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Exploring segment reporting alternatives

In February, the Financial Accounting Standards Board (FASB) discussed its ongoing project to improve how companies provide information around business segments. It doesn’t appear that a proposal will be issued anytime soon. Instead, the FASB plans to reach out to more investors on what segment data they’d like to see disclosed.

Segment reporting guidance

The FASB has spent months on outreach related to potential tweaks to FASB Accounting Standards Codification (ASC) Topic 280, Segment Reporting. In general, the FASB wants to improve the detail businesses provide about their segments.

The existing standard advises businesses to connect the information for reporting segments based on the person or group of people described by the disclosure requirements and implementation guidance as the chief operating decision maker (CODM). Businesses are required to disclose certain information about their segments if the information is regularly reviewed by the CODM. This is more commonly known as the so-called “management approach” to segment reporting.

Under the existing rules, segment totals must be reconciled to the consolidated amounts if the segment totals are “significant.” In general, a business must report information about an operating segment if:

  • Its revenue — including sales to external customers and intersegment sales or transfers — is 10% or more of the combined internal and external revenue of all operating segments, or
  • Its profit or loss is 10% or more of the greater of either the combined reported profit of all operating segments that didn’t report a loss or the combined reported loss of all operating segments that did report a loss.

A segment that includes assets that are 10% or more of the combined assets of all operating segments also must appear in the financial statements.

Need for change

Investors often complain that the financial reporting that conforms to Topic 280 leaves them with too little information. They say large multinationals often report one or two business segments when other evidence indicates they should report more.

Investors say the problem can be traced to the leeway companies are given to determine when they should aggregate information from several business lines. In addition, the existing disclosure requirements are somewhat limited. Yet businesses are wary about offering too much information that could give competitors information about trade secrets.

Ongoing research

In June 2018, FASB staff began surveying issuers on ways to improve segment reporting. They explored three options for changing the current approach for determining which segment information needs to be reported. The management approach “requires an entity to report segment information in the way that management internally organizes its segments to make operating decisions and assess performance.”

Of the three alternatives, FASB staff didn’t recommend pursuing two of them. Under the remaining alternative, staff will study how to clarify the meaning of “regularly reviewed information,” with a particular focus on technology changes and information that’s reviewed by the CODM only on an irregular basis.

FASB members want more investors to be consulted as part of the ongoing study. In particular, FASB member Gary Buesser advocated focusing on two groups during the research study: 1) companies who report, and 2) investors who consume financial information.

Stay tuned

No formal decisions about segment reporting have been made yet. However, if your company is interested in participating in the FASB’s ongoing research study, contact your MCM professional as soon as possible.

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