider is whether there are significant differences in current or expected gross margin

percentages or other measures of operating performance. Differences are calculated based on a relative

difference between measures of operating segments rather than a difference in percentage points. For

example, two operating segments with gross margins of 30% and 33% have a relative difference of 10% (33%

less 30% equals 3%, which is then divided by the base margin of 30%, to calculate the relative difference).

ASC 280 does not prescribe a specific threshold for economic similarity, and therefore, there is no bright

line when making this evaluation. However, the greater the percentage difference, the more evidence the

company should have to support economic similarity of its operating segments. For example, a relative

difference of more than 10% may indicate that operating segments are not economically similar and would

require more evidence to support economic similarity. Additional factors may be appropriate to consider

in determining whether a difference in the economic measure percentages would not support a company’s

assertion that operating segments are similar. Those considerations may relate to unforeseen or

unanticipated events that are not indicative of the long-term operating results. For example, as discussed

above, a company may have experienced inventory problems caused by vendors in the current year that

caused gross margins to differ by a greater percentage when compared to an otherwise economically similar

operating segment. In this case, the company might be able to demonstrate that long-term average gross

margins are expected to be similar in the future in order to conclude that the segments have similar

economic characteristics. The question of economic similarity also comes up in circumstances in which a

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Financial reporting developments Segment reporting | 27

company has recently made an acquisition and is currently going through the process of integrating the

target. Consider the following example:

Illustration 3-2: Recent acquisition

Company A, a public entity has recently acquired Company B. Company A previously identified two

operating segments, X and Y, which are also its reportable segments. Company A has determined that

Company B will meet the definition of an operating segment (Segment B). Company A wishes to

aggregate Segment B with its operating segment X. Gross margins of B have historically been 30%

while X’s gross margin has historically been 35%. Company A forecasts that as the result of realizing

synergies through the acquisition, gross margins for Segment B are expected to be 37%. All other

aggregation criteria are met. Therefore, Company A concludes that it is appropriate to aggregate

Segment B with operating segment X. The fact that the difference in historical gross margins is greater

than 10% would not prevent aggregation in this circumstance. However, if Company A does not realize

all or part of the synergies it expected and Company B does not achieve the forecasted gross margins,

Company A would have to reassess whether the segments are economically similar.

Also note that, when operating segments are based on geography and when the relevant macroeconomic

indicators have varied or are expected to vary between the respective geographic regions, it might be

difficult for a registrant to support an assertion that its geographic operating segments exhibit similar

long-term financial performance and qualify for aggregation.

3.1.3 Qualitative characteristics

Careful consideration should be given not only to quantitative factors but also to qualitative factors in

assessing whether it is appropriate to aggregate operating segments. The SEC staff has focused on the

qualitative criteria in ASC 280 and has reminded registrants of the requirement to meet all of the

aggregation criteria in ASC 280.

In the basis for conclusions of Statement 131, the FASB indicated that an entity’s range of activities can

affect conclusions about similarity.

The SEC staff has reminded registrants that the guidance on

determining whether two operating segments are “similar” requires the evaluation to be made relative to

the range of the company’s business activities and the economic environment in which it operates.

The operating segments must be similar in each (i.e., all) of the following areas:

1) The nature of the products and services. Similar products or services generally will have similar

purposes or end uses. Thus, they may be similar types and degrees of risk and similar opportunities

for growth. Evaluation of similarity of products or services should be based on the range of activities

of the organization. For example, when evaluating the similarity of products and services, a company

with a diversified product portfolio may consider certain products to be similar, while a company with

a narrower product portfolio may conclude that those same products are not similar.

Illustration 3-3: Similar products and services

When evaluating the similarity of products and services, a highly diversified company that

manufactures a variety of consumer products, provides financial services and has a construction

business may determine that all of its consumer products are similar. However, an entity that only

sells consumer products might determine that not all of its consumer products are similar.

See paragraph 68 of Statement 131.

Remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA

National Conference on Current SEC and PCAOB Developments, 9 December 2015.

3 Reportable segments

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2) The nature of the production processes. A similar production process might be demonstrated by the

sharing of common or interchangeable production facilities, equipment, labor force or service group

and by using similar raw materials in the production process. Likewise, similarity in the nature and

type of labor or amounts of capital required also may be indicative of a similar production process.

The nature of the production process of two different products may be similar, even if the products

do not function similarly. Consider the following example:

Illustration 3-4: Similar production process

Assume that Life Co., a life sciences company manufactures various pharmaceutical products for

commercial sale. These products include cold medicines and diet pills. Each product is manufactured

through the same production process, even though the products have different applications. Both

products consist of various chemical compounds that are mixed together in batches to create the

end product. Both products undergo quality control testing in order to confirm the efficacy of the

product. Both products also use the same manufacturing equipment for parts of the production

process. Thus, Life Co. concludes that for purposes of the segment aggregation criteria, the

production processes are similar, despite the differences in the applications of the end products.

3) The type or class of customer for their products and services. Factors to consider in evaluating whether

the type or class of customer are similar include: (1) the region or geography in which the products or

services are marketed, (2) the methods used to market the products or services, including the use of a

common or interchangeable sales force and (3) the nature or type of customer, including the industries in

which the customers may operate. Entities should carefully consider whether this criterion has been met

when the products or services are targeted to a different customer base. We understand that the SEC

staff has objected to aggregation in circumstances where one of the operating segments had an

incremental customer base with a material revenue stream.

Consider the following example:

Illustration 3-5: Type and class of customer

Market Co., a diversified clothing manufacturer has two operating segments, Retail and Wholesale.

Retail primarily markets its products to consumers through electronic and print advertising. In

contrast, Wholesale principally markets its products through a network of sales representatives who

call upon the distributors to purchase the products. In considering the type or class of customer,

Market Co. concludes that the type and class of customer are not similar for the two operating

segments based upon the distinction between retail and wholesale as well as the primary marketing

methods for its products. As such, aggregation of the two operating segments would not be permitted.

4) The methods used to distribute their products or provide their services. The determination of whether

two methods of distribution are similar will depend on the structure of a particular company.

Consider the following example:

Illustration 3-6: Retail outlets and internet distribution

Software Co., a software retailer, has two operating segments: Retail, which distributes its

products through retail outlets, and Internet, which distributes its products through a website on

the internet. In evaluating whether these operating segments can be aggregated, Software Co.,

might conclude that the methods to distribute its products are not similar because Retail and

Internet distribute products through different distribution channels.

Remarks by Dan Murdock, SEC Deputy Chief Accountant, Office of the Chief Accountant, at the 2014 AICPA National

Conference on Current SEC and PCAOB Developments, 8 December 2014.

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5) If applicable, the nature of the regulatory environment, for example, banking, insurance or public

utilities. Entities that operate within certain industries may be subject to regulatory requirements

that are promulgated by a government agency. Sometimes two operating segments may produce the

same product through the same production process, but because of differences in the class of

customer and the regulatory environment, the operating segments should not be aggregated. For

example, it may not be appropriate for an entity that has an operating segment that produces a

product under government contracts and an operating segment that produces the same product for

commercial purposes to aggregate these operating segments.

Some entities are comprised of operating segments that operate within different regulatory

environments. We believe that the nature of the regulatory environments in which two or more

operating segments operate might be similar, even if the regulatory bodies are not the same.

ASC 280 does not define the term “similar” and does not provide guidance about what is similar for aggregation

purposes. The FASB acknowledges that the determination of whether two or more operating segments are

similar requires professional judgment and is dependent on the individual facts and circumstances.

3.2 Determining amounts included in segment measures for the quantitative

threshold tests

Once an entity has determined its operating segments and which of those operating segments may be

aggregated, it must next determine which of the operating segments are reportable. Operating segments

(or aggregated operating segments) that meet certain quantitative thresholds are material and must be

individually disclosed under ASC 280. However, entities are encouraged to report information about

segments that do not meet the quantitative thresholds if management believes that the information is

useful to the readers of the financial statements.

The quantitative threshold tests are based on the amounts that are reported internally and used by the

CODM for purposes of allocating resources and assessing the performance of the operating segments.

Generally, these same amounts used in the quantitative threshold tests are the amounts that are reported

in the financial statements for operating segments; however, as discussed in section 3.2.3, if the CODM

uses a different measure of performance for different operating segments, the measures disclosed may

differ from the measures used in the quantitative tests. The amounts used to measure the quantitative

thresholds for operating segments also are affected by the accounting principles used for internal

segment reporting as well as the allocations, if any, to operating segments for internal segment reporting.

ASC 280 does not provide a standard measure of revenues, profit or loss, or assets for reportable

operating segments. Instead, the FASB decided that each segment should be measured on the same

basis as the information used by the CODM. The FASB did not think that a separate measure of segment

profit or loss or assets should have to be developed solely for the purpose of measuring reportable

segments and disclosing segment information.

For example, an entity that accounts for inventory using

a specialized valuation method for internal purposes is not required to restate inventory amounts for

each segment. In addition, an entity that accounts for pension expense only on a consolidated basis is not

required to allocate pension expense to each operating segment.

If the accounting principles and allocations used in generating the financial information for segments are

not consistently applied from period to period, a company is required to disclose the nature of any changes

from prior periods in the measurement methods used to determine reported segment profit or loss and the

effect, if any, of those changes on the measure of segment profit or loss. For example, if an entity switches

See paragraph 74 of Statement 131.

See paragraph 81 of Statement 131.

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from using the FIFO method of valuing inventory at the segment level to using the LIFO method (the

method used in consolidation), an entity would disclose the fact that it had changed its method to measure

inventory at the segment level and would disclose the effect of these changes on segment profit or loss.

3.2.1 Operating segment accounting principles

When presenting segment information, the required information does not have to be provided in accordance

with the same GAAP that are used in consolidation. Instead, segment disclosures should be based on the

accounting principles used to report segment information to the CODM. The FASB decided not to require

that segment information be provided in accordance with the same GAAP used to prepare the consolidated

financial statements because the FASB believes that preparing segment information in accordance with

GAAP used at the consolidated level may be difficult in certain circumstances because some aspects of

generally accepted accounting principles are not intended to apply at the segment level.

Examples

include allocation of the purchase price of an acquisition to individual assets acquired and liabilities

assumed in a business combination when the allocation is made only in consolidation, accounting for the

cost of entity-wide employee benefit plans, accounting for income taxes in an entity that files a

consolidated tax return and accounting for inventory on a LIFO basis if the pools include items in more

than one segment. Further, there is no explicit GAAP for allocating joint costs, jointly used assets or jointly

incurred liabilities or for pricing intersegment transfers.

Furthermore, the segment information is not required to be in accordance with any GAAP. For example,

an entity that reports pension expense on a cash basis for individual segments for internal segment

reporting would not be required to change to GAAP for external segment reporting purposes.

3.2.2 Allocations to operating segments

Under ASC 280, adjustments and eliminations made in preparing a public entity’s consolidated financial

statements and allocations of revenues, expenses, gains or losses are only included in the reported measure of

profit or loss if these items are included in the measure provided to the CODM. Thus, the measure of segment

profit or loss should include items such as allocations of the costs of the headquarters building, equity in the net

income of investees accounted for under the equity method, interest and gains/losses on asset dispositions,

only if these amounts are included in the measure used by the CODM to make operating decisions.

Under the management approach, even revenues and expenses directly incurred by or directly attributed

to an operating segment (e.g., an impairment write-off) are not included in the segment’s profit or loss

unless those items are included in the measure reviewed by the CODM. However, the FASB observed that

it is likely that information used by the CODM would include amounts that clearly are directly attributable

to a particular segment, otherwise the information for decision-making purposes is less useful.

Similarly, only those assets that are included in the measures of the segment’s assets that are used by

the CODM are included in the segment assets that are reported in the financial statements. Even if assets

are directly identifiable with the segment, they are not included in the measure of segment assets unless

they are also included in the information provided to and used by the CODM. Often segment assets

provided to and used by the CODM include assets maintained for general corporate purposes (e.g., corporate

headquarters or common warehouses), intersegment loans and advances, and equity method

investments. However, jointly used assets are not included in the amount of segment assets disclosed

unless they are allocated for the CODM’s review.

If amounts are allocated in the measurement of segment profit or loss or of assets used by the CODM,

the allocations must be reasonable. ASC 280 does not include interpretative guidance with respect to

what types of allocation methods may be acceptable. As a result, there is diversity in practice regarding

See paragraph 84 of Statement 131.

See paragraph 89 of Statement 131.

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the approaches that companies use in allocating amounts to segments. For example, pension expense

may be allocated to individual segments based on the number of employees in each segment as compared

to company-wide headcount or based on a ratio of segment salary expense to consolidated salaries.

Either of these methods may be reasonable, but the amounts allocated could vary significantly.

On the other hand, certain allocation methods might be unreasonable in some cases. For example, a

method that results in the allocation of pension expense to a segment with no employees would appear

to be unreasonable. Because arbitrary approaches to allocations may result in potentially misleading

information, the FASB decided that allocations must be reasonable even if those allocations result in a

deviation from the management approach.

If it is determined that the allocations are not reasonable, we

believe that the segment disclosures should be adjusted from the management approach to reflect a

reasonable allocation. As noted above, ASC 280 does not provide implementation guidance for allocations.

ASC 280 does not require the related asset to be allocated to a segment in order for related revenue or

expenses to be allocated to that segment if the asset is not allocated in reports used by the CODM. For

example, interest revenue on an intercompany loan may be reported by a segment even if the loan

receivable is not identified as a segment asset (e.g., is maintained at the corporate level). Also, if

depreciation expense is allocated to segments for the CODM’s review, it is included in the related segment

disclosures even when the related assets are not included in the CODM’s measure of assets for that

particular segment. Disclosure is required in the circumstances in which asset allocations are not

symmetrical to the related income statement allocations for operating segments.

3.2.3 CODM uses more than one measure of segment profit/loss or segment assets

Companies also should consider the appropriate measure of profit or loss or measure of assets that

should be used to determine reportable segments when more than one measure of profit or loss or of

assets is used by the CODM for their review of operating segments.

Consistent with the disclosure guidance in ASC 280-10-50-28 (see section 4.1.4), if the CODM uses more

than one measure of a segment’s profit or loss, the segment measures to be used in the quantitative test

should be those that management believes are determined in accordance with the measurement principles

most consistent with those used in measuring the corresponding amounts in the entity’s consolidated

financial statements. For example, if the CODM uses operating income and EBITDA to assess performance

and allocate resources, the GAAP measure (i.e., operating income) should be the measurement used in

the quantitative test.

3.2.4 CODM uses different measures for different segments

In certain circumstances the measure of segment profit or loss that is used by the CODM is a different

measure for each segment (for example, if the CODM uses net income for purposes of evaluating the

performance of three segments but uses operating income for purposes of evaluating the performance of

two other segments). In the event that segments are evaluated based on different measures of segment

profit or loss, the threshold criterion of the 10% of profit or loss test should be applied to a consistent

measure of segment profit or loss for each segment (e.g., either net income or operating income at the

company’s consistently applied option), whether or not such measure is consistently used by the CODM for

purposes of evaluating segment performance. While the use of a particular measure is not required, we

generally would expect that entities would choose the measure used for the majority of the operations or

the measure which is most consistent with a GAAP presentation. As discussed in section 4.1, the use of a

consistent measure would not affect the requirement to disclose the actual measure of segment profit or

loss that is used by the CODM for purposes of evaluating each reportable segment. Thus, the measure

used to determine if the segment is reportable (i.e., for the quantitative threshold test) and the measure

presented in the segment disclosures may be different (ASC 280-10-55-40).

See paragraph 88 of Statement 131.

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The combined reported profit and loss of all reportable segments includes reportable operating segments

as well as segments and business activities that would be reported in the “all other” category. Therefore,

the combined measure of profit or loss for the segments should approximate the corresponding measure

used in the consolidated financial statements (absent any reconciling items) (ASC 280-10-55-39). Similarly,

the 10% threshold criteria for revenues and assets should be applied to a combined measure of all segment

revenues and all segment assets, respectively. Such combined measures should approximate (absent any

reconciling items) consolidated revenues and consolidated assets, respectively.

3.2.5 Changes in segment measurements (updated April 2023)

As discussed in section 4.6, restatement of segment disclosures is required only for changes in the

composition of reportable segments, and it is not required for changes in segment measurements. If the

accounting principles or allocations are not consistently applied at the operating segment level, or the

measurement used by the CODM changes, ASC 280-10-50-29 requires disclosure of the nature of any

changes from prior periods in the measurement methods used to determine reported segment profit or loss

and the effect, if any, on the measure of the prior year’s segment profit or loss. In addition, since ASC 280

emphasizes comparability of segments among periods presented, ASC 280-10-50-36 states that restatement

of prior years to reflect the change in segment measurement is preferable if practicable to do so.

For example, if an entity switches from using the FIFO method of valuing inventory at the segment level

to using the LIFO method, the entity would disclose the fact that it had changed its method to measure

inventory at the segment level and would disclose the effect of these changes on prior years’ segment

profit or loss (i.e., the segment profit or loss for each year presented is disclosed with and without the

change in segment measure). Alternatively, the public entity may restate the prior periods to reflect the

segment disclosures as if it had used the LIFO method and disclose the change in accounting method.

As discussed above, this would also apply if the CODM changes the segment measure used for purposes of

assessing performance and allocating resources. For example, if the CODM changes the segment profit or

loss measure from operating income to EBITDA, the entity would disclose that fact and the effect of the

change on prior years’ reportable segments.

Although a restatement is not required for a change in segment measure, it is preferable to show all

segment information on a comparable basis, if practicable. If a CODM undertakes a process to change the

measure used to assess performance and allocate resources, we would expect the entity to provide this

information on a comparable basis to assist users in understanding the performance of the segment.

When the measure of segment profit or loss is changed, the entity should also carefully consider whether

the CODM continues to use the previous measure. If so, the entity needs to report the measure that is

most consistent with that used in measuring the corresponding amounts in its consolidated financial

statements. See section 4.1.4 for considerations when the CODM uses more than one measure of

segment profit or loss.

3 Reportable segments

Financial reporting developments Segment reporting | 33

3.3 Quantitative thresholds

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-12

A public entity shall report separately information about an operating segment that meets any of the

following quantitative thresholds (see Example 2, Cases C, D, and E [paragraphs 280-10-55-39

through 55-45]):

a. Its reported revenue, including both sales to external customers and intersegment sales or transfers,

is 10 percent or more of the combined revenue, internal and external, of all operating segments.

b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in

absolute amount, of either:

1. The combined reported profit of all operating segments that did not report a loss

2. The combined reported loss of all operating segments that did report a loss.

c. Its assets are 10 percent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered

reportable, and separately disclosed, if management believes that information about the segment

would be useful to readers of the financial statements.

A public entity must separately report information about an operating segment that meets any of the

following quantitative thresholds. In addition, an entity may elect to separately report information about

operating segments that do not meet the quantitative thresholds if it believes such information is useful.

These tests can be applied to either single operating segments or to two or more operating segments

that have been properly aggregated for purposes of determining reportability.

• Revenues — The segment’s reported revenue, including sales to external customers and intersegment

sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating

segments. Combined revenue is the sum of all segment revenue, not consolidated revenue

(i.e., intersegment revenues are not eliminated unless they are already eliminated in the segment

measures reviewed by the CODM).

• Profit/loss — The absolute amount of the segment’s reported profit or loss is 10% or more of the

greater, in absolute amount, of (1) the combined profit of all operating segments that did not report

a loss or (2) the combined loss of all operating segments that did report a loss.

• Assets — The segment’s assets are 10% or more of the combined assets of all operating segments.

In addition, as discussed in section 3.5, the combined revenue of reported segments from sales to

external (unaffiliated) customers must constitute at least 75% of total consolidated revenues. Additional

operating segments must be identified as reportable segments (even if they do not meet the quantitative

thresholds) until this test is met.

3.3.1 Revenues

Operating segment revenue includes unaffiliated customer sales and intersegment sales or transfers,

including sales primarily or exclusively to other operating segments of the same entity. Vertically

integrated operating segments also are reportable if they meet the quantitative thresholds. For example,

3 Reportable segments

Financial reporting developments Segment reporting | 34

the extractive, refining and retailing operations of an integrated oil company may be required to report

separately even if sales of the extractive and refining operating segments are primarily to affiliates

(e.g., the oil company’s own retailers). In computing whether an operating segment meets the revenue

threshold for disclosure, an entity should use the revenues that are used by the CODM to allocate

resources and assess performance. Consider the following example:

Illustration 3-7: Revenue test

Reporting Co. has identified five segments: A, B, C, D and E. Further assume that the “all other” category

is attributable to operating segments that are individually insignificant (e.g., four segments with revenues

of under $1 million each) based on a complete quantitative materiality assessment in accordance with

ASC 280-10-50-12 (and as discussed here and in sections 3.3.2 and 3.3.3).

The following information

summarizes sales information for Reporting Co. for its most recent reporting period:

(Amounts in thousands)

Segment

All other

Combined

Eliminations

Consolidated

Revenues from

external customers

$ 2,500

$ 3,000

$ 2,500

$ 19,000

$ 3,500

$ 34,000

—

$ 34,000

Intersegment

revenues

2,000

—

8,000

—

12,000

$ (12,000)

—

Total revenues

$ 4,500

$ 5,000

$ 2,500

$ 27,000

$ 3,500

$ 46,000

$ (12,000)

$ 34,000

Segments B and D are individually reportable under the revenue test as their revenues are at least

$4,600,000, which is 10% of combined revenue of the operating segments of $46,000,000.

Segments A, C and E are not individually reportable under the revenue test.

3.3.2 Profit or loss

In assessing whether an operating segment meets the profit/loss threshold for disclosure, an entity’s

computation is based on the absolute amount of the greater of (1) the combined reported profit of all

operating segments that did not report a loss or (2) the combined reported loss of all operating segments

that did report a loss, using the measure of segment profit or loss that is reviewed by the CODM to allocate

resources and assess performance. Also, similar to the revenue test, profit or loss included in the “all other”

category not related to operating segments are excluded from the test. Consider the following example:

Illustration 3-8: Profit or loss test

Reporting Co. has identified five segments: A, B, C, D and E. Also assume that Reporting Co.’s CODM uses

the measure of segment profit or loss that does not include the loss on sale of assets or equity income.

(Amounts in thousands)

Segment

All other

Combined

Eliminations

Consolidated

Segment profit (loss)

(before items shown

below)

$ (800)

$ (4,000)

$ 900

$ 7,400

$ 400

$ 100

$ 4,000

$ (400)

$ 3,600

Loss on sale of assets

—

(200)

—

(200)

—

(200)

Equity income

—

1,000

—

1,000

—

1,000

Segment profit (loss)

$ (800)

$ (4,000)

$ 700

$ 7,400

$ 1,400

$ 100

$ 4,800

$ (400)

$ 4,400

To the extent that revenues in the “all other” category are not related to an operating segment (e.g., incidental revenues), these

revenues should be subtracted from the combined total to obtain the denominator for purposes of determining which operating

segments are reportable.

This category includes operating segments that are clearly not individually significant as well as net proceeds from incidental

sales of miscellaneous items (e.g., scrap). In this example, we assumed the sale of scrap was at a breakeven otherwise the impact

to the profit/loss would be excluded (similar to the revenue test example).

This column would include such items as intercompany profit eliminations and depreciation on unallocated assets.

3 Reportable segments

Financial reporting developments Segment reporting | 35

Since some operating segments reported income and others reported a loss, Reporting Co. must first

determine the denominator in the calculation, which is the greater, in absolute amount, of (1) the combined

profit of all operating segments that did not report a loss or (2) the combined loss of all operating

segments that did report a loss. The absolute amount of the combined segment profit of all operating

segments that did not report a loss is $8,800,000 ($900,000 + $7,400,000 + $400,000 + $100,000)

and the absolute amount of the combined segment loss for all operating segments that reported a loss

is $4,800,000 ($(800,000) + $(4,000,000)). Therefore, the operating segments with a profit or loss

reported to the CODM of more than $880,000, which is 10% of the greater of $8,800,000, and

$4,800,000 are material and must be individually reported. As a result, operating segments B, C and

D meet the profit or loss test and are required to be separately presented. The following table

summarizes Reporting Co.’s evaluation.

(Amounts in thousands)

Segment

Absolute amount

of profit/loss

Threshold

Reportable?

$800

$880

No (even though over 10% of combined loss)

$4,000

$880

Yes

$900

$880

Yes

$7,400

$880

Yes

$400

$880

3.3.2.1 Use of a consistent measure of profit or loss

The evaluation of the profit or loss test could change if the CODM used different measures of operating

profit or loss for different segments in order to allocate resources and assess performance. As discussed

in section 3.2.4, if profit or loss measures used by the CODM are different by operating segment, a

consistent measure should be used in the quantitative threshold test. We believe that the measure used

should be the one that is most consistent with the GAAP used in the entity’s consolidated financial

statements or the measure that is used for the majority of the operations. Consider the following example:

Illustration 3-9: Different measures of profit or loss

Assume the same facts as in Illustration 3-8 above. Further, assume that Reporting Co.’s CODM uses

a measure of segment profit or loss that includes equity income and the loss on sale of assets for

Segments B and C but uses segment profit or loss before equity income and the loss on sale of assets

for Segments A, D and E. In order to apply the quantitative threshold test, Reporting Co. uses segment

profit or loss that includes equity income and the loss on sale of assets because this is the measure

most consistent with a GAAP presentation.

If segment profit or loss that includes equity income and the loss on sale of assets is used to determine

whether or not the segment meets the profit or loss quantitative threshold, the combined segment

profit of all operating segments that reported a profit is $9,600,000 ($700,000 + $7,400,000 +

$1,400,000 + $100,000). In this case, the operating segments with an absolute amount of profit or

loss reported to the CODM of more than $960,000 (which is the greater of 10% of $9,600,000 and

10% of $4,800,000) are material and must be individually reported. Reporting Co. concludes that

operating segments B, D and E meet the profit and loss test and require separate presentation. The

following table summarizes Reporting Co.’s analysis:

(Amounts in thousands)

Segment

Absolute amount of profit/loss

Threshold

Reportable?

$ 800

$ 960

$ 4,000

$ 960

Yes

$ 700

$ 960

$ 7,400

$ 960

Yes

$ 1,400

$ 960

Yes

3 Reportable segments

Financial reporting developments Segment reporting | 36

3.3.2.2 Aggregation may change reportable segments

As discussed before, ASC 280 requires that segments first be identified, and identified segments may be

aggregated into a single segment. Identified segments (as revised for aggregation) then are measured

against the quantitative thresholds to determine whether they are reportable (ASC 280-10-55-45).

Management’s decision to aggregate may change the number of reportable segments from the number

that would be reported assuming management chooses not to aggregate.

Illustration 3-10: Without aggregation

Assume that Reporting Co. has five operating segments that have operating profit (loss) as

summarized below:

(Amounts in thousands)

Segment

Profit/(loss)

($ 800)

($ 4,000)

$ 900

$ 7,400

$ 400

All other

$ 100

Assuming that Reporting Co. does not choose to aggregate, the threshold calculations for separate

reporting are as follows:

(Amounts in thousands)

Prior to aggregation

Combined reported profits

$ 8,800

Combined reported losses

($ 4,800)

Greater absolute amount

$ 8,800

10% threshold

$ 880

If Reporting Co. does not aggregate, Segments B, C and D would be identified as individually

reportable because they meet the 10% of segment profit or loss criterion. Segments A and E do not

meet the thresholds and are therefore not reportable.

Illustration 3-11: With aggregation

Assume the same facts as in Illustration 3-10. Now assume that Reporting Co. chooses to apply the

aggregation criteria and concludes that Segments B and C meet all of the aggregation criteria. Assuming

that Reporting Co. aggregates, the threshold calculations for separate reporting are as follows:

(Amounts in thousands)

Subsequent to aggregation

Combined reported profits

$ 7,900

Combined reported losses

($ 3,900)

Greater absolute amount

$ 7,900

10% threshold

$ 790

The combined segment profit of all operating segments that reported a profit is now $7,900,000

($7,400,000 + $400,000 + $100,000). As a result, Reporting Co. would be required to separately

present as reportable segments A, D and the aggregated B/C.

This category includes operating segments that are clearly not individually significant as well as net proceeds from incidental

sales of miscellaneous items (e.g., scrap). In this example, we assumed the sale of scrap was at breakeven, otherwise the impact

to the profit/loss would be excluded (similar to the revenue test example).

3 Reportable segments

Financial reporting developments Segment reporting | 37

3.3.3 Assets

When performing the asset test, the asset amount is based upon the measure used by the CODM to

allocate resources and assess performance even if other assets may be identifiable with the operating

segment.

Further, if the CODM does not receive asset information by segment, the asset test need not

be performed to determine if quantitative materiality thresholds have been met.

If the CODM used two measures of total assets to make operating decisions, application of the asset test

would be based on the measure that management believes is more consistent with the measurement

principles used to measure the corresponding amount in the consolidated financial statements. For

example, if one measure of total assets did not include an allocation of the headquarters building but a

second measure included all property, plant and equipment, the second measure would be used because

it more closely corresponds to the consolidated amount.

Illustration 3-12: Asset test

Assume that Reporting Co. has identified the following operating segments: A, B, C, D and E. In

addition, assume that the Reporting Co.’s CODM uses total assets as the measure of segment assets.

The following table summarizes the asset information for Reporting Co.’s operating segments.

Asset test

(Amounts in thousands)

Segment

All other

Combined

Eliminations

Consolidated

Total assets

$ 3,000

$ 6,000

$ 33,000

$ 5,000

$ 58,000

$ (5,000)

$ 53,000

Under the asset test, Segments B, C, and D are reportable because the measure of total assets for

each of these segments is at least $5,800,000, which is 10% of combined segment total assets of

$58,000,000.

3.4 Combination of operating segments that do not meet quantitative thresholds

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-13

An entity may combine information about operating segments that do not meet the quantitative

thresholds with information about other operating segments that do not meet the quantitative

thresholds to produce a reportable segment only if aggregation is consistent with the objective and

basic principles of this Topic, the segments have similar economic characteristics, and the operating

segments share a majority of the aggregation criteria listed in paragraph 280-10-50-11.

To the extent that assets that are in an “all other” category are not related to an operating segment, these assets should be

subtracted from the combined total to obtain the denominator for purposes of determining which operating segments are reportable.

This category is assumed to include operating segments that are clearly not individually significant.

This column would include such items as intercompany receivables, intercompany inventory profit eliminations, purchase price

adjustments made only in consolidation, the headquarters building if not allocated, and the LIFO reserve if segments are reported

using FIFO.

3 Reportable segments

Financial reporting developments Segment reporting | 38

After determining which segments meet the quantitative tests, the entity must decide how to report the

remaining segments that did not meet the quantitative thresholds. If any individual or properly aggregated

operating segment does not meet the quantitative thresholds discussed in section 3.3, the entity is

permitted to combine two or more of those operating segments into a single reportable segment provided

the following conditions are satisfied:

• The combination is consistent with the objective and basic principles of ASC 280 (i.e., to provide the

users of the financial statements with disaggregated information similar to what management

receives in order to better understand the entity’s performance and assess its prospects for future net

cash flows) (as discussed in section 3.1.1).

• The segments have similar economic characteristics (as discussed in section 3.1.2).

• The segments share a majority of the five specific aggregation criteria in ASC 280-10-50-11

(as discussed in section 3.1.3).

Companies may want to combine immaterial operating segments for reporting purposes to help satisfy

the requirement to individually report operating segments that contribute at least 75% of consolidated

revenue (see section 3.5). However, it may be difficult for relatively small operating segments to satisfy

the criteria above and, therefore, be combined into a reportable segment. Also, the SEC staff may

challenge a registrant’s combination of operating segments under ASC 280-10-50-13 in much the same

manner as it challenges aggregation of operating segments under paragraph ASC 280-10-50-11. Refer

to section 3.1 for guidance on aggregating operating segments into reportable segments.

If operating segments do not meet the criteria to be combined and the entity has not met the requirement

to individually report operating segments that contribute at least 75% of consolidated revenue, the entity

must present additional operating segments until the threshold is met. Operating segments that do not

meet the quantitative thresholds are presented for segment reporting purposes in an “all other” category

(see section 3.7).

3.5 Meeting the 75% of consolidated revenue test

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-14

If total of external revenue reported by operating segments constitutes less than 75 percent of total

consolidated revenue, additional operating segments shall be identified as reportable segments (even if

they do not meet the criteria in paragraph 280-10-50-12) until at least 75 percent of total consolidated

revenue is included in reportable segments.

Once an entity determines its reportable operating segments, it must ascertain that the external revenues

attributable to those reportable segments constitute at least 75% of the total consolidated revenues.

Once segments that satisfy the 10% threshold for the revenue, profit/loss and asset tests are identified,

ASC 280 does not specify an approach with respect to the determination of which additional operating

segment(s) should be presented to satisfy the 75% test. As a result, companies that have numerous

operating segments often will have latitude in selecting operating segments to report in order to satisfy

the 75% test. Consider the following example:

If revenue for an equity method investment operating segment is disclosed in the segment disclosures, as discussed in section 3.6, we

do not believe such revenue would be considered in the 75% test as the revenue is not considered to be external revenue to the entity.

3 Reportable segments

Financial reporting developments Segment reporting | 39

Illustration 3-13: Meeting the 75% of consolidated revenue test

Assume Performance Co. has determined that it has seven operating segments that contribute the

following percentages to consolidated revenues. Further, assume that each of the operating segments

that are below 10% of consolidated revenue do not meet either the profit/loss or asset quantitative

threshold tests and, therefore, are not required to be separately reported. The following table

summarizes the revenue information for Performance Co.’s operating segments:

Segment

Percentage of consolidated revenue

27%

Miscellaneous revenue

100%

Based upon the information above, Performance Co. would be required to separately report Segments

A and B because they meet the revenue test. In addition, Performance Co. would be required to

separately report a third segment (or combination of two or more segments) that constitutes at least

8% of consolidated revenue because Segments A and B provide only 67% of consolidated revenue. In

this case, Performance Co. could choose to report individually Segment D or F to achieve the 75%.

Alternatively, if two or more of the less than 10% segments have similar economic characteristics,

meet a majority of the aggregation criteria and the combination is consistent with the objective and

basic principles of ASC 280, they could be combined for reporting purposes (e.g., C and G if they meet

the combination criteria could be combined into a single segment) and reported to achieve the 75%.

Any segment(s) that are not separately reported would be included in the “all other” category, along

with any business activities that do not constitute operating segments.

3.6 Determining whether an equity method investment is a reportable segment

As discussed in section 2.3, an equity method investee or joint venture can be considered an operating

segment if the criteria in ASC 280-10-50-1 are met. Generally, we would not expect that an equity

method investment that is an operating segment would meet the criteria to be aggregated with other

operating segments. As such, the quantitative thresholds would need to be considered to determine if an

equity method investment that is an operating segment is required to be separately reported. We believe

the quantitative tests should be applied to such an equity method investment as follows:

• Revenue — Generally, we do not believe a revenue test would be relevant for an equity method

investment operating segment. However, if the CODM receives and uses revenue information from

the equity method investment as part of the review of the operating segment, we believe the

investee revenue reviewed by the CODM (i.e., the full amount or the investee proportionate share,

whichever is used) should be included in the revenue test to determine reportability. That is, the

revenue amount reviewed would be included in the numerator and would be combined with the

revenue of the other operating segments to determine the denominator.

• Profit/loss — Generally, the calculation should be based on the public entity’s equity in the earnings

of the investee based on the same consistent measure used for the other operating segments. For

example, if EBITDA is used in the public entity’s profit/loss test, the public entity’s proportionate

share of the investee’s EBITDA should be used to determine reportability. Also, if the public entity’s

3 Reportable segments

Financial reporting developments Segment reporting | 40

investment includes an embedded basis difference, the impact of the embedded basis difference on

the equity method profit/loss should be included for purposes of the quantitative threshold test if it is

included in the information used by the CODM.

• Assets — Generally, the calculation should be based on the public entity’s total investment in the

investee, which would include any embedded basis difference, if these amounts are reflected in the

information used by the CODM. However, if the CODM receives and reviews only full or proportionate

asset information from the investee, this amount (either full or proportionate) would be used in the

asset calculation. If the CODM receives and reviews both the total investment and full or

proportionate asset information, we believe the total investment would be used in the asset

calculation as the total investment would be the most consistent with the measurement principles

used in the public entity’s consolidated financial statements.

See section 4.4 for a discussion of the information to be disclosed for an equity method investment that

is required to be separately reported.

3.7 The ‘all other’ category

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-15

Information about other business activities and operating segments that are not reportable shall be

combined and disclosed in an all other category separate from other reconciling items in the

reconciliations required by paragraphs 280-10-50-30 through 50-31. The sources of the revenue

included in the all other category shall be described.

Many public entities have business activities that are not operating segments as defined in ASC 280.

These activities are not required to be separately described in the segment footnote. However, it is not

appropriate to combine these other activities that do not constitute an operating segment (or immaterial

operating segments) with another reportable segment. Rather, these activities, along with operating

segments that are neither individually reportable, nor aggregated (section 3.1) or combined (section 3.4)

with another operating segment, are presented for segment reporting purposes in an “all other” category.

The “all other” category should be presented alongside the reportable segments in the tabular presentation

(i.e., the activities that compose the “all other” category should not be presented as reconciling items to

consolidated totals). Since many immaterial operating segments and other activities potentially could be

included in the “all other” category, ASC 280 requires a public entity to describe the sources of revenue

that are included in the “all other” category.

3.8 Change in the quantitative thresholds from year to year

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-16

If management judges an operating segment identified as a reportable segment in the immediately

preceding period to be of continuing significance, information about that segment shall continue to be

reported separately in the current period even if it no longer meets the criteria for reportability in

paragraph 280-10-50-12.

3 Reportable segments

Financial reporting developments Segment reporting | 41

280-10-50-17

If an operating segment is identified as a reportable segment in the current period due to the

quantitative thresholds, prior-period segment data presented for comparative purposes shall be

restated to reflect the newly reportable segment as a separate segment even if that segment did not

satisfy the criteria for reportability in paragraph 280-10-50-12 in the prior period unless it is

impracticable to do so. For purposes of this Subtopic, information is impracticable to present if the

necessary information is not available and the cost to develop it would be excessive.

When an operating segment (either individually or aggregated) does not meet one or more of the

quantitative thresholds in one year because of abnormal revenues or profits, it may be appropriate to

rely on prior or expected future results for selecting reportable operating segments in order to provide

comparability from year to year. For example, if revenues of an operating segment that historically have

been more than 10% fell to 8% of the combined revenue of all operating segments, that operating

segment likely would be considered a reportable segment if revenues were expected to increase to 10% or

more in the following year(s). However, if revenues were not expected to increase to 10% or more in the

following year(s), and the current year is less than the quantitative thresholds, for comparability purposes,

we believe it is acceptable to continue to disclose the operating segment until all years presented are less

than the quantitative thresholds.

In addition, for comparison purposes, separate segment data should be presented for all prior years presented

(i.e., restated) as well as the current year for an operating segment that meets the quantitative threshold in

the current year, even if the operating segment was less than the quantitative thresholds in prior years.

3.9 Number of reportable segments

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Quantitative Thresholds

280-10-50-18

There may be a practical limit to the number of reportable segments that a public entity separately

discloses beyond which segment information may become overly detailed. Although no precise limit

has been determined, as the number of segments that are reportable in accordance with paragraphs

280-10-50-12 through 50-17 increases above 10, the public entity should consider whether a

practical limit has been reached.

Although the tests are based on a 10% threshold, the application of the tests could result in more than 10

segments that would be reportable. For example, in one entity, seven segments could meet the revenue

test, three additional segments could meet the profit/loss test and four more could meet the assets test.

The FASB indicates in ASC 280 that there may be a practical limit to the number of reportable segments

that an entity separately discloses beyond which segment information may become overly detailed.

Although the FASB did not set a precise limit, it states that as the number of segments that are reportable

increases above 10, the entity should consider whether a practical limit has been reached.

Financial reporting developments Segment reporting | 42

4 Segment disclosure requirements

 Proposed amendment to the standard

In October 2022, the FASB issued an exposure draft that would require public entities to disclose more

segment information, including significant segment expenses and other segment items, on an annual and

interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and

assets that are currently required annually. The proposal would also permit public entities to disclose

multiple measures of segment profit or loss, and public entities with a single reportable segment would

have to provide all the disclosures required by ASC 280, including the proposed disclosures.

Readers should monitor developments.

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Disclosure Requirements

280-10-50-20

A public entity shall disclose all of the following for each period for which an income statement is presented.

However, reconciliations of balance sheet amounts for reportable segments to consolidated balance sheet

amounts are required only for each year for which a balance sheet is presented. Previously reported

information for prior periods shall be restated as described in paragraphs 280-10-50-34 through 50-35.

General Information

280-10-50-21

A public entity shall disclose the following general information (see Example 3, Case A [paragraph

280-10-55-47]):

a. Factors used to identify the public entity’s reportable segments, including the basis of organization

(for example, whether management has chosen to organize the public entity around differences

in products and services, geographic areas, regulatory environments, or a combination of factors

and whether operating segments have been aggregated)

b. Types of products and services from which each reportable segment derives its revenues.

ASC 280 requires a public entity to disclose segment information in both its year-end and interim

financial statements. The FASB believes the disclosure requirements represent a balance between the

needs of financial statement users, who generally want companies to disclose a lot of segment

information, and the cost to preparers.

In addition to the reportable operating segment disclosures, a public entity is also required to make

certain entity-wide disclosures, which are discussed in chapter 5.

See paragraph 92 of Statement 131.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 43

ASC 280 requires an entity to disclose the following information in the footnotes to the annual financial

statements:

• General information describing how the entity’s reportable segments were identified, including the basis

of organization (e.g., by products and services, geographical area, regulatory environments, whether

operating segments have been aggregated

), the types of products and services from which each

reportable segment derives its revenues and the sources of revenue included in the “all other” category

• Profit or loss measurement for reportable segments, including certain revenue and expense

components included in the reported measure of profit or loss

• Assets for reportable segments, including certain asset components included in the measure of

segment assets reviewed by the CODM

• Measurement basis of segment profit or loss and segment assets for each reportable segment

• Reconciliations of the totals of reported segment revenues, profit or loss measurement, assets and

other significant items reported by segment to the corresponding consolidated GAAP totals

The information is required for each period in which an income statement is provided, including segment

asset disclosures even though a Form 10-K requires the presentation of only two balance sheets.

However, segment assets are only required to be reconciled to the consolidated balance sheet assets

for the years in which a balance sheet is presented. See chapter 7 for a comprehensive example of the

segment disclosure requirements.

In addition, summarized information for each reportable segment is required in condensed financial

statements of interim periods.

At times, application of the guidance may result in the identification of a single operating segment. The

SEC staff stated that when such identification is consistent with the guidance, it can be a significant

signal to investors about how management has allocated resources.

Upon arriving at this conclusion,

registrants should disclose that they allocate resources and assess financial performance on a

consolidated basis and explain the basis for that management approach in their disclosure.

4.1 Disclosure of segment profit or loss and segment assets

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Profit or Loss and Assets

280-10-50-22

A public entity shall report a measure of profit or loss and total assets for each reportable segment. A

public entity also shall disclose all of the following about each reportable segment if the specified

amounts are included in the measure of segment profit or loss reviewed by the chief operating

decision maker or are otherwise regularly provided to the chief operating decision maker, even if not

included in that measure of segment profit or loss (see Example 3, Case B [paragraph 280-10-55-48]):

a. Revenues from external customers

Q&A 131, Question 12.

Remarks by Courtney D. Sachtleben, SEC Professional Accounting Fellow, Office of the Chief Accountant, at the 2015 AICPA

National Conference on Current SEC and PCAOB Developments, 9 December 2015.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 44

b. Revenues from transactions with other operating segments of the same public entity

c. Interest revenue

d. Interest expense

e. Depreciation, depletion, and amortization expense

f. Unusual items as described in paragraph 220-20-45-1

g. Equity in the net income of investees accounted for by the equity method

h. Income tax expense or benefit

i. Subparagraph superseded by Accounting Standards Update No. 2015-01

j. Significant noncash items other than depreciation, depletion, and amortization expense.

A public entity shall report interest revenue separately from interest expense for each reportable

segment unless a majority of the segment’s revenues are from interest and the chief operating

decision maker relies primarily on net interest revenue to assess the performance of the segment and

make decisions about resources to be allocated to the segment. In that situation, a public entity may

report that segment’s interest revenue net of its interest expense and disclose that it has done so.

280-10-50-25

A public entity shall disclose both of the following about each reportable segment if the specified

amounts are included in the determination of segment assets reviewed by the chief operating decision

maker or are otherwise regularly provided to the chief operating decision maker, even if not included

in the determination of segment assets:

a. The amount of investment in equity method investees

b. Total expenditures for additions to long-lived assets other than any of the following (see Example 3,

Case B [paragraph 280-10-55-48]):

1. Financial instruments

2. Long-term customer relationships of a financial institution

3. Mortgage and other servicing rights

4. Deferred policy acquisition costs

5. Deferred tax assets.

Measurement

280-10-50-27

The amount of each segment item reported shall be the measure reported to the chief operating

decision maker for purposes of making decisions about allocating resources to the segment and

assessing its performance. Adjustments and eliminations made in preparing a public entity’s general-

purpose financial statements and allocations of revenues, expenses, and gains or losses shall be

included in determining reported segment profit or loss only if they are included in the measure of the

segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets

that are included in the measure of the segment’s assets that is used by the chief operating decision

maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss

or assets, those amounts shall be allocated on a reasonable basis.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 45

280-10-50-28

If the chief operating decision maker uses only one measure of a segment’s profit or loss and only one

measure of a segment’s assets in assessing segment performance and deciding how to allocate

resources, segment profit or loss and assets shall be reported at those measures. If the chief operating

decision maker uses more than one measure of a segment’s profit or loss and more than one measure

of a segment’s assets, the reported measures shall be those that management believes are determined

in accordance with the measurement principles most consistent with those used in measuring the

corresponding amounts in the public entity’s consolidated financial statements.

ASC 280 does not define the segment profit or loss measure of profit or loss to be reported. Rather, the

measure of profit or loss disclosed for reportable segments is the measure used by the CODM to make

decisions about allocating resources to the segment and to assess segment performance. As such, the

components of reported profit or loss will often differ by company, even if the companies are in the same

industry and if the reportable segments are similar. If the CODM uses more than one measure of profit or

loss, the measure reported is the measure most consistent with that used in measuring the corresponding

amounts in the entity’s consolidated financial statements.

See section 4.1.4 for further discussion.

Further, if the CODM uses different measures across operating segments, the measure used to determine

whether or not the segment meets the quantitative threshold may not be the measure disclosed for each

reportable segment. See section 3.2.4 for further discussion of how to make this determination.

4.1.1 What is required to be disclosed

The items described in items a. through j. in ASC 280-10-50-22 are to be separately reported for each

reportable segment only if they are components of the measure of segment profit or loss used by the CODM

or are otherwise regularly provided to the CODM. ASC 280-10-55-12 through 55-15 clarify that these 10

items should be separately reported for each reportable segment if such amounts are “provided to”

the

CODM by segment in management reports or other segment profitability reports, even if these amounts

are not part of the CODM’s basic performance evaluation. That is, if amounts are included by segment in

any reports that are regularly provided to and reviewed by the CODM (for example, interest revenue and

expense), even though they are not included in the measure of segment profit or loss (operating income),

then disclosure of such amounts is required.

For example, the CODM evaluates the performance of its segments based on EBITDA. However, included in

the management reports reviewed by the CODM are summaries of depreciation and amortization expense

related to each of the segments. Although depreciation and amortization expense is not included in “the

measure of segment profit or loss” reviewed by the CODM, depreciation and amortization expense would be

required to be disclosed for each reportable segment because it is included in segment reports provided to

the CODM. This conclusion does not change the requirement that the measure of segment profit or loss to

be disclosed for each reportable segment be based on the segment EBITDA data that are used by the CODM.

Conversely, if the CODM uses pretax income to assess the performance and allocate resources to the

entity’s segments, and the management reports or segment profitability reports used by the CODM do

not contain allocations of income tax expense or benefit, that entity would not disclose an amount for

income tax expense or benefit by segment.

ASC 280-10-55-9.

We believe the term “provided to” should be interpreted to include not only amounts that are specifically and separately provided

to the CODM, but amounts that are inherently provided to the CODM. For example, if the CODM reviews operating income and is not

separately provided depreciation expense, we believe depreciation expense is “provided to” the CODM as it is inherently included in

the determination of operating income and, as such, is a component of the measure of segment profit or loss used by the CODM.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 46

4.1.2 What is not required to be disclosed

Amounts that are not allocated for purposes of the CODM’s review should not be allocated for reporting

purposes. Further, a public entity is not required to disclose any components of the measure of profit

or loss used by the CODM other than those 10 items that are noted above. For example, some entities

engage in significant research and development activities and allocate research and development

expense to operating segments for internal review purposes. ASC 280 does not require disclosure of this

expense, even if the expense is allocated for the CODM’s use. However, amounts allocated are included in

the measure of the segment’s profit or loss that is disclosed.

Also, separate disclosure of noncontrolling interest by segment is not required, even if these items are

reported to the CODM. For example, if an entity consolidates a 60% owned subsidiary that constitutes a

reportable operating segment, the entity would not be required to separately disclose the noncontrolling

interest share of the earnings of the subsidiary in the reported segment profit or loss information. However,

companies may wish to separately disclose these items to help users understand the information.

4.1.3 Non-GAAP measures

By definition, a segment measure of profit or loss that a company is required to disclose in accordance

with ASC 280 (i.e., the measure that is reported to the CODM for purposes of making decisions about

allocating resources to the segment and assessing its performance) is not a non-GAAP measure and is

not subject to the rules and regulations on the use of non-GAAP financial measures by SEC registrants.

The SEC staff’s Compliance & Disclosure Interpretations (C&DIs)

on the use of non-GAAP financial

measures address this point. “Because [ASC 280] requires or expressly permits the footnotes to the

company’s consolidated financial statements to include specific additional financial information for each

segment, that information also would be excluded from the definition of non-GAAP financial measures,”

the C&DIs state.

As discussed in section 4.3, ASC 280 requires a reconciliation of the total of the reportable segments’

measures of profit or loss to the entity’s consolidated income before taxes and discontinued operations.

However, the SEC staff’s C&DIs state that if the total segment profit or loss measure is presented in any

context other than the reconciliation required by ASC 280 in the note to the financial statements

(e.g., MD&A), the total of reportable segments’ measures of profit or loss would be considered a non-GAAP

measure and the presentation would have to comply with all of the non-GAAP rules and regulations.

The SEC rules

describe the requirements for disclosing non-GAAP measures in SEC filings and other

communications, including the following:

• Non-GAAP measures cannot be presented in any way that may be misleading.

• Non-GAAP measures must be reconciled to the most directly comparable GAAP measure (which may

be the measure of segment profit under ASC 280 for adjusted segment measures).

• Non-GAAP measures cannot be given prominence that is equal to or greater than the GAAP measures.

• Non-GAAP measures must be accompanied by disclosures about why they are useful to investors and

how management uses them.

Section 104. Segment Information, of the C&DIs on Non-GAAP Financial Measures can be found at

https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

Regulation S-K Item 10(e).

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 47

At the 2016 AICPA National Conference on Current SEC and PCAOB Developments,

the SEC staff said

that companies should not attempt to circumvent the rules on non-GAAP measures by disclosing multiple

measures of a segment’s profit or loss in their financial statements. See section 4.1.4 for considerations

when the CODM uses more than one measure of segment profit or loss.

Similarly, the SEC staff may challenge a company that discloses a measure of segment profit or loss (that

would otherwise be considered a non-GAAP measure) as part of its ASC 280 disclosure, but the company

is managed as one operating segment and, therefore, discloses a single reportable segment. As discussed

in section 4.1.4, when the CODM uses multiple measures, ASC 280-10-50-28 requires disclosure of the

measure that is most consistent with the one used in measuring the corresponding amounts in the

entity’s consolidated financial statements (e.g., operating income instead of EBITDA). Therefore, the SEC

staff has challenged the presentation of such a measure since it would not be consistent with a

consolidated profit or loss measure presented in accordance with US GAAP.

The SEC’s requirements for management’s discussion of business segments are designed to give registrants

the flexibility to discuss their business in the manner most appropriate to the company’s facts and

circumstances. However, the C&DIs also indicate that when a registrant includes in its MD&A a discussion

of segment profitability determined in accordance with ASC 280, it also should include a discussion of the

reconciling items (as disclosed in accordance with ASC 280) that apply to the particular segment being

discussed. Refer to our SEC Financial Reporting Series publication, 2022 SEC annual reports — Form 10-K,

for additional considerations related to MD&A disclosure requirements.

4.1.4 CODM uses more than one measure of segment profit/loss or segment assets

Companies should consider the appropriate measure of profit or loss or measure of assets that should be

disclosed in accordance with ASC 280-10-50-22 when more than one measure of profit or loss or of

assets is used by the CODM for their review of operating segments.

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Measurement

280-10-50-28

If the chief operating decision maker uses only one measure of a segment’s profit or loss and only one

measure of a segment’s assets in assessing segment performance and deciding how to allocate

resources, segment profit or loss and assets shall be reported at those measures. If the chief operating

decision maker uses more than one measure of a segment’s profit or loss and more than one measure

of a segment’s assets, the reported measures shall be those that management believes are determined

in accordance with the measurement principles most consistent with those used in measuring the

corresponding amounts in the public entity’s consolidated financial statements.

Comments by Mark Kronforst, SEC Chief Accountant, Division of Corporation Finance, at the 2016 AICPA National Conference on

Current SEC and PCAOB Developments.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 48

Implementation Guidance and Illustrations

A Public Entity Uses Multiple Performance Measures in Evaluating Segment Performance and

Allocating Resources

280-10-55-9

If a public entity uses multiple performance measures in evaluating segment performance and allocating

assets, the reported measures shall be those that management believes are determined in accordance

with the measurement principles most consistent with those used in measuring the corresponding

amounts in the public entity's consolidated financial statements (see paragraphs 280-10-50-27

through 50-29). Preparing segment information in accordance with the GAAP used at the consolidated

level would be difficult because some GAAP are not intended to apply at a segment level. Examples

include accounting for income taxes in a public entity that files a consolidated income tax return.

280-10-55-10

Entities may use multiple performance measures in evaluating segment performance and allocating

resources including both pretax and after-tax measures. Because it may not always be practicable to

apply GAAP relating to income taxes to the segment level, after-tax segment measures are not

typically in accordance with GAAP. Therefore, either a pretax or after-tax measure could be used for

reporting segment information, with disclosure of the difference in measurement principles for

determining taxes, if an after-tax measure is used. However, if the after-tax measures are determined

on the same basis as the consolidated financial statements, the after-tax measure would be the

preferable measure of segment profit or loss to report.

If the CODM uses more than one measure of profit or loss, the measure reported to meet the requirements

in ASC 280-10-50-22 is the measure most consistent with that used in measuring the corresponding

amounts in the entity’s consolidated financial statements.

In certain instances, a CODM may use both pretax and after-tax measures in evaluating segment

performance and allocating resources. However, since it may not always be practicable to apply income

taxes in accordance with GAAP at a segment level (for example, accounting for income taxes in an entity that

files a consolidated tax return), after-tax segment measurements may not be in accordance with GAAP.

Therefore, either a pretax or after-tax measure could be used for reporting segment information, provided

that the difference in measurement principles for income taxes is disclosed when the after-tax measure is

used. However, if the after-tax measures are determined on the same basis as the consolidated financial

statements, the after-tax measure would be the preferable measure of segment profit or loss to report.

The SEC staff only considers the measure of segment profit or loss disclosed in accordance with ASC 280

to be required by US GAAP. Accordingly, measures of segment profit or loss other than the measure

required to be disclosed under ASC 280 are considered non-GAAP measures, unless calculated in

accordance with US GAAP. The SEC staff has stated that non-GAAP measures can never be presented in

the financial statements, and it objects to the presentation of a non-GAAP measure in the footnotes

when an entity has disclosed that the CODM also uses a GAAP measure to assess performance and

allocate resources.

For example, if the CODM uses operating income and EBITDA to assess

performance and allocate resources, the measure of segment profit would be operating income.

Therefore, companies should expect the SEC staff to challenge the disclosure of the additional non-GAAP

financial measure (EBITDA) by a reportable segment in the footnotes. Consider the following example:

Comments by Patrick Gilmore, SEC Deputy Chief Accountant, Division of Corporation Finance, at the 2020 AICPA Conference on

Current SEC and PCAOB Developments.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 49

Illustration 4-1: Multiple measures of segment profit

Company X’s CODM uses multiple measures of segment income when allocating resources and assessing

performance of Company X’s operating segments. These measures include income before income taxes

and income before income taxes and depreciation expense. The appropriate income measure to be

reported by Company X in its segment disclosure is the measure that includes depreciation expense

because depreciation expense is included in the measurement of the corresponding amount (i.e., income

before income taxes) in the consolidated financial statements.

4.1.5 Materiality

While the provisions of ASC 280 are not required to be applied to immaterial items, the basis for conclusions

of Statement 131 stated that “magnitude by itself, without regard to the nature of the item and circumstances

in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment.”

Evaluating materiality may be more challenging when an item is not material to the consolidated financial

statements but is material to the segment and requires careful consideration of the facts and circumstances.

Thus, an item of segment information that, if omitted, would change a user’s decision about that segment so

significantly that it may change the user’s decision about the entity as a whole may be material, even though

an item of a similar magnitude might not be considered material if it were omitted from the consolidated

financial statements. Therefore, entities are encouraged to report information about segments that may not

be material to the consolidated financial statements. The determination of what is material is a matter of

professional judgment and must be made by those who are familiar with the particular circumstances of the

entity, especially for those items that are of a material magnitude to the segment but not a material

magnitude to the consolidated amounts. Factors that may be helpful in assessing materiality include

considering whether an item distorts the trends reflected in the segment or consolidated information and

whether an item is considered by management to be important to the entity’s future profitability.

The considerations with respect to materiality by the SEC often consider the effect on segment disclosures.

For example, the SEC settled civil proceedings alleging W. R. Grace & Co. (Grace) intentionally manipulated

earnings of its Health Care Group and, thereby, misled investors. The misstated amounts were not material

to Grace’s consolidated results but had a significant impact on the Health Care Group’s results, which was a

reported industry segment. The erroneously reported Health Care Group growth rates remained relatively

steady from 1991-1995. However, actual growth rates showed a significantly different trend. The SEC

asserted that the misstatements resulting from the erroneous reserves were material to investors because

they affected reported trends in operations. In this situation, the SEC indicated that materiality was not

viewed solely in relation to the dollar amounts involved to the consolidated entity, but also included other

qualitative factors such as information related to an industry segment and segment trend information.

ASC 250-10-S99-1 provides the SEC staff view regarding the factors that registrants may look to in

determining when a misstatement is immaterial, including both quantitative and qualitative factors, as

well as matters related to aggregation and netting. Included in these qualitative factors are “whether the

misstatement concerns a segment or other portion of the registrant’s business that has been identified

as playing a significant role in the registrant’s operations or profitability.”

The materiality of a misstatement may depend on where it appears in the financial statements. For

example, a misstatement may involve a segment of the registrant’s operations. In that instance, in

assessing materiality of a misstatement to the financial statements taken as a whole, registrants and

their auditors should consider not only the size of the misstatement but also the significance of the

segment information to the financial statements taken as a whole. The SEC guidance outlines that “a

misstatement of the revenue and operating profit of a relatively small segment that is represented by

management to be important to the future profitability of the entity is more likely to be material to

investors than a misstatement in a segment that management has not identified as especially important.”

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 50

4.1.6 Interest

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Profit or Loss and Assets

280-10-50-23

Disclosure of interest revenue and interest expense included in reported segment profit or loss is

intended to provide information about the financing activities of a segment.

280-10-50-24

If a segment is primarily a financial operation, interest revenue probably constitutes most of segment

revenues and interest expense will constitute most of the difference between reported segment

revenues and reported segment profit or loss. If the segment has no financial operations or only

immaterial financial operations, no information about interest is required.

Disclosure of interest revenue and interest expense included in the reported measure of segment profit or

loss is intended to provide information about the financing activities of a segment. Both interest revenue

and interest expense should be separately presented; however, an entity is permitted to report interest

revenue net of interest expense if (1) a majority of the segment’s revenues are from interest and (2) the

CODM relies primarily on the “spread” between interest revenue and interest expense (net interest

revenue) to assess performance of the segment and to make resource allocation decisions (e.g., banking,

insurance, leasing and financing companies). The entity is required to disclose the fact that it has elected

to report net interest revenue. If a segment has no financial operations or only immaterial financial

operations, no disclosure of information about interest is required.

In addition, if the CODM reviews the performance of and allocates resources to the entity’s segments using a

measure of segment profit or loss that includes interest charged internally between the segments, disclosure

of intercompany interest along with external interest is required (ASC 280-10-55-11). In this circumstance,

intercompany interest should be included in the amounts of interest revenue and interest expense to be

disclosed for each respective segment. Intercompany interest should not be disclosed if it is eliminated from

the measure of a segment’s profit or loss and is not otherwise regularly provided to the CODM.

4.1.7 Segment assets

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Profit or Loss and Assets

280-10-50-26

If no asset information is provided for a reportable segment, that fact and the reason therefore shall

be disclosed.

ASC 280 requires a public entity to disclose a measure of assets for each reportable segment. Generally,

this disclosure would include only the assets that are included in the measure of the segment’s assets

reviewed by the CODM for assessing performance and allocating resources. However, if the amounts

required to be disclosed separately by segment are included by segment in any of the reports that

regularly are provided to the CODM, disclosure of such amounts is required even if those amounts are

not included in the measure of segment assets reviewed by the CODM (ASC 280-10-55-14).

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 51

In certain cases, an entity may not allocate any assets to a segment and, therefore, no amount of assets

is reported to the CODM and disclosed in the financial information for the segment. When an operating

segment with no separately identified assets included in the discrete financial information provided to the

CODM is a reportable segment, the fact that asset information is not available should be disclosed.

In addition to the measure of segment assets, an entity is required to disclose the following components

of segment assets if these components are included in the measure of segment assets used by the CODM

or otherwise provided to the CODM:

• The amount of investment in equity method investees, such as joint ventures, unconsolidated

subsidiaries and other investments accounted for under the equity method

• Total expenditures for additions to long-lived assets (excluding financial instruments, certain

intangible assets of financial institutions, deferred policy acquisition costs and deferred tax assets)

Segment liabilities do not have to be reported, even if they are reported to the CODM. However, an entity

can elect to voluntarily make these disclosures.

4.2 Explanation of measurements

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Measurement

280-10-50-29

A public entity shall provide an explanation of the measurements of segment profit or loss and

segment assets for each reportable segment. At a minimum, a public entity shall disclose all of the

following (see Example 3, Cases A through C [paragraphs 280-10-55-47 through 55-49]):

a. The basis of accounting for any transactions between reportable segments.

b. The nature of any differences between the measurements of the reportable segments’ profits

or losses and the public entity’s consolidated income before income taxes and discontinued

operations (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through

50-31). Those differences could include accounting policies and policies for allocation of centrally

incurred costs that are necessary for an understanding of the reported segment information.

c. The nature of any differences between the measurements of the reportable segments’ assets and

the public entity’s consolidated assets (if not apparent from the reconciliations described in

paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies

and policies for allocation of jointly used assets that are necessary for an understanding of the

reported segment information.

d. The nature of any changes from prior periods in the measurement methods used to determine

reported segment profit or loss and the effect, if any, of those changes on the measure of

segment profit or loss.

e. The nature and effect of any asymmetrical allocations to segments. For example, a public entity

might allocate depreciation expense to a segment without allocating the related depreciable

assets to that segment.

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As discussed earlier, segment information under the management approach is not required to be

prepared in accordance with GAAP. Thus, ASC 280 requires an entity to explain how segment profit or

loss and segment assets are measured for each reportable segment by providing, at a minimum, the

following information:

• The basis of accounting for transactions between reportable segments (e.g., intersegment sales).

For example, an entity should disclose how it determines its internal selling price when its wholesale/

manufacturing segment sells product to its retail segment.

• The nature of differences between the measurements of the reportable segments’ profits or losses and

the entity’s consolidated income before income taxes and discontinued operations (if not apparent from

the reconciliations to consolidated amounts — see below). The differences could include accounting

policies and allocation methods for centrally incurred costs that are necessary for an understanding of

the reported segment information. For example, an entity that recognizes commission expense paid to

salespeople at the time cash is collected for segment purposes, but for consolidated reporting purposes

recognizes commission expense when the related revenue is recorded, would need to disclose that

policy and reflect this difference in the reconciliation to consolidated amounts.

• The nature of differences between the measurements of the reportable segments’ assets and the

entity’s consolidated assets (such as policies for allocation of jointly used assets), if not apparent

from the reconciliation of those amounts. For example, an entity should disclose its policy to account

for inventory on the FIFO basis at the segment level if at the consolidated level inventory is

accounted for on a LIFO basis.

• The nature and effect on segment profit or loss of any changes from prior periods in the measurement

methods used to determine segment profit or loss, if not apparent from the reconciliation of those

amounts. For instance, if an entity allocated pension expense to operating segments based on the

number of employees in each segment in one year, and in the following year allocated pension

expense based on the segments’ total salary expense in relation to the consolidated amounts, the

change in allocation method as well as the effect of the change should be disclosed. As discussed in

section 3.2.5, although not required, restatement of prior years to reflect the change in segment

measurement would be preferable.

• The nature and effect of any asymmetrical allocations to segments. Asymmetrical allocations are

differences between the measurements of the reportable segments’ assets and those segments’

profits. For example, if an operating segment reported a significant gain on a sale of a long-lived

asset, but the long-lived asset was carried on the corporate books rather than on the books of the

segment, that should be disclosed.

4.3 Reconciliations

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Reconciliations

280-10-50-30

A public entity shall provide reconciliations of all of the following (see Example 3, Case C [paragraphs

280-10-55-49 through 55-50]):

a. The total of the reportable segments’ revenues to the public entity’s consolidated revenues.

4 Segment disclosure requirements

Financial reporting developments Segment reporting | 53

b. The total of the reportable segments’ measures of profit or loss to the public entity’s consolidated

income before income taxes and discontinued operations. However, if a public entity allocates

items such as income taxes to segments, the public entity may choose to reconcile the total of the

segments’ measures of profit or loss to consolidated income after those items.

c. The total of the reportable segments’ assets to the public entity’s consolidated assets.

d. The total of the reportable segments’ amounts for every other significant item of information

disclosed to the corresponding consolidated amount. For example, a public entity may choose to

disclose liabilities for its reportable segments, in which case the public entity would reconcile the

total of reportable segments’ liabilities for each segment to the public entity’s consolidated

liabilities if the segment liabilities are significant.

280-10-50-31

All significant reconciling items shall be separately identified and described. For example, the amount

of each significant adjustment to reconcile accounting methods used in determining segment profit or

loss to the public entity’s consolidated amounts shall be separately identified and described.

In addition to the disclosures regarding how and why segment information differs from consolidated

financial information, public entities are required to disclose quantitative reconciliations of differences

between combined segment information and consolidated totals, with separate disclosure of significant

reconciling items:

• The total of the reportable segments’ revenues to the entity’s consolidated revenues. The combined

reportable segment revenue amount often will include intersegment revenues that have to be

eliminated in consolidation, and therefore, the elimination would be reported as a reconciling item.

• The total of the reportable segments’ profit or loss to the entity’s consolidated income before income

taxes and discontinued operations. If an entity allocates these items to segments, the entity may

reconcile the combined total of the reportable segments’ profit or loss to the consolidated income

amount that reflects these items. For example, if the CODM uses segment net income to assess

performance and allocate resources, then an entity should reconcile the combined total of reportable

segment net income to consolidated net income.

• Intersegment profit must be eliminated in consolidation and, therefore, would be a reconciling item

where intersegment revenues were reported (unless the transfer price between segments equaled the

cost to the selling segment). The reconciliation also should identify items not allocated to reportable

segments or included in “all other” category, but recorded in consolidation, such as centrally incurred

corporate overhead expenses. Accounting policy differences also would be identified in the reconciliation.

For instance, if pension expense is allocated to segments on the cash basis for internal reporting, the

adjustment to pension expense in consolidation would be identified in the reconciliation.

• The total of the reportable segments’ assets that are required to be disclosed to the entity’s

consolidated assets. Frequently, an entity will not allocate to segments those assets that are used by

more than one segment, such as warehouses and corporate headquarters. These items would

represent reconciling items. Further, if the total of current assets is the measure of total segment

assets reported, the entity should reconcile this total to consolidated current assets.

• The total of the reportable segments’ amounts for every other significant item of information disclosed

(e.g., interest, segment liabilities if voluntarily presented) to the corresponding consolidated amount.

4 Segment disclosure requirements

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4.4 Disclosures and reconciliations related to equity method investments

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Implementation Guidance and Illustrations

Information About Profit or Loss and Assets Measurement

Proportionate Consolidation Used to Measure Performance of an Equity Investee

280-10-55-8

In measuring the performance of its equity investees, proportionate consolidation shall be used for

reporting segment information if that is the way in which such information is reviewed by the chief

operating decision maker. This Subtopic specifies that the amount of each segment item reported shall

be the measure reported to the chief operating decision maker for purposes of making decisions about

allocating resources to the segment and assessing its performance. If proportionate consolidation is

used for segment reporting, this Subtopic also requires disclosure of the accounting policy followed for

segment reporting (see paragraph 280-10-50-29(b)), the elimination of the investee's revenues and

assets in reconciling to consolidated results (see paragraphs 280-10-50-30 through 50-31), and the

investment in and equity income from the investee (see paragraphs 280-10-50-22(g) and 280-10-50-

25(a)). Even though the proportionate consolidation method may be used for internal reporting

purposes (and thus for external reporting of segment information), that method is not permitted for

purposes of preparing general-purpose financial statements in accordance with generally accepted

accounting principles (GAAP) except where it is established industry practice (for example, in some oil

and gas venture accounting).

If an equity method investment is considered a reportable segment, as discussed in section 3.6, an entity

is required to disclose financial information that is consistent with the management approach and is

based on the information the CODM receives and uses for purposes of assessing performance and

allocating resources. If the CODM reviews financial information of the equity method investee on a

proportionate consolidation basis, the entity would provide its segment disclosures on a proportionate

consolidation basis. Similarly, if the CODM reviews full financial information of the investee (e.g., total

revenue, total profit or loss), we believe it would be appropriate for the entity to provide its segment

disclosures on that basis (i.e., full financial information of the investee).

If the information an entity discloses about the investee differs from the equity in earnings (losses)

measured in accordance with US GAAP, ASC 280 also requires an entity to disclose the accounting policy

it follows for segment reporting (see section 4.2) and eliminate the investee’s full or proportionate

amounts in reconciling to consolidated amounts (see section 4.3). Further, ASC 280 may require an

entity to disclose the investment in and equity in earnings (losses) of the investee (see section 4.1).

Entities should also consider whether additional disclosures are necessary to make sure that the financial

information they present about the investee is not misleading.

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4.5 Interim period information

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Interim Period Information

280-10-50-32

A public entity shall disclose all of the following about each reportable segment in condensed financial

statements of interim periods:

a. Revenues from external customers

b. Intersegment revenues

c. A measure of segment profit or loss

d. Total assets for which there has been a material change from the amount disclosed in the last

annual report

e. A description of differences from the last annual report in the basis of segmentation or in the

basis of measurement of segment profit or loss

f. A reconciliation of the total of the reportable segments’ measures of profit or loss to the public

entity’s consolidated income before income taxes and discontinued operations. However, if a public

entity allocates items such as income taxes to segments, the public entity may choose to reconcile

the total of the segments’ measures of profit or loss to consolidated income after those items.

Significant reconciling items shall be separately identified and described in that reconciliation.

280-10-50-33

Interim disclosures are required for the current quarter and year-to-date amounts. Paragraph 270-10-

50-1 states that when summarized financial data are regularly reported on a quarterly basis, the

information in the previous paragraph with respect to the current quarter and the current year-to-date

or the last 12 months to date should be furnished together with comparable data for the preceding year.

Implementation Guidance and Illustrations

Interim Period Information

280-10-55-16

Interim information is intended to be an update of the information that was presented in the most

recent annual financial statements. Therefore, in the absence of a change in the structure of a public

entity’s internal organization during an interim period that would cause the composition of its

reportable segments to change, generally, a public entity need not apply the quantitative tests in each

interim period. However, if facts and circumstances change that would suggest that application of the

quantitative tests in an interim period would reveal a reportable segment that was previously not

reportable, and management expects that the segment will continue to be of significance, the segment

should be disclosed as a new, separate reportable segment. This conclusion is consistent with the basic

principle of interim financial reporting in paragraph 270-10-45-2.

ASC 280 requires certain information to be disclosed for reportable segments in condensed financial

statements in interim reports, such as a Form 10-Q. While ASC 280 requires, for the entity as a whole,

certain additional information about the geographic areas and the products and services of all entities

that disclose segment information, these disclosures are not required for interim reporting purposes.

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The interim disclosures are required for the current quarter and year-to-date amounts. These requirements

include:

• External revenues

• Intersegment revenues

• A measure of segment profit or loss. It is important to note that the components of segment profit or

loss required to be disclosed in the annual report are not required to be disclosed in condensed

interim reports.

• Segment assets if they have changed materially since the last annual report. For example, if a

substantial portion of the assets of a segment were sold or written off, the entity would be required

to disclose the new asset balance of the segment and explain the reason(s) for the change.

• A description of differences, if any, from the last annual report in the basis of segmentation or in the

basis of measurement of segment profit or loss. For instance, if an entity in its 31 December 20X8

annual report discloses that it does not allocate corporate overhead to segment profit or loss and

subsequently in its 31 March 20X9 Form 10-Q begins to allocate corporate overhead to segments,

that change in how segment profit or loss is measured must be disclosed. Also, if the way that an

entity determines its segments’ changes, that must be disclosed. For instance, a company must

disclose that it reported its operations to the CODM based on geographic distinctions in its

31 December 20X8 annual report and after a restructuring in the first quarter of 20X9 now reports to

the CODM based on product differences. The prior periods would have to be restated, if practicable.

• In general, an entity need not apply the quantitative tests to their operating segments when

determining reportable segments for the interim period. However, if facts and circumstances

change, for instance, there is a change in the structure of an entity’s internal organization in an

interim period, a new operating segment may be identified. Application of the quantitative tests in an

interim period could indicate that this operating segment is a reportable segment. If management

expects that this segment will continue to be of significance, the segment should be disclosed as a

new, separately reportable segment in the interim reports.

• A reconciliation of the total of the reportable segments’ profits or losses to the entity’s consolidated

income before income taxes and discontinued operations. If certain of these items are allocated to

segments, the entity may choose to reconcile the total of the segments’ measure of profit or loss to

consolidated income after those items. All significant reconciling items are shown separately with a

corresponding description provided.

4.6 Changes in reportable segments

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Restatement of Previously Reported Information

280-10-50-34

If a public entity changes the structure of its internal organization in a manner that causes the

composition of its reportable segments to change, the corresponding information for earlier periods,

including interim periods, shall be restated unless it is impracticable to do so. Accordingly, a public

entity shall restate those individual items of disclosure that it can practicably restate but need not

restate those individual items, if any, that it cannot practicably restate. Following a change in the

composition of its reportable segments, a public entity shall disclose whether it has restated the

corresponding items of segment information for earlier periods.

4 Segment disclosure requirements

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280-10-50-34A

For example, a fundamental reorganization of an entity may cause it to be very difficult and expensive

to restate segment information and therefore it may not be practicable.

280-10-50-35

If a public entity has changed the structure of its internal organization in a manner that causes the

composition of its reportable segments to change and if segment information for earlier periods,

including interim periods, is not restated to reflect the change, the public entity shall disclose in the

year in which the change occurs segment information for the current period under both the old basis

and the new basis of segmentation unless it is impracticable to do so.

280-10-50-36

Although restatement is not required to reflect a change in measurement of segment profit and loss, it

is preferable to show all segment information on a comparable basis to the extent it is practicable to

do so. If prior years’ information is not restated, paragraph 280-10-50-29(d) nonetheless requires

disclosure of the nature of any changes from prior periods in the measurement methods used to

determine reported segment profit or loss and the effect, if any, of those changes on the measure of

segment profit or loss.

Sometimes, when an entity implements a new internal reporting system, undergoes reorganization,

restructuring or other corporate transactions (such as an acquisition or a spin-off), or changes its CODM,

the way the CODM assesses performance and allocates resources could change. In these circumstances,

a company should consider the effect, if any, on the determination of its operating segments as well as

the application of the aggregation criteria. Acquisitions, corporate restructurings (including changes in

who reports to and meets with the CODM), changes in the process to establish budgets, updates to

compensation plans, changes in the information that is communicated to external parties or changes to

the CODM’s reporting package may affect the determination of a company’s reportable segments.

In some instances, an entity may reorganize certain businesses (e.g., product lines) by moving a business

or product line to a different operating segment without a change in the determination of operating

segments or its management structure. For example, consider an entity that has two operating segments

and multiple product lines within each segment. Product X has historically been included in the results of

operating segment A and now will be included in the results of operating segment B. The reporting

package reviewed by the CODM will remain the same after the reorganization. A question may arise as to

whether this change qualifies as a change in the composition of an entity’s reportable segments. We

believe in these situations an entity will need to carefully consider the qualitative changes as well as

quantitative impact (i.e., materiality) of the change (for both the current period and prior periods) in

order to determine whether there has been a change in the reportable segments of the entity.

When a change in the composition of reportable segments occurs, an entity is required to restate its prior

periods, including interim periods, to reflect the change, unless it is impracticable to do so (i.e., the

necessary information is not available and the cost to develop it would be excessive). ASC 280 also

allows for partial restatement if certain of the individual items could be restated but it is not practicable

to restate others. Accordingly, an entity restates those individual items of disclosure that it can practicably

restate. If the composition of a reportable segment changes, the entity must disclose whether it has

restated the corresponding items of segment information for earlier periods. If it is impracticable to

restate prior period information, an entity must report the current period segment information under

both the new and old basis in the year in which the change occurs, unless it is also impracticable to do

this. If a company determines that it is impracticable to restate, the entity must disclose that fact.

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We view impracticable as a very high standard to meet, and the SEC staff shares this view. In evaluating

whether it is impracticable to restate, the FASB notes that if a reorganization is simply the reassignment

of a discrete profit center from one segment to another, restatement would be relatively simple.

On the

other hand, if an entity undergoes a fundamental reorganization, restatement may be very difficult and

expensive, which may indicate restatement is impracticable. Companies are encouraged to carefully

consider the facts and circumstances before concluding that it is impracticable to provide the

comparative historical information when there is a change to its segment presentation.

4.6.1 Interim restatement

Consistent with annual reporting, segment information for earlier interim periods is restated when a

public entity changes its organization in a manner that causes the composition of its reportable segments

to change unless restatement is impracticable (in which case the entity should disclose that fact). For

example, if a change in internal reporting related to implementation of a new internal reporting system

were completed in the third quarter of 20X9, the new segmentation would need to be reflected in the

segment disclosures for the third quarter and year-to-date periods ended 30 September 20X9 and 20X8.

4.6.2 Timing of a change in segment reporting

If the change in the identification or composition of reportable segments occurs after the balance sheet date

but before the issuance of the financial statements, the reportable segments should continue to be disclosed

under the old basis in the financial statements as the change is considered a nonrecognized subsequent

event. However, disclosures that describe the change in the composition of reportable segments should be

made in the notes to the financial statements.

The succeeding interim and annual periods would disclose

the reportable segments under the new basis with prior periods restated to reflect the change, unless it is

impracticable to do so, as described in ASC 280-10-50-34 and discussed in section 4.6.

4.6.3 SEC reporting considerations (added April 2023)

A change in reportable segments that occurs after the end of a fiscal year may require a registrant to

retrospectively revise annual or interim financial statements included (or incorporated by reference) in a

registration statement or proxy statement. Depending on the circumstance, the registrant may be

required to recast financial statements (the “pre-event” financial statements) that were previously filed.

In other situations, management will need to evaluate whether the change in reportable segments

represents a fundamental change and, therefore, requires a post-effective amendment to a Form S-3 to

retrospectively recast financial statements.

4.6.3.1 New registration statements and proxy statements

Registration statements (e.g., Form S-1, Form S-3, Form S-4) and proxy statements (excluding Form S-8)

require reissuance of recast financial statements (the “pre-event” financial statements) for a change in

reportable segments if the registration statement also includes (or incorporates by reference) financial

statements that cover the period in which the change occurred (i.e., “post-event” financial statements).

For example, if a change in reportable segments occurred in July 20X1 for a calendar-year company but

interim financial statements as of 30 September 20X1 (i.e., “post-event” financial statements) have not

been issued, the registrant would not recast its annual financial statements for the three years ended 31

December 20X0 (or current fiscal year interim period) to reflect the change in reportable segments since

“post-event” financial statements have not been issued.

See paragraph 100 of Statement 131.

ASC 855-10-50-2.

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However, if the 30 September 20X1 financial statements reflecting the change in reportable segments are

included in or incorporated into the registration statement (e.g., Form 10-Q incorporated by reference), the

prior-year annual financial statements would require recasting, generally through a Form 8-K incorporated

by reference in the registration statement or included in the registration statement itself. The registrant’s

Description of Business and MD&A should be similarly revised. Generally, and in this example, the first- and

second-quarter interim information is deemed superseded, and any first- and second-quarter information

that also may be incorporated by reference does not require recasting.

4.6.3.2 Effective shelf registration statements

After the effective date of a shelf registration statement or post-effective amendment, the prospectus

doesn’t need to be updated unless there has been a “fundamental change.” Thus, entities can sell securities

based on shelf registration statements without recasting financial statements to reflect a change in

reportable segments, unless the event is deemed a fundamental change.

However, even if a registrant, in consultation with legal counsel, concludes that a post-effective

amendment is not required because there has not been a fundamental change, management still could

conclude that the change was material based on their judgment and choose to file recast annual financial

statements in a Form 8-K once “post-event” financial statements have been issued. In this case, financial

statements for interim periods preceding the event are superseded and not recast (similar to the discussion

in section 4.6.3.1) even though they remain incorporated by reference.

4.6.4 Non-SEC offerings (added April 2023)

For exempt offerings by a private or public company, there is no explicit guidance that would require recasting

and reissuing historical annual financial statements to reflect a change in reportable segments. However,

if the historical annual financial statements are directly included (i.e., reissued) in the offering document

along with interim period financial statements reflecting the “post-event” change in reportable segments,

then retrospective revision of the historical financial statements for the change in reportable segments

as described in ASC 280-10-50-34 would apply in a manner similar to the discussion in section 4.6.3.1.

If the historical annual financial statements are incorporated by reference rather than directly included in

the exempt offering document, we believe entities should consider the guidance for effective shelf

registration statements as discussed in section 4.6.3.2.

4.7 Interaction with other ASC Topics

In addition to the disclosures required by ASC 280, certain ASC Topics also may require disclosures by

segment.

4.7.1 Goodwill

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Relationships

Intangibles — Goodwill and Other

280-10-60-1

For information to be disclosed about goodwill in each reportable segment and significant changes in

the allocation of goodwill by reportable segments, see Topic 350.

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Intangibles — Goodwill and Other — Goodwill

Disclosure

350-20-50-1

The changes in the carrying amount of goodwill during the period shall be disclosed, showing separately

(see Example 3 [paragraph 350-20-55-24]):

a. The gross amount and accumulated impairment losses at the beginning of the period

b. Additional goodwill recognized during the period, except goodwill included in a disposal group

that, on acquisition, meets the criteria to be classified as held for sale in accordance with

paragraph 360-10-45-9

c. Adjustments resulting from the subsequent recognition of deferred tax assets during the period in

accordance with paragraphs 805-740-25-2 through 25-4 and 805-740-45-2

d. Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-

10-45-9 and goodwill derecognized during the period without having previously been reported in

a disposal group classified as held for sale

e. Impairment losses recognized during the period in accordance with this Subtopic

f. Net exchange differences arising during the period in accordance with Topic 830

g. Any other changes in the carrying amounts during the period

h. The gross amount and accumulated impairment losses at the end of the period.

Entities that report segment information in accordance with Topic 280 shall provide the above

information about goodwill in total and for each reportable segment and shall disclose any significant

changes in the allocation of goodwill by reportable segment. If any portion of goodwill has not yet been

allocated to a reporting unit at the date the financial statements are issued, that unallocated amount and

the reasons for not allocating that amount shall be disclosed.

Glossary

350-10-20

Goodwill

An asset representing the future economic benefits arising from other assets acquired in a business

combination or an acquisition by a not-for-profit entity that are not individually identified and

separately recognized. For ease of reference, this term also includes the immediate charge recognized

by not-for-profit entities in accordance with paragraph 958-805-25-29.

Pending Content:

Transition Date: (P) December 16, 2019; (N) December 16, 2022 | Transition Guidance: 350-20-65-3

350-20-50-1A

Entities that have one or more reporting units with zero or negative carrying amounts of net assets

shall disclose those reporting units with allocated goodwill and the amount of goodwill allocated to

each and in which reportable segment the reporting unit is included.

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Entities that report segment information in accordance with ASC 280 are required to disclose goodwill

for each reportable segment and any significant changes in the carrying amount or allocation of goodwill

by reportable segment from period to period. In addition, an entity must disclose whether goodwill has

not been allocated to a reportable segment at the date the financial statements are issued and the reason

why the amount was unallocated. Refer to our FRD, Intangibles — Goodwill and other, for further discussion.

4.7.2 Business combinations

Excerpt from Accounting Standards Codification

Business Combinations — Goodwill or Gain from Bargain Purchase, Including Consideration

Transferred

Disclosure

805-30-50-1

Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination.

To meet that objective, the acquirer shall disclose all of the following information for each business

combination that occurs during the reporting period:

e. If the acquirer is required to disclose segment information in accordance with Subtopic 280-10,

the amount of goodwill by reportable segment. If the assignment of goodwill to reporting units

required by paragraphs 350-20-35-41 through 35-44 has not been completed as of the date the

financial statements are issued or are available to be issued (as discussed in Section 855-10-25),

the acquirer shall disclose that fact. …

Glossary

805-10-20

Acquirer

The entity that obtains control of the acquiree. However, in a business combination in which a

variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.

Business Combination

A transaction or other event in which an acquirer obtains control of one or more businesses.

Transactions sometimes referred to as true mergers or mergers of equals also are business

combinations. See also Acquisition by a Not-for-Profit Entity.

4.7.3 Exit or disposal activities

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Relationships

Exit or Disposal Cost Obligations

280-10-60-3

For segment information to be disclosed in the period in which an exit or disposal activity is initiated,

see paragraph 420-10-50-1.

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Exit or Disposal Cost Obligations — Overall

Disclosure

420-10-50-1

All of the following information shall be disclosed in notes to financial statements that include the

period in which an exit or disposal activity is initiated and any subsequent period until the activity is

completed:

d. For each reportable segment, as defined in Subtopic 280-10, the total amount of costs expected

to be incurred in connection with the activity, the amount incurred in the period, and the

cumulative amount incurred to date, net of any adjustments to the liability with an explanation of

the reason(s) why.

Entities that are in the scope of ASC 280 also must disclose the amount of costs related to exit or

disposal activities incurred in the period and cumulative-to-date costs by reportable segment. These

disclosures must be presented starting in the period in which an exit or disposal activity is initiated and in

any subsequent period until the plan is completed, regardless of whether a liability for those costs is

recognized at that date or not. Refer to our FRD, Exit or disposal cost obligations, for further discussion.

4.7.4 Discontinued operations

Excerpt from Accounting Standards Codification

Presentation of Financial Statements — Discontinued Operations

Disclosure

205-20-50-1

The following shall be disclosed in the notes to financial statements that cover the period in which a

discontinued operation either has been disposed of or is classified as held for sale under the

requirements of paragraph 205-20-45-1E:

d. If applicable, the segment(s) in which the discontinued operation is reported under Topic 280 on

segment reporting.

4.7.5 Revenue recognition (updated April 2022)

Excerpt from Accounting Standards Codification

Revenue from Contracts with Customers — Overall

Disclosure

Disaggregation of Revenue

606-10-50-6

In addition, an entity shall disclose sufficient information to enable users of financial statements to

understand the relationship between the disclosure of disaggregated revenue (in accordance with

paragraph 606-10-50-5) and revenue information that is disclosed for each reportable segment, if the

entity applies Topic 280 on segment reporting.

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Implementation Guidance and Illustrations

Disclosure of Disaggregated Revenue

606-10-55-90

When selecting the type of category (or categories) to use to disaggregate revenue, an entity should

consider how information about the entity’s revenue has been presented for other purposes, including

all of the following:

a. Disclosures presented outside the financial statements (for example, in earnings releases, annual

reports, or investor presentations)

b. Information regularly reviewed by the chief operating decision maker for evaluating the financial

performance of operating segments

c. Other information that is similar to the types of information identified in (a) and (b) and that is

used by the entity or users of the entity’s financial statements to evaluate the entity’s financial

performance or make resource allocation decisions.

The FASB noted in the Basis for Conclusions of Accounting Standards Update (ASU) 2014-09

that

segment revenue disclosures may not always provide users of financial statements with enough

information to help them understand the composition of revenue recognized in the period. Under

ASC 606-10-50-6, an entity is required to explain the relationship between the disclosure of

disaggregated revenue and revenue information that is disclosed for each reportable segment. Refer to

section 10.5.1.1 of our FRD, Revenue from contracts with customers (ASC 606), for further discussion.

4.7.6 Impairment of intangible assets

Excerpt from Accounting Standards Codification

Intangibles — Goodwill and Other — General Intangibles Other Than Goodwill

Disclosure

350-30-50-3

For each impairment loss recognized related to an intangible asset, all of the following information

shall be disclosed in the notes to financial statements that include the period in which the impairment

loss is recognized:

d. If applicable, the segment in which the impaired intangible asset is reported under Topic 280.

4.7.7 Impairment or disposal of long-lived assets

Excerpt from Accounting Standards Codification

Property, Plant, and Equipment — Overall

Disclosure

360-10-50-2

All of the following information shall be disclosed in the notes to financial statements that include the

period in which an impairment loss is recognized:

d. If applicable, the segment in which the impaired long-lived asset (asset group) is reported under

Topic 280.

Paragraph BC340 of ASU 2014-09.

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360-10-50-3

For any period in which a long-lived asset (disposal group) either has been disposed of or is classified

as held for sale (see paragraph 360-10-45-9), an entity shall disclose all of the following in the notes to

financial statements:

f. If applicable, the segment in which the long-lived asset (disposal group) is reported under Topic

280 on segment reporting.

Glossary

360-10-20

Disposal Group

A disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents

assets to be disposed of together as a group in a single transaction and liabilities directly associated

with those assets that will be transferred in the transaction. A disposal group may include a

discontinued operation along with other assets and liabilities that are not part of the discontinued

operation.

Impairment

Impairment is the condition that exists when the carrying amount of a long-lived asset (asset group)

exceeds its fair value.

In the period in which an impairment loss is recognized or for any period in which a long-lived asset either

has been disposed of or is classified as held for sale, an entity is required to disclose the segment in which

the related long-lived asset is reported. Refer to our FRD, Impairment or disposal of long-lived assets,

for additional information and an illustration of the segment disclosure requirements for impairments of

long-lived assets.

Financial reporting developments Segment reporting | 65

5 Entity-wide disclosures

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Entity-Wide Information

280-10-50-38

Paragraphs 280-10-50-40 through 50-42 apply to all public entities subject to this Subtopic including

those public entities that have a single reportable segment. Some public entities’ business activities

are not organized on the basis of differences in related products and services or differences in

geographic areas of operations. That is, a public entity’s segments may report revenues from a broad

range of essentially different products and services, or more than one of its reportable segments may

provide essentially the same products and services. Similarly, a public entity’s segments may hold

assets in different geographic areas and report revenues from customers in different geographic

areas, or more than one of its segments may operate in the same geographic area. Information

required by paragraphs 280-10-50-40 through 50-42 need be provided only if it is not provided as

part of the reportable operating segment information required by this Subtopic.

280-10-50-39

Entity-wide disclosures are required only for annual reporting.

In addition to the management approach, ASC 280 requires disclosure of certain additional information

about an entity even if it is not used by the CODM to manage the entity. For example, if an entity is not

managed based on differences in products or services (e.g., a geographical approach is used), the

standard requires disclosure of certain information about products or services. In addition, if an entity

manages its worldwide operations based on differences in products or services, certain geographic

information also is required to be disclosed. Further, some entities might not be managed by either a

products or services approach or a geographic approach, in which case both products or services and

geographic information would be required to be disclosed on an entity-wide basis. For example, entities

that are managed by customer type would disclose entity-wide information regarding its products or

services and geographic areas.

The entity-wide disclosures must be made for all public entities, including entities with only one reportable

segment. To the extent that the information required by the entity-wide disclosures is provided via the

individual segment reporting requirements, it is not required to be repeated. These disclosures are

required to be made only for annual periods, not interim periods.

Unlike much of the other information required to be disclosed about segments, the amounts reported for

purposes of the entity-wide disclosures are based on the financial information that is used to produce the

entity’s general-purpose (consolidated) GAAP financial statements, as opposed to the amounts of revenues

reported to the CODM (or some other measure) (ASC 280-10-55-21). As a result, the revenue reported

under the entity-wide disclosure requirements should agree to the consolidated revenue amount.

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ASC 280 requires disclosure of entity-wide information about products and services and geographic areas

unless it is impracticable to provide that information. It might be impracticable for an entity to provide this

information if its internal reporting systems are simply not capable of gathering financial information by

product or service or by geographic area; however, situations such as these are expected to be rare. If it is

determined that the entity-wide disclosures are impracticable to provide, that fact must be disclosed.

5.1 Information about products and services

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Products and Services

280-10-50-40

A public entity shall report the revenues from external customers for each product and service or each

group of similar products and services unless it is impracticable to do so. The amounts of revenues

reported shall be based on the financial information used to produce the public entity’s general-

purpose financial statements. If providing the information is impracticable, that fact shall be disclosed.

ASC 280 requires a public entity to disclose the amount of revenues derived from transactions with

external customers for each product or service or each group of similar products or services, if not

already provided as part of the reportable operating segment information required by ASC 280. Entities

that have only one reportable segment and that provide a range of products and services also would be

required to disclose revenues from transactions with external customers for each product or service or

each group of similar products or services. Consider the following example:

Illustration 5-1: Products and services

Assume that Global Co. has determined its operating segments based upon the following geographic

areas: the Eastern United States, the Western United States and Canada. Assume that the entity

manufactures carpet that it sells to retailers in each of its three geographic segments and other

consumer products that it sells only to retailers in the two segments in the United States.

Segment

Includes carpet sales

Includes consumer products

Eastern United States

Western United States

Canada

Even though Global Co.’s segments are based upon geography, it still must disclose the amount of

revenue attributable to carpet and consumer products sales for the entity as a whole. Global Co. would

disclose that it sells carpet in each of its three segments and that it sells consumer products only in the

Eastern United States and Western United States segments.

ASC 280 does not define “similar” products and services. Therefore, the determination of whether two or

more products and services are similar and can be combined for purposes of the entity-wide disclosures will

depend on the facts and circumstances of the particular entity. In the basis for conclusions of Statement 131,

the FASB noted that an entity with a relatively narrow product line may not consider two products to be

similar, while an entity with a broad product line may consider those same two products to be similar.

See paragraph 68 of Statement 131.

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Financial reporting developments Segment reporting | 67

For example, a highly diversified entity that manufactures a variety of consumer products, owns financial

institutions and has a construction business may determine that all of its consumer products are similar.

However, an entity that sells only a narrow line of consumer products might determine that its sales of

furniture and rugs do not represent similar products.

5.2 Information about geographic areas

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Geographic Areas

280-10-50-41

A public entity shall report the following geographic information unless it is impracticable to do so (see

Example 3, Case D [paragraph 280-10-55-51]):

a. Revenues from external customers attributed to the public entity’s country of domicile and

attributed to all foreign countries in total from which the public entity derives revenues. If

revenues from external customers attributed to an individual foreign country are material, those

revenues shall be disclosed separately. A public entity shall disclose the basis for attributing

revenues from external customers to individual countries.

b. Long-lived assets other than financial instruments, long-term customer relationships of a financial

institution, mortgage and other servicing rights, deferred policy acquisition costs, and deferred

tax assets located in the public entity’s country of domicile and located in all foreign countries in

total in which the public entity holds assets. If assets in an individual foreign country are material,

those assets shall be disclosed separately.

The amounts reported shall be based on the financial information that is used to produce the general-

purpose financial statements. If providing the geographic information is impracticable, that fact shall

be disclosed. A public entity may wish to provide, in addition to the information required by the

preceding paragraph, subtotals of geographic information about groups of countries.

In addition to the information required, a public entity may wish to provide subtotals of geographic

revenue and long-lived asset information for groups of countries. For example, if an entity was not

required to report individual foreign countries because of immateriality, the entity may choose to instead

report groupings of countries (e.g., Europe, South America) to provide additional information.

A public entity is required to provide the geographic information by individual country, if material. However,

the entity may always provide the subtotal of geographic information for groups of countries (e.g., Europe).

The country of domicile for an entity usually is the country where it is incorporated and maintains its

headquarters and executive offices. For most domestic SEC registrants, the country of domicile will be

the United States. On the other hand, the country of domicile of a foreign SEC registrant generally will

not be the United States.

For the purposes of providing geographic information, Puerto Rican (as well as other non-self-governing

US territories, such as the Virgin Islands and American Samoa) operations of US public companies are

considered domestic operations.

ASC 280 does not prohibit additional disclosures about such

operations that might be useful in analyzing and understanding a company’s financial statements.

ASC 280-10-55-25.

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Financial reporting developments Segment reporting | 68

5.2.1 Meaning of ‘material’

ASC 280 does not define “material” for purposes of the individual country disclosure requirement. We

believe a reasonable approach is if an individual country has external revenues or long-lived assets that

represent more than 10% of the consolidated totals, the presumption is that country is material and

should be disclosed separately.

However, an individual country may be material even if it does not contribute more than 10% of the

consolidated amount in question. ASC 280-10-55-51 provides an example that separately discloses

a country that provides slightly less than 10% of consolidated revenue. Certain countries may present

more risk than other countries and, therefore, disclosure may be appropriate even if that country is not

10% of the consolidated amount in question. Ultimately, the determination of whether a particular

country is material is a matter of judgment and should be based upon careful consideration of the

particular facts and circumstances of the entity.

5.2.2 Revenues from external customers

The basis for attributing revenues from external customers to individual countries must be disclosed.

Often revenues will be attributed to individual countries based on the location of the customer. For

example, if a company headquartered in the United States sells its product to a customer whose country

of domicile is Germany, that company would attribute that sale to Germany, the location of the customer.

However, the determination of the foreign country to disclose may be less clear for multinational

customers. For example, suppose that the customer, although domiciled in Germany, has the product

shipped directly from the US to one of its subsidiaries in France. In that example, the revenue could be

attributed to Germany (where the customer is located and where the sales invoice is sent) or France

(where the product is shipped). The determination may be further complicated if the customer has

products shipped to both Germany and France. All the revenue could be attributed to Germany (where the

subsidiary is located) or shown separately (Germany and France) based on the location of the customer.

ASC 280 doesn’t prescribe a specific method for determining the appropriate country for attribution of

sales. We believe that the approach used is a matter of accounting policy that should be reasonable and

consistently applied. However, the basis that is used to attribute revenues should be disclosed.

5.2.3 Long-lived assets

Generally, long-lived assets include items such as property, plant, equipment, long-term prepaid assets,

capital leases of lessees (before the adoption of ASC 842), right-of-use (ROU) assets of lessees (after the

adoption of ASC 842), assets of lessors subject to operating leases and goodwill. However, for the purposes

of entity-wide geographic area disclosures, the definition of long-lived assets implies hard assets that

cannot be readily removed. As such, intangible assets (ASC 280-10-55-23) and goodwill, would be excluded.

An ROU asset is in the scope of ASC 360 and is similar to a tangible asset. Accordingly, ROU assets would

generally be included in entity-wide geographic disclosures. Each company should assess what should be

included in long-lived assets based on their specific facts and circumstances. Entity-wide disclosure of capital

expenditures during the year is not required.

Disclosure of long-lived assets by geographic area is required so that users may understand concentrations

of risk and the possible effect of negative or positive changes in economic conditions as well as prospects

for growth. Risks include political risks, such as the possibility of expropriation or long-term business

failures if the country is unstable. For example, if an entity discloses that 25% of the company’s long-lived

assets are located in Canada (versus, for example Zimbabwe), users likely would have a different picture

of potential risk. We believe that disclosures by each country that are material typically would not be

burdensome because most companies have that information readily available.

ASC 280-10-55-22.

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5.3 Information about major customers

Excerpt from Accounting Standards Codification

Segment Reporting — Overall

Disclosure

Information About Major Customers

280-10-50-42

A public entity shall provide information about the extent of its reliance on its major customers. If

revenues from transactions with a single external customer amount to 10 percent or more of a public

entity’s revenues, the public entity shall disclose that fact, the total amount of revenues from each

such customer, and the identity of the segment or segments reporting the revenues. The public entity

need not disclose the identity of a major customer or the amount of revenues that each segment

reports from that customer. For purposes of this Subtopic, a group of entities known to a reporting

public entity to be under common control shall be considered as a single customer, and the federal

government, a state government, a local government (for example, a county or municipality), or a

foreign government each shall be considered as a single customer (see Example 3, Case E

[paragraph 280-10-55-52]).

ASC 280 requires a public entity to disclose the extent of its reliance on major customers. If 10% or more

of the entity’s revenue is derived from a single external customer, the entity is required to disclose that

fact (but not the name of the customer). The total amount of revenues from each such customer, and the

segment or segments reporting those revenues must be disclosed. For the purposes of assessing a

customer’s relative concentration, a group of entities under common control is considered a single

customer. Consider the following example:

Illustration 5-2: Major customers

Assume Sales Co. sells products to two subsidiaries of Company XYZ, 6% of total revenue to subsidiary A

and 7% of total revenue to subsidiary B. When assessing whether more than 10% of Sales Co.’s

revenue is derived from a single customer, Sales Co. would be required to aggregate the sales to A and

sales to B. As a result, Sales Co. would report Company XYZ as a major customer and disclose total

combined revenues (i.e., 13%) attributable to Company XYZ, as well as the segment or segments to

which these revenues relate.

Federal, state and local governments (e.g., a city, county) or a foreign government each should be

considered a single customer. For example, if an entity derives 8% of its revenues from services to the

federal government and 4% of its revenues from services to a state government, it would not be required

to report the federal or state government as a major customer. If, on the other hand, that entity also

earned 12% of its revenues through services provided to the Canadian government, it would have to

report the Canadian government as a major customer.

It is not always clear who the “customer” is when evaluating possible disclosures under this provision of

ASC 280. For example, insurance premiums received through an independent agent should be considered

sales to the insured individuals and not the agent because the agent, in substance, acts only as an

intermediary between the insurance entity and the insured.

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5.4 Restatement of entity-wide disclosures

ASC 280 does not provide guidance on whether restatement of prior period entity-wide disclosures is

necessary if there is a change in the current year. However, one of the fundamental principles of

ASC 280 is to reflect comparable segment information from year to year. Therefore, we believe

providing comparative information is appropriate. For example, if revenues of a particular country are

material for the current year but were immaterial in prior years (and thus not separately disclosed

pursuant to ASC 280-10-50-41), we believe it would be consistent with the principles of ASC 280 to

present the particular country’s revenues for the current and prior years, even though prior year’s

revenue for that country are immaterial.

5.5 SEC disclosure rules

Form 10-K and most registrant statements filed under the Securities Act call for information specified in

Item 101 of Regulation S-K, including a description of the registrant’s business and each of its reportable

segments. Item 101(c), Description of Business, of Regulation S-K allows the registrant to focus its

business discussion on its dominant segment or on each reportable segment about which financial

information is presented in the registrant’s financial statements. The rules also contain a non-exclusive

list of topics that would need to be disclosed only if they are material to understanding the registrant’s

business taken as a whole.

Regulation S-K requires registrants to describe the location and general character of their principal physical

properties that are material and identify the business segment or segments that use these properties.

Registrants should consider related existing staff guidance and interpretations, including presentation of

separate quantitative disclosures for each different business segment under quantitative and qualitative

disclosures about market risk

(i.e., S-K Item 305).

For more information on these requirements, refer to our SEC Financial Reporting Series publication,

2022 SEC annual reports — Form 10-K.

SEC’s Frequently Asked Questions and Staff Statements, “Questions and Answers About the New ’Market Risk’ Disclosure

Rules” (31 July 1997), Question 29.

Specifically, refer to (1) sections 3.1 and 3.2 related to S-K Item 101, (2) section 3.5 related to S-K Item 102 and (3) section 4.3

related to S-K Item 305.

Financial reporting developments Segment reporting | 71

6 Industry supplements

6.1 Introduction

Under the management approach, each company will have its own unique circumstances to consider in

satisfying its segment reporting requirements. However, companies in the same industry are likely to

face similar issues. This section provides guidance for determining and reporting segments for public

entities in the following specific industries:

• Banking and capital markets (section 6.2)

• Insurance (section 6.3)

• Retail (section 6.4)

• Real estate (section 6.5)

• Health (section 6.6)

• Oil and gas (section 6.7)

• Telecommunications (section 6.8)

• Casinos (section 6.9)

The information provided in chapter 6 is supplemental and should be considered in conjunction with the

other sections of this publication.

6.2 Banking and capital markets

Smaller or mono-line institutions (e.g., community banks, retail broker-dealers) may often determine that

under the requirements of ASC 280 they have only one operating segment. However, financial services

companies with larger and more diversified operations, may determine that they are required to report

more than one segment in their financial statements.

6.2.1 Operating segments

Financial services companies provide a full range of products through traditional branches, offices,

ATMs, telephones, online banking and other delivery channels throughout their various geographic

areas. We believe operating segments defined by aggregate product or service are the most common for

financial services companies (e.g., retail/consumer banking, commercial real estate, corporate/wholesale

banking, securities/investment banking, market making and trading, mortgage banking, transaction/data

processing, consumer services).

However, operating segments may vary depending on the size and complexity of the organization as the

information that the CODM receives and uses to make decisions will differ depending on the organization.

For example, at large, diverse financial services companies, financial information for residential mortgages,

credit cards, student loans and auto loans may be reviewed by the CODM on a combined basis and thus

qualify as a single operating segment — consumer services. At another institution, depending on the facts

and circumstances, any one of these components alone might constitute an operating segment.

Bank holding companies that have acquired substantial asset management, insurance or other lines of

business (which may be separate operating subsidiaries) will have to determine whether these business

lines, often with their own brand identities, are individual operating segments or whether they are part of

some larger operating segment for which discrete financial information is regularly reviewed by the CODM.

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6.2.2 Reportable segments

Because many financial services companies will conclude that they have more than one operating segment,

determining which of their operating segments constitute reportable operating segments will require

careful thought and analysis. As discussed in detail in section 3.1, while consideration of the aggregation

criteria is subjective in nature, they nonetheless represent a considerable hurdle for aggregation as all the

criteria must be met in order to report two or more material operating segments on an aggregated basis.

For financial services companies, the revenue measure used in determining the quantitative tests (both

the 10% threshold test and the 75% of total consolidated revenue test) may vary depending on the nature

of the operating segment and the information primarily relied upon by the CODM. For example, the

CODM of certain operating segments, such as deposit- and lending-based operating segments, may rely

on interest revenue net of interest expense as the relevant “revenue” measure in order to assess

performance and allocate resources. On the other hand, fee-based operating segments, such as trust

services, item processing or securities trading, may rely on a more traditional “gross” fee revenue as

their relevant revenue measure. Therefore, depending on how the operating segment is managed and

what measure of revenue is relied upon by the CODM in decision-making, interest expense may be

considered in the total consolidated revenue measure for a financial institution.

Financial services companies that identify several operating segments will also need to thoroughly

understand how the materiality thresholds affect their reporting. Large institutions with several

(e.g., more than three or four) reportable operating segments may have multiple operating segments

that are under the 10% thresholds. These same institutions will probably also find that they need to

disclose some of these “smaller” operating segments in order to meet the 75% of total consolidated

revenue test. Section 3.5 covers numerous conditions that should be considered in determining which

additional operating segments to report in order to meet the 75% test.

It is important to keep in mind that operating segments that are currently immaterial may exceed the

10% thresholds in the future. If an immaterial segment subsequently meets the materiality thresholds

and must be separately reported, prior-period segment data must be restated, unless impracticable.

To minimize restatement situations, financial services companies should consider reporting operating

segments that are currently under the 10% thresholds when those operating segments are expected to

exceed the reporting thresholds in the future. This approach may be particularly relevant for financial

services companies that need to select additional operating segments to report to meet the 75% test.

Financial services companies also can consider combining immaterial segments to meet the 75% test. As

fully explained in section 3.4, operating segments that do not individually meet the 10% thresholds,

(after determining that combining is consistent with the objective and basic principles of ASC 280 and

economic similarity), the individually immaterial segments must only share a majority of the aggregation

criteria to be combined for reporting purposes.

6.2.3 Entity-wide disclosures

Because ASC 280 does not define “similar” products or services for purposes of the entity-wide

disclosures, the extent that products and services can be combined at financial services companies will

depend on individual circumstances. Consider a consumer services operating segment that includes credit

cards, student loans and installment loans. Such an operating segment may provide similar products and

services and, therefore, would not require any further product or service disclosure. On the other hand, a

bank holding company may consider each of its subsidiary banks an operating segment if that is the way

the entity is run. Each operating segment bank could provide a range of commercial, consumer loan/deposit

and trust services. In this situation, entity-wide disclosures by product or service may be warranted.

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Although ASC 280 includes geographic based disclosures for long-lived assets, because the requirements

exclude financial instruments, core-deposit intangibles and mortgage servicing rights (generally the

significant long-lived assets of a financial institution), the disclosure requirements regarding long-lived

assets will not be material to many financial services companies. However, it is important to note that

public entities are still required to report information about financial instruments with concentrations of

risk in accordance with ASC 825 and ASC 275.

6.3 Insurance (updated April 2022)

Despite similarities in the underlying products offered by insurers, segments to be reported under ASC 280

will depend on facts and circumstances specific to each insurance entity and should be consistent with

other public financial information of the insurance entity. In this section, we will make a few observations

with respect to specific questions an insurer may have in satisfying its segment reporting requirements.

6.3.1 Operating segments

A CODM of an insurance entity may review business components at various levels of detail. For example, a

CODM may review financial information separately, or on a combined basis, for different types of insurance

operations (e.g., life, property/casualty, health) as well as for the different types of major products that

comprise those insurance operations (e.g., protection, wealth and asset management, accumulation,

personal, commercial, reinsurance, governmental). The components that are regularly reviewed by the

CODM generally comprise the entity’s operating segments for purposes of segment reporting.

For insurers, particularly global insurers, there could also be situations in which a CODM reviews financial

information for some operating segments on a basis that differs from other operating segments. For

example, a CODM may review domestic operations on one basis, such as by product, and foreign

operations on another basis, such as geography. In this case, the entity would report segment information

for each of the reportable segments, even though the basis of segmentation (i.e., by geographic location

and by product) of the business components differs (note that the entity also would need to make

adequate disclosure of the basis of segmentation). In addition, the insurer would need to make the

appropriate entity-wide disclosures, such as disclosure of products for foreign operations.

6.3.2 Aggregation criteria

When determining which operating segments to aggregate, insurers, like all companies, should consider

the operating segments reviewed by the CODM, aggregation criteria and materiality through application

of quantitative thresholds. Based on the varying size and business strategies among insurers (e.g., large

diverse organizations vs. small niche players), it is likely that the operating segments will differ among

insurers, even among peer companies. For example, while a CODM of a multi-line insurer may review

separate financial information for life and property/casualty insurance operations, a CODM of a large

financial services conglomerate, which includes insurance operations, may review combined financial

information for life and property/casualty operations. Additionally, application of the aggregation criteria

may yield different results by company, even when operating segments of the entities are similar.

ASC 280 permits operating segments to be aggregated for reporting purposes even though they may be

individually material, if: (1) aggregation is consistent with the objective and basic principles of ASC 280,

(2) the operating segments have similar economic characteristics and (3) the operating segments are similar

in each of the five qualitative areas discussed in section 3.1.3 of this FRD. In determining whether aggregation

of operating segments is consistent with the objective and basic principles of ASC 280, insurers may

consider certain qualitative factors such as whether the segments are combined in operational analyses

(e.g., product disclosures) presented in the business section of Annual Reports or separately provided to

financial analysts, rating agencies or regulators.

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In determining whether operating segments have similar economic characteristics, operating measures

typically should be considered.

For example, a property/casualty insurer might compare operating measures (e.g., duration of claim

payments, types of coverage, commission structure) to determine if two or more segments have similar

economic characteristics. For a life insurer, different products often will not possess similar economic

characteristics because of different revenue and cost characteristics. For example, a life insurance entity

reports policy premium revenue for traditional insurance products, such as whole life and term

insurance, whereas the entity reports service fee revenue for certain investment-type products, such as

variable annuities. When two or more operating segments report different types of operating measures

to the CODM, aggregation may still be appropriate, provided the entity can demonstrate that the other

operating measures of the operating segments indicate similar economic characteristics.

Some life and property/casualty insurers have both direct and assumed reinsurance operations. When

considering whether it would be appropriate to aggregate direct and reinsurance operating segments,

entities will need to carefully consider whether the objective and basic principles of ASC 280 have been

met and that the operating segments meet all of the aggregation criteria, each of which can require

significant judgment.

Included below are some of the aggregation criteria and related judgments that should be considered for

the insurance industry:

• The nature of the products and services — Mono-line and multi-line writers will typically reach

different conclusions in determining operating segments because of differences in the financial

information used by the CODM. For example, the CODM of a mono-line writer may use information

organized by geographic region or class of customer, whereas the CODM of a multi-line writer may

review information by product.

• The type or class of customer for their product and services — This characteristic should be carefully

considered as it may preclude aggregation of operating segments for many insurers. For purposes of

CODM review, many property/casualty insurers segregate personal and commercial lines, and many

life and health insurers segregate group and individual products. Because these businesses usually have

different types of customers (e.g., companies versus individuals), aggregation may not be appropriate.

• The methods used to distribute their products or provide their services — There are various

distribution methods used by insurers. In determining whether two distribution methods are similar,

an entity should consider the nature of the distribution method. For example, selling products direct

to end users either through internal or external distribution methods might still be considered similar

since both methods result in products being distributed directly to the end user. Sometimes, two

segments share some, but not all, distribution methods. For example, a life insurer may sell its life

insurance through agents, the internet and direct mailings, while it sells its annuity products only

through agents and banks. In these cases, if certain of the distribution methods differ, the

significance of these differences must be considered in determining whether this criterion for

aggregation is met.

See the SEC Financial Reporting Releases and Codifications (FRR), Section 400 Specialized Industries, 403 Insurance Companies,

403.01 Consolidation and Supplementary Segment Disclosures for SEC Considerations.

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• The nature of the regulatory environment — While life, property/casualty and health insurers may be

regulated by different bureaus within a state or other regulatory department, the nature of such

regulation (e.g., protect the policyholders from non-payment of claims or insurer insolvency) often is

similar. In addition, certain products issued by life insurers may require filings with the SEC. Aggregation

of operating segments regulated by the SEC with segments that are not subject to SEC regulation may

not be appropriate because the nature of the regulation may be viewed as fundamentally different.

See section 3.1 for additional information associated with the aggregation criteria.

6.3.3 Measurements used in segment disclosures

The measurement of segment profit or loss may vary widely among insurers. Many insurer CODMs

review financial information on a statutory accounting basis (SAP) as accounting systems may be

designed to facilitate reporting in the Statutory Annual Statement filed by insurers with state insurance

regulators. Other CODMs review financial information on a GAAP basis, while some CODMs review

financial information on both GAAP and SAP accounting bases. If the CODM reviews information about

operating segments prepared under both accounting bases, an entity would report the segment

information that is prepared under GAAP.

For property/casualty insurance products, profitability is often reviewed by underwriting results that

exclude the impact of investment income and miscellaneous expenses. For life insurance products,

profitability is often reviewed on the basis of pretax income. Insurers often may not allocate certain

operating costs, such as the cost of aggregate reinsurance agreements that provide protection for more

than one segment, or a portion of investment results, such as investment income, among segments. If

the operating results reviewed by the CODM exclude certain items, such as allocated costs or realized

gains/losses, segment disclosures should exclude those items as well.

When disclosing profit or loss by segment and reconciling to consolidated profit or loss, the insurer

should consider whether additional disclosure is necessary for the readers of the financial statements to

understand the company’s performance. For an insurer, disclosure of profits in excess of GAAP income

(e.g., certain costs are not allocated) may raise pricing questions from consumers and regulators if not

adequately addressed in the financial statement disclosures. Conversely, disclosure of operating results

that are unfavorable relative to GAAP results (e.g., underwriting results) may raise shareholder concerns.

Management should evaluate whether disclosure in response to those questions is appropriate.

6.3.4 Scope

As sponsors of variable annuity and life separate accounts, financial statements of many life insurers are

included in N-4 and N-6 filings with the SEC, respectively. If the sponsor insurance company is not a

public entity (in accordance with ASC 280-10-20) because it only furnishes financial statements with the

SEC, the sponsor would not be required to include segment information in its financial statements. See

section 1 for the definition of a public entity.

6.4 Retail (updated April 2022)

6.4.1 General considerations

The application of ASC 280 will vary from one retailer to another in light of the variety of issues retailers

face. An individual retailer could have multinational operations, grant credit to customers and others,

separately manage real estate operations, operate both company-owned and franchised stores, be

vertically integrated (by virtue of its manufacturing and/or wholesale operations), manage multiple

brands or labels, sell to wholesalers and other retailers, and have both outlet stores and full-price stores.

Often, retailers will have a number of different retail operations that meet the definition of operating

segments. The most significant question then is whether and how operating segments may be aggregated.

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Retailers will have to make many judgments in determining how the aggregation rules apply to their

particular circumstances. It is unlikely that two retailers with multiple segments will consider and apply

the aggregation criteria identically. The following broad guidelines reflect certain considerations as to

how the rules apply.

6.4.2 Aggregation considerations

From company to company, retailers are likely to organize reporting to the CODM in a variety of ways,

and therefore, the business components that constitute operating segments will vary by company. Some

retailers report business components to the CODM by retail channel — for example, traditional brick and

mortar stores, e-commerce, wholesale, distributor or licensing. Other retailers report to the CODM by

retail chain, concept/format, geographic region, etc. The CODM of entities that consist of several chains

might use information organized by traditional retail segments — for example, the individual chains might

be combined into separate segments for apparel, shoes, sportswear, soft goods, hardlines and

broadlines. The determination of operating segments and decisions about which of those segments can

be aggregated will depend on each retailer’s facts and circumstances.

Once the operating segments are identified, they can be separately reported, or they may be aggregated

for reporting purposes provided the criteria for aggregation are met. In that regard, ASC 280 requires

that aggregated segments have similar economic characteristics. While ASC 280 includes similar average

long-term gross margin as an example, we believe other economic characteristics that retailers could

consider include year-to-year comparable-store sales, return on investment (ROI) and return on capital

(ROC), if these measures are used by the CODM. Although those economic characteristics are not

prescriptive, we believe it would be inappropriate to aggregate identified segments that historically (say,

over three to five years) have not performed comparably. For example, it generally would be

inappropriate to aggregate a historical “outperformer” with a historical “underperformer” because it

would be difficult to support that they have similar economic characteristics.

Once a retailer determines that two or more operating segments have similar economic characteristics,

the retailer may aggregate the segments into one operating segment only if the segments also are

similar with respect to all of the following aggregation criteria:

• The nature of the products and services — To determine whether products and services are similar,

generally, we would expect retailers to follow traditional merchandise classifications — such as

broadlines, apparel, food, hardlines and electronics. However, that is not to suggest those

classifications represent the minimum aggregation level. For example, it may be inappropriate to

aggregate a men’s apparel chain and a women’s apparel chain if it is determined the class of

customer is different. Similarly, it may be inappropriate to combine a fashion-forward apparel

segment with one that focuses on basic apparel because of the differing nature of the products.

• The nature of the production processes — Except for vertically integrated retailers who are considering

whether to combine multiple manufacturing segments, this factor generally is not applicable.

• The type or class of customer for their products and services — As it applies to retailers, this factor

generally would consider whether the segments’ sales are comparably affected by the nature of the

target customers. For example, an apparel chain focusing on high-income customers usually would

not be aggregated with an apparel chain focusing on customers in lower income brackets. In that

regard, an upscale department store generally would not be aggregated with an off-price, deep-

discount mass merchandise store. Additionally, see Illustration 3-5 in section 3.1.3.

• The methods used to distribute their products or provide their services — For retailers, this criterion

often is analyzed based upon the type of retail channel or format. General classifications that

typically would not be combined are stores and e-commerce. Retailers should also consider whether

it is appropriate to combine different store concepts/formats that otherwise meet the aggregation

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Financial reporting developments Segment reporting | 77

criteria. In certain circumstances, the same chain might have large-store formats that sell a broader

variety of merchandise than a smaller-store format bearing the same name, and the different

concepts/formats are separate operating segments (i.e., the different concepts/formats each meet

the definition of an operating segment). The distribution concepts are similar, but the product and

service offerings might be considered too dissimilar to permit aggregation. Additionally, see

Illustration 3-6 in section 3.1.3.

• The nature of the regulatory environment — As retailers typically do not operate under a regulatory

authority, this factor is generally not applicable.

6.4.3 Geographic segments in the same country

A retailer might be organized by geographic region within the United States and report information to

the CODM by region, such as Southeast, Northwest and Mid-Atlantic. The regions could represent the

combination of chains within the region, a single chain within the region or a national chain’s stores within

a designated region. The concepts and formats are assumed to be similar, although they might trade

under different names. Those segments may be properly aggregated if they have similar economic

characteristics (e.g., similar gross margins, similar comparable-store sales growth).

6.4.4 Real estate operations

Many retailers have real estate departments that perform a variety of functions. In the usual situation, they

buy, finance and manage real estate used by the retail operations and charge the retail operations rental

and other fees for their services. In that situation, the real estate operations are essentially a support

function and generally would not qualify as an operating segment because the CODM does not use discrete

financial information about real estate activities to make decisions or allocate resources. In these cases, the

costs and assets generally are not allocated to the individual retail operating segments and often are

included as part of corporate overhead (and, thus, are not reported as a segment). On the other hand, if

the real estate department performs services for and collects revenue from third-party customers,

assuming that activity is a significant part of the operations, it often would qualify as an operating

segment because the CODM likely would receive and use financial information about the business.

6.5 Real estate

As discussed in section 3.1, ASC 280 lists certain attributes that must be present in order for two or

more operating segments to be aggregated. If an entity has various real estate properties, the ability to

aggregate may be important. Judgment is often required to determine whether operating segments

share “similar economic characteristics.” This assessment might become more straightforward after

considering the other aggregation criteria because the other criteria tend to impact the economics of a

real estate asset. For example, one of the aggregation criteria is the similarity of the type or class of

customer. Low-income housing will attract a different class of customer (tenant) than a deluxe apartment

complex. Similarly, a strip mall attracts different tenants than a super-regional mall. The class of

customer likely will impact the long-term financial performance of real estate assets primarily due to such

things as the amount of rent that can be charged, credit risk associated with the tenants and the ability

to negotiate long-term leases. Thus, a similar class of customer (tenant) is often indicative of similar

economic characteristics.

The other aggregation criteria, their relationship to real estate entities and observations about their

impact on economic characteristics are discussed below:

• The nature of the products and services — For a real estate entity, the nature of the product or service

is primarily leasing space on a transient, short-term or long-term basis, or selling assets developed by

the entity. Economics are impacted for reasons similar to those noted above for class of customer.

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Financial reporting developments Segment reporting | 78

• The nature of the production processes — This attribute is applicable primarily to builders and developers

because the nature of the production process generally is the development of raw land or the

improvement of developed land for sale to end users. Different project types often will have different

margins and may impact the analysis of whether the projects have similar economic characteristics.

• The methods used to distribute their products or provide their services — This criterion usually is not

applicable to the majority of real estate entities. However, this criterion might be applicable if, for

example, a lodging company has both a value-oriented motel and a full-service destination resort.

These products will often have divergent economics because of the difference in the room rates that

can be charged.

• Consider the following example:

Illustration 6-1: Real estate aggregation

Real Co., a diversified real estate entity, has investments in various property types: Central Business

District (CBD) office buildings and retail and residential properties located in a number of markets. The

CODM uses information at the individual property level to assess performance and make resource

allocations. Therefore, Real Co. wishes to consider the aggregation criteria in ASC 280 to determine

whether each of the properties share similar economic characteristics. In performing its analysis, Real

Co. determines that it cannot aggregate the operating segments for office, retail and residential

properties because they generally do not have similar economic characteristics. In addition, they do

not meet the other aggregation criteria in certain circumstances.

Alternatively, some entities are segmented geographically as opposed to by product or service. For those

entities, it might be appropriate to aggregate two or more geographic regions, depending on whether the

aggregation criteria are met. For lodging properties, the nature of the property, such as resort property,

CBD hotels, budget hotels and extended stay hotels, will often impact whether the aggregation criteria

are met.

6.6 Health

6.6.1 Scope

ASC 280 applies to public entities with certain exceptions. It does not apply to not-for-profit entities,

including not-for-profit health care entities, regardless of whether they meet the definition of a public entity.

Some health care entities may conclude that their consolidated operations represent a single operating

segment as that is the way in which the CODM manages the business. However, health care entities that

are in the scope of ASC 280 need to perform a careful analysis to determine reportable segments and

satisfy the segment disclosure requirements.

6.6.2 Determining operating segments

In determining operating segments, a health care entity should evaluate whether the CODM reviews

operating results on a disaggregated basis, including by geographic location (e.g., south, west, main campus)

or product or service line (e.g., acute care, managed care, home health, skilled nursing, physician practice).

6.6.3 Segment disclosures

The disclosure requirements for health care entities are the same as the requirements for all other entities

in the scope of ASC 280. The CODMs of health care entities often use EBITDA to assess performance and

allocate resources. As a result, it is appropriate for those entities to disclose EBITDA by reportable segment

to satisfy the requirement to disclose a measure of profit or loss. See section 4.1 for further discussion.

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6.6.4 Entity-wide disclosures

Entity-wide disclosures, as discussed in Chapter 5, are required even if the entity has only one reportable

segment. Health care entities with only one reportable segment that provide a range of products and

services must disclose revenues for each product, type of service or groups of similar products or services.

Because ASC 280 does not define “similar” products and services, combining products and services for

purposes of entity-wide disclosures will depend on the entity’s specific facts and circumstances.

In addition, entity-wide disclosures include revenues from major customers, as described in section 5.3.

ASC 954-280-45-1 states that, for purposes of providing information about major customers, an

insuring entity is not considered the customer of a health care entity. An insuring entity is a paying agent

for the patient (i.e., the customer) and does not decide which services to purchase and from which health

care entity to purchase the services. The latter two factors are important in determining the customer.

6.7 Oil and gas

ASC 932-280 requires that oil- and gas-producing entities follow the requirements in ASC 932-235-50-22

and 50-23. These requirements include reporting the results of operations for oil- and gas-producing activities

in the aggregate and by each geographic area for which oil and gas reserve quantities are disclosed. Entities

with oil and gas operations are permitted to make required oil and gas disclosures as part of segment

disclosures if they represent an operating segment. Entities that report using the full cost method capture

cost pools at the country level; therefore, the geographic regions for reporting would not typically be at

any level lower than the country. A successful efforts entity may determine geographic regions on a lower

level depending on its specific facts and circumstances. Once geographic regions are determined, oil- and

gas-producing entities should report revenue, production costs, exploration expenses, DD&A (depreciation,

depletion and amortization) and valuation provisions, income tax and results of operations for oil- and gas-

producing activities, excluding corporate overhead and interest costs. Oil- and gas-producing entities

should consider whether this information is appropriate for segment reporting (i.e., if segment information is

based on the same geographic areas as the required oil and gas disclosures, or if the segments are on some

other basis). If required oil and gas disclosures are made within the segment disclosures, they are not required

to be disclosed elsewhere.

Organizations with multiple reporting entities (e.g., entities with multiple SEC-registered entities within

the consolidated group) should consider their basis for segment reporting conclusions for each reporting

entity. They also should fully evaluate any inconsistencies between the conclusions reached on segment

reporting for the separate reporting entities. For example, a subsidiary of an oil and gas entity may have

public debt that creates a separate SEC reporting requirement. The CODM may be the same or different

for each of these entities, and the evaluation of information available for resource allocations may be the

same or different. Oil and gas entities should carefully evaluate the requirements of segment reporting

for each entity, especially when the CODM is the same for both reporting entities but the segment

reporting conclusions differ.

In ASC 280, the definition of an operating segment includes businesses that sell primarily or exclusively

to other operating segments of the entity. Thus, a vertically integrated entity could have a segment that

does not have any external sales. The standard provides that information about the components

engaged in each stage of production is particularly important for understanding vertically integrated

entities in certain businesses, including oil and gas.

ASC 280-10-50-2.

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Financial reporting developments Segment reporting | 80

Oil and gas entities should carefully consider the requirements in ASC 280 as they relate to downstream

businesses, including refining, transportation and marketing activities. Often, analysts request the

separate operating results for the refining and marketing businesses included in vertically integrated

energy companies. Any information that is made public is generally considered to be available to the CODM

and, therefore, could influence the determination of segment reporting. As a result, oil and gas entities

should carefully evaluate the other information about their operations that may be publicly available.

6.8 Telecommunications (updated April 2022)

The business models as well as the range of products and services that telecommunications (telecom)

companies offer to customers continue to evolve as the industry converges with the media and

entertainment and technology industries. From TV and video services offered through fiber networks,

cable and satellite technology, cloud computing and other enterprise business solutions, to apps for smart

phones and tablets, telecom companies are continuing to expand the products and services they offer.

Telecom companies need to evaluate the requirements in ASC 280 regarding the identification of operating

segments and the related aggregation criteria. As with other organizations, the operating segments that

telecom companies identify depend on the information that the CODM uses. The information that the

CODM receives and uses to make decisions often varies based upon the size and complexity of the

organization. For example, a CODM of a telecom company may review business components by class of

customer or for all customers. We believe operating segments defined by class of customer or aggregate

product or services are the most common for telecom companies.

When determining which operating segments to aggregate, telecoms, like all companies, should consider

the operating segments reviewed by the CODM, aggregation criteria and materiality through application

of quantitative thresholds. Based on the varying size and business strategies among telecoms, there may

be instances where the operating segments will differ among telecoms, even among peer companies.

Additionally, application of the aggregation criteria may yield different results by company, even when

operating segments of the entities are similar. In determining whether aggregation of operating segments

is consistent with the objective and basic principles of ASC 280, telecoms may consider certain qualitative

factors, such as whether the segments are combined in operations analyses provided in Annual Reports

or through earnings releases and information that is routinely provided to financial analysts or regulators.

6.9 Casinos

Excerpt from Accounting Standards Codification

Entertainment — Casinos — Segment Reporting

Disclosure

Geographic Segments

924-280-50-1

Operations of a nonpublic business entity with a casino property that also includes a hotel, restaurant,

parking garage, and the like are generally considered as one industry segment. The operating

revenues of each are generally separately determinable. However, because of the natural

interdependence of such operations, an allocation of costs among them to determine relative

contributions to income (operating profit) would be largely arbitrary and, therefore, not meaningful.

However, nonpublic casino business entities operating in various legal jurisdictions may have

geographic segments and shall therefore report such information.

Financial reporting developments Segment reporting | 81

7 Comprehensive example

This section provides a comprehensive example that illustrates the year-end and interim disclosure

provisions of ASC 280 for ABC Company (Company), a hypothetical public company. The example

includes the determination of ABC Company’s reportable operating segments based on ABC Company’s

internal system of management reporting, the disclosures required to be made for each reportable

segment, the entity-wide disclosures and the interim period information. There are a wide variety of ways

that entities organize themselves and the determination of reportable segments must be based on the

individual facts and circumstances.

All amounts in the example are in thousands.

Background

ABC Company has three divisions: construction materials, metal products and paper products. The

Company’s construction materials division consists of three operating units. Its metal products division

consists of two operating units. Its paper products division is a single operating unit that manufactures

and distributes boxes, cartons and other packing materials for industrial uses. In addition, ABC Company

has two smaller operating units, electrical parts and construction engineering, which are not part of a

division. The Company also has a corporate headquarters, which is not a separate operating unit.

The organizational chart of ABC Company is as follows:

Each of the three divisions has a president who reports directly to the CEO. The CEO has final authority

over resource allocation decisions and performance assessment. Consequently, the CEO has been

identified as the CODM. Each of the operating units has a vice president who reports to the applicable

division president, except for the electrical parts and construction engineering operating units, whose

vice presidents report directly to the CODM. The CODM receives discrete financial information about the

divisions, as well as the operating units. However, for decision-making purposes related to the

assessment of performance and allocation of resources, the CODM uses financial information at the

divisional level, except for the electrical parts and construction engineering operating units, which report

directly to the CODM.

The divisions, as well as the electrical parts and construction engineering units, constitute the operating

segments of ABC Company. In this example, even though the CODM receives discrete financial information

about the other operating units, the CODM does not use the financial information of those operating

units to assess performance and make resource allocations. In addition, there are segment managers at

the division level (division president).

CODM

Chief Executive Officer

Operating Unit

Construction Engineering

Vice President

Division

Construction Materials

President

Operating Unit

Electrical Parts

Vice President

Division

Metal Products

President

Division

Paper Products

President

Operating Unit

Heating Systems

Vice President

Operating Unit

Plumbing Supplies

Vice President

Operating Unit

Misc. Metal Goods

Vice President

Operating Unit

Vent Systems/

Range Hoods

Vice President

Operating Unit

Metal Hose/

Light Coverings

Vice President

7 Comprehensive example

Financial reporting developments Segment reporting | 82

For purposes of this example, ABC Company has determined that the construction materials, metal

products and paper products operating segments are separately reportable because each meets the

quantitative thresholds for reporting segment information. In addition, ABC Company has determined that

the electrical parts and construction engineering operating segments are not required to be separately

reported because they do not meet the quantitative thresholds and the revenue attributable to the three

reportable divisions constitutes more than 75% of consolidated revenue. These two operating segments

are included in the “all other” category along with information about the corporate headquarters.

Disclosures

The format of the disclosures in this example is consistent with the format of the example provided in

ASC 280-10-55-46 through 55-52. This is not a required format. However, the standard provides for

entities to present segment information in the most understandable manner given the entity’s specific

circumstances. The example presents the data for one year; however, the data is required for each year

that a full set of financial statements is presented (e.g., three years).

Note that the following italicized text under the italicized headers is not part of the disclosure; the text

under the boldfaced headers as well as the headers themselves is what actually would be disclosed.

Descriptive information about reportable operating segments

ASC 280 requires certain descriptive information to be provided about an entity’s reportable operating

segments. This information includes the factors that management uses to identify the reportable segments

of an entity, the types of products and services from which each reportable segment derives its revenues,

how management measures segment profit or loss and segment assets, and if any reportable segments are

aggregated. The following paragraphs provide examples of the disclosures for ABC Company.

Description of the types of products and services from which each reportable segment derives its

revenues

ABC Company has three reportable segments: construction materials, metal products and paper

products. The Company’s construction materials division consists of three operating units that sell the

following products directly to construction companies and independent wholesale supply warehouses:

residential heating systems, plumbing supplies and miscellaneous metal goods (including items that are

purchased from the metal products division). The Company’s metal products division consists of two

operating units that also sell to construction companies and independent wholesale supply warehouses,

and also sell to the construction materials division. One operating unit sells vent systems and range

hoods, the other sells flexible metal hoses and light coverings. The paper products division manufactures

and distributes boxes, cartons and other packing materials for industrial uses.

Measurement of segment profit or loss and segment assets

The Company evaluates performance and allocates resources based on profit or loss from operations

before income taxes, not including gains and losses on the Company’s investment portfolio. The accounting

policies of the reportable segments are the same as those described in the summary of significant accounting

policies except that the Company recognizes and measures pension expense of its segments based on

cash payments to the pension plan, and accounts for inventory on a FIFO basis at the segment level

compared to a LIFO basis in the consolidated financial statements.

Intersegment sales and transfers are recorded at ABC Company’s cost; there is no intercompany profit or

loss on intersegment sales or transfers.

7 Comprehensive example

Financial reporting developments Segment reporting | 83

Factors management used to identify the public entity’s reportable segments

ABC Company’s reportable segments are business units that offer different products. The reportable

segments are each managed separately because they manufacture and distribute distinct products with

different production processes.

Information about segment profit/loss and segment assets

The following table illustrates a suggested format for presenting information about reported segment

profit or loss and segment assets. The same type of information is required for each year for which a

complete set of financial statements is presented. The amounts in this illustration are assumed to be the

amounts in reports used by the CODM and that are deemed material. Assume that the information is

provided in the annual report for the year ended 31 December 20X8.

Year ended 31 December 20X8

Construction

materials

Metal

products

Paper

products

All other

Totals

Revenues from external customers

$ 110,000

$ 20,000

$ 8,000

$ 158,000

Intersegment revenues

–

10,000

–

10,000

Interest expense

1,500

500

–

2,500

Restructuring charge

–

1,000

–

1,000

Depreciation expense

4,000

3,000

4,000

–

11,000

Segment profit (loss)

15,000

5,000

(4,000)

3,000

19,000

Other significant noncash item:

Write-down of impaired long-lived

assets

–

2,600

–

2,600

Segment assets

100,000

20,000

10,000

150,000

Expenditures for long-lived assets

10,000

12,000

2,000

–

24,000

Reconciliations

The following are illustrations of reconciliations of reportable segment revenues, profit or loss, and assets

to ABC Company’s consolidated totals. Reconciliations also are required to be disclosed for every other

significant item of information disclosed. As discussed in the disclosure related to the measurement of

segment profit or loss and segment assets, ABC Company recognizes and measures pension expense of

its segments based on cash payments to the pension plan, and it values its inventory on the FIFO basis for

segment reporting purposes, as opposed to LIFO for consolidated purposes. Also, the company does not

allocate certain items to its segments.

Revenues

Total external revenues for reportable segments $ 150,000

Intersegment revenues for reportable segments 10,000

Other revenues 8,000

Elimination of intersegment revenues (10,000)

Total consolidated revenues $ 158,000

Revenue from segments below the quantitative thresholds is attributable to two operating segments of ABC Company, an

electrical parts business and a construction engineering consulting business. Neither of these segments meet the quantitative

thresholds for determining reportable segments.

7 Comprehensive example

Financial reporting developments Segment reporting | 84

Profit or loss

Total profit or loss for reportable segments $ 16,000

Other profit or loss 3,000

Unallocated amounts:

Loss on sale of marketable securities (1,100)

Adjustment to pension expense in consolidation (750)

Adjustment of inventory to LIFO in consolidation (1,000)

Income before income taxes $ 16,150

Assets

Total assets for reportable segments $ 140,000

Other assets 10,000

Elimination of intercompany receivables (2,000)

Adjustment of inventory to LIFO in consolidation (7,000)

Total consolidated assets $ 141,000

Other significant items

Segment totals

Adjustments

Consolidated totals

Depreciation expense

$ 11,000

$ 200

$ 11,200

Interest expense

2,500

100

2,600

Restructuring charge

1,000

—

1,000

Write-down of impaired long-

lived assets

2,600

150

2,750

Expenditures for assets

24,000

1,000

25,000

The reconciling item to adjust expenditures for segment assets is the amount of acquisitions by non-

reportable operating segments. None of the other adjustments to consolidated totals is significant.

Entity-wide disclosures

The following illustrates the entity-wide geographic disclosures. Note that ABC Company is segmented

based on differences in products and services; as such, no additional disclosures of revenue information

about products and services are required.

Geographic information

Revenues

Long-lived

assets

United States

$ 80,000

$ 50,000

Mexico

35,000

16,000

Germany

37,000

20,000

Other foreign countries

6,000

2,000

Consolidated total

$ 158,000

$ 88,000

Revenues are attributed to countries based on the location of customers.

Major customer

Revenues from one customer of ABC Company’s paper products segment represents approximately

$18,000 of the Company’s consolidated revenues.

7 Comprehensive example

Financial reporting developments Segment reporting | 85

Interim period information

Following is an example of the interim period information that ABC Company would present in its

condensed financial statements of interim periods. Note that segment information in interim reports is

provided both for the current quarter and for the year-to-date. For example, in an interim report for the

nine months ended 30 September 20X9, segment information would be provided for the nine months and

three months ended 30 September 20X9 and 20X8 (for purposes of this example, only the disclosures for

the interim periods in 20X9 are provided). The information is required for each reportable segment.

Note X — Segment Information

Construction

materials

Metal products

Paper products

Three months ended 30 September 20X9

Revenues from external customers

$ 20,000

$ 5,000

$ 3,500

Intersegment revenues

—

2,000

—

Segment profit

6,000

2,500

1,000

Nine months ended 30 September 20X9

Revenues from external customers

65,000

12,000

9,700

Intersegment revenues

—

8,000

—

Segment profit

11,500

6,000

1,500

Segment assets

94,000

—

Profit

Three months ended

30 September 20X9

Nine months ended

30 September 20X9

Total profit for reportable segments

$ 9,500

$ 19,000

Other profit

1,000

2,250

Loss on sale of marketable securities

—

(750)

Adjustment to pension expense

in consolidation

(200)

(600)

Adjustment of inventory to LIFO in

consolidation

(300)

(800)

Income before income taxes

$ 10,000

$ 19,100

The decrease in assets since 31 December 20X8 is due to the company’s disposition of a portion of its residential heating

systems business.

Financial reporting developments Segment reporting | A-1

A Diagram to determine segments

The following diagram, taken from ASC 280-10-55-26, illustrates how to identify reportable operating

segments as discussed in chapters 2 and 3.

Yes

Do segments

meet the quantitative

thresholds?

Aggregate segments

if desired.

Yes

Identify operating segments based

on management reporting system.

Do some

segments meet all

aggregation

criteria?

some segments

meet a majority of the

aggregation

criteria?

Aggregate segments

if desired.

These are reportable

segments to be

disclosed.

Yes

Aggregate remaining

into “all other”

category.

Report additional

segments if external

revenue of all

segments < 75% of

consolidated revenue.

Do reportable

segments account

for 75% of consolidated

revenue?

Yes

Financial reporting developments Segment reporting | B-1

B Abbreviations used in this publication

Abbreviation

FASB Accounting Standards Codification

ASC 205

FASB ASC Topic 205, Presentation of Financial Statements — Discontinued Operations

ASC 250

FASB ASC Topic 250, Accounting Changes and Error Corrections

ASC 275

FASB ASC Topic 275, Risks and Uncertainties

ASC 280

FASB ASC Topic 280, Segment Reporting

ASC 350

FASB ASC Topic 350, Intangibles — Goodwill and Other

ASC 360

FASB ASC Topic 360, Property, Plant, and Equipment

ASC 420

FASB ASC Topic 420, Exit or Disposal Cost Obligations

ASC 606

FASB ASC Topic 606, Revenue from Contracts with Customers

ASC 805

FASB ASC Topic 805, Business Combinations

ASC 825

FASB ASC Topic 825, Financial Instruments

ASC 842

FASB ASC Topic 842, Leases

ASC 855

FASB ASC Topic 855, Subsequent Events

ASC 924

FASB ASC Topic 924, Entertainment — Casinos

ASC 932

FASB ASC Topic 932, Extractive Activities — Oil and Gas

ASC 954

FASB ASC Topic 954, Health Care Entities

Abbreviation

Other Authoritative Standards

ASU 2014-09

FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with

Customers (Topic 606)

Regulation S-K

SEC Regulation S-K, Standard instructions for filing forms under Securities Act

of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation

Act of 1975

Regulation S-X

SEC Regulation S-X, Form and content of and requirements for financial statements

Rule 3-05

Financial statements of businesses acquired or to be acquired

Rule 3-09

Separate financial statements of subsidiaries not consolidated and 50 percent or

less owned persons

Rule 3-14

Special instructions for real estate operations to be acquired

Abbreviation

Non-Authoritative Standards

Q&A 131

FASB Q&A 131, Segment Information: Guidance on Applying Statement 131

Statement 131

FASB Statement No. 131, Disclosures about Segments of an Enterprise and

Related Information

C&DI

SEC Division of Corporation Finance staff’s Compliance and Disclosure

Interpretations, Non-GAAP Financial Measures

Financial reporting developments Segment reporting | C-1

C Index of ASC references in this

publication

ASC Paragraph

Section

205-20-20

2.2

Discontinued operations

205-20-50-1

4.7.4

Discontinued operations

250-10-S99-1

4.1.5

Materiality

280-10-05-3

Scope and overview

280-10-05-4

1.2

Operating segments

280-10-05-5

1.5

Annual disclosure requirements

280-10-10-1

Scope and overview

280-10-15-2

Scope and overview

280-10-15-3

Scope and overview

280-10-20

Scope and overview

280-10-20

2.3

Unconsolidated businesses

280-10-20

2.3.1

Inclusion of separate financial statements of other entities

280-10-20

6.3.4

Scope

280-10-45-1

1.5

Annual disclosure requirements

280-10-45-2

1.5

Annual disclosure requirements

280-10-50-1

2.1

Determination of operating segments

280-10-50-1

3.6

Determining whether an equity method investment is a reportable

segment

280-10-50-2

2.1

Determination of operating segments

280-10-50-2

6.7

Oil and gas

280-10-50-3

2.1

Determination of operating segments

280-10-50-4

2.1

Determination of operating segments

280-10-50-5

2.1

Determination of operating segments

280-10-50-6

2.1.4

CODM uses multiple types of segment information

280-10-50-7

2.1.4

CODM uses multiple types of segment information

280-10-50-7

2.5

Goodwill considerations

280-10-50-8

2.1.4

CODM uses multiple types of segment information

280-10-50-9

2.1.4

CODM uses multiple types of segment information

280-10-50-10

Reportable segments

280-10-50-11

Reportable segments

280-10-50-11

3.1

Aggregation criteria

C Index of ASC references in this publication

Financial reporting developments Segment reporting | C-2

ASC Paragraph

Section

280-10-50-11

3.4

Combination of operating segments that do not meet quantitative

thresholds

280-10-50-12

3.3

Quantitative thresholds

280-10-50-12

3.3.1

Revenues

280-10-50-13

3.4

Combination of operating segments that do not meet quantitative

thresholds

280-10-50-14

3.5

Meeting the 75% of consolidated revenue test

280-10-50-15

3.7

The ‘all other’ category

280-10-50-16

3.8

Change in the quantitative thresholds from year to year

280-10-50-17

3.8

Change in the quantitative thresholds from year to year

280-10-50-18

3.9

Number of reportable segments

280-10-50-18A

Reportable segments

280-10-50-19

Reportable segments

280-10-50-20

Segment disclosure requirements

280-10-50-21

Segment disclosure requirements

280-10-50-21(a)

3.1

Aggregation criteria

280-10-50-22

4.1

Disclosure of segment profit or loss and segment assets

280-10-50-22

4.1.1

What is required to be disclosed

280-10-50-22

4.1.4

CODM uses more than one measure of segment profit/loss or

segment assets

280-10-50-23

4.1.6

Interest

280-10-50-24

4.1.6

Interest

280-10-50-25

4.1

Disclosure of segment profit or loss and segment assets

280-10-50-26

4.1.7

Segment assets

280-10-50-27

4.1

Disclosure of segment profit or loss and segment assets

280-10-50-28

3.2.3

CODM uses more than one measure of segment profit/loss or

segment assets

280-10-50-28

4.1

Disclosure of segment profit or loss and segment assets

280-10-50-28

4.1.3

Non-GAAP measures

280-10-50-28

4.1.4

CODM uses more than one measure of segment profit/loss or

segment assets

280-10-50-29

3.2.5

Changes in segment measurements

280-10-50-29

4.2

Explanation of measurements

280-10-50-30

4.3

Reconciliations

280-10-50-31

4.3

Reconciliations

280-10-50-32

4.5

Interim period information

280-10-50-33

4.5

Interim period information

280-10-50-34

4.6

Changes in reportable segments

280-10-50-34

4.6.2

Timing of a change in segment reporting

C Index of ASC references in this publication

Financial reporting developments Segment reporting | C-3

ASC Paragraph

Section

280-10-50-34

4.6.4

Non-SEC offerings

280-10-50-34A

4.6

Changes in reportable segments

280-10-50-35

4.6

Changes in reportable segments

280-10-50-36

3.2.5

Changes in segment measurements

280-10-50-36

4.6

Changes in reportable segments

280-10-50-38

Entity-wide disclosures

280-10-50-39

Entity-wide disclosures

280-10-50-40

5.1

Information about products and services

280-10-50-41

5.2

Information about geographic areas

280-10-50-41

5.4

Restatement of entity-wide disclosures

280-10-50-42

5.3

Information about major customers

280-10-55-2

2.3

Unconsolidated businesses

280-10-55-3

2.1.1

Engages in business activities

280-10-55-4

2.1.1

Engages in business activities

280-10-55-5

2.1.1

Engages in business activities

280-10-55-6

2.1.1

Engages in business activities

280-10-55-7

2.2

Discontinued operations

280-10-55-7A

through 55-7C

3.1

Aggregation criteria

280-10-55-7A

through 55-7C

3.1.2

Economic characteristics

280-10-55-8

4.4

Disclosures and reconciliations related to equity method investments

280-10-55-9

4.1

Disclosure of segment profit or loss and segment assets

280-10-55-9

4.1.4

CODM uses more than one measure of segment profit/loss or

segment assets

280-10-55-10

4.1.4

CODM uses more than one measure of segment profit/loss or

segment assets

280-10-55-11

4.1.6

Interest

280-10-55-12

through 55-15

4.1.1

What is required to be disclosed

280-10-55-14

4.1.7

Segment assets

280-10-55-16

4.5

Interim period information

280-10-55-19

2.2

Discontinued operations

280-10-55-21

Entity-wide disclosures

280-10-55-22

5.2.2

Revenues from external customers

280-10-55-23

5.2.3

Long-lived assets

280-10-55-25

5.2

Information about geographic areas

280-10-55-26

Appendix A

Diagram to determine segments

C Index of ASC references in this publication

Financial reporting developments Segment reporting | C-4

ASC Paragraph

Section

280-10-55-27

through 55-30

2.4

Reportable segments of public subsidiaries

280-10-55-35

3.1.2

Economic characteristics

280-10-55-36

3.1.2

Economic characteristics

280-10-55-39

3.2.4

CODM uses different measures for different segments

280-10-55-40

3.2.4

CODM uses different measures for different segments

280-10-55-45

3.3.2.2

Aggregation may change reportable segments

280-10-55-46

through 55-52

Comprehensive example

280-10-55-51

5.2.1

Meaning of ‘material’

280-10-60-1

4.7.1

Goodwill

280-10-60-3

4.7.3

Exit or disposal activities

350-10-20

4.7.1

Goodwill

350-20-35-34

2.5

Goodwill considerations

350-20-35-35

2.5

Goodwill considerations

350-20-50-1

4.7.1

Goodwill

350-30-50-3

4.7.6

Impairment of intangible assets

350-20-50-1A

4.7.1

Goodwill

360-10-20

4.7.7

Impairment or disposal of long-lived assets

360-10-50-2

4.7.7

Impairment or disposal of long-lived assets

360-10-50-3

4.7.7

Impairment or disposal of long-lived assets

420-10-50-1

4.7.3

Exit or disposal activities

606-10-50-6

4.7.5

Revenue recognition

606-10-55-90

4.7.5

Revenue recognition

805-10-20

4.7.2

Business combinations

805-30-50-1

4.7.2

Business combinations

855-10-50-2

4.6.2

Timing of a change in segment reporting

924-280-50-1

6.9

Casinos

932-235-50-22

6.7

Oil and gas

932-235-50-23

6.7

Oil and gas

954-280-45-1

6.6.4

Entity-wide disclosures

Financial reporting developments Segment reporting | D-1

D Summary of important changes

The following highlights important changes to this FRD since the April 2022 edition:

• Sections 1.5, 1.6 and Chapter 4 were updated to highlight recent developments in the FASB’s project

on segment reporting.

• Section 3.2.5 was updated to include additional considerations when there is a change in the

measure of segment profit or loss.

• Sections 4.6.3 and 4.6.4 were added to include reporting considerations in connection with SEC and

non-SEC offerings when there is a change in reportable segments.

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