Last month, the FASB issued a proposed ASU on segment reporting. In its announcement, the FASB explained that investors find segment information to be critically important to understanding a company's different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses. According to FASB Chair Richard Jones, the "proposed ASU would represent the FASB's most significant change to segment reporting since 1997....On the basis of our extensive stakeholder outreach, the proposed ASU would provide investors and other allocators of capital with valuable insights into significant segment expenses, expand segment disclosures reported in interim periods, and require disclosures for single-segment entities."
The FASB in Focus regarding the proposed ASU summarizes the key aspects of the proposed ASU as follows:
- "Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the CODM [chief operating decision-maker] and included within each reported measure of segment profit or loss.
- Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.
- Require that a public entity provide all annual disclosures about a reportable segment's profit or loss and assets currently required by Topic 280 in interim periods.
- Clarify that multiple measures of segment profit or loss may be disclosed and that if the CODM uses more than one measure of a segment's profit or loss, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity's consolidated financial statements. In other words, in addition to the measure that is most consistent with the measurement principles under generally accepted accounting principles, a public entity is not precluded from reporting additional measures of a segment's profit or loss that are used by the CODM.
- Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this proposed ASU and all existing segment disclosures in Topic 280."
Currently, financial statements are required to include segment information prepared under the "management approach," an approach that requires segment reporting "based on the way that management internally organizes the segments within a public entity for purposes of allocating resources and assessing performance. That approach allows users to see disaggregated information about the entity through the eyes of management and to assess the performance of the segments in the same way that management reviews them." Essentially, the entity first identifies its operating segments based on the perspective of the CODM. Then, entities may, but need not, "aggregate their operating segments if certain criteria are met. The operating segments, including those that have been aggregated, are then evaluated against quantitative thresholds to determine an entity's reportable segments."
Currently, a public entity is required to disclose certain information about its reportable segments, such as "a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources," and, under certain circumstances, other specified segment items, such as depreciation and amortization. Those requirements would not change under the ASU, nor would the ASU change how the entity "identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments." Rather, the amendments would "improve financial reporting by requiring incremental segment information on an annual and interim basis for all public entities to enable investors to perform more decision-useful financial analyses."
The ASU indicates that the FASB decided to focus on expense information after considering feedback from stakeholders requesting more detailed expense information at the segment level. According to the ASU, additional expense information "helps investors better assess financial trends, perform more precise financial modeling when forecasting the components of an individual segment's profit or loss, and better evaluate an entity's business activities. Additionally, some investors indicated that understanding the composition of an entity's expenses at the segment level and how the related amounts vary over time is helpful in signaling when major changes occur within the business." Interestingly, the ASU notes that "[a]pproximately half of preparers included in the FASB staff's outreach explained that their CODMs are not regularly provided with segment expense information."
SideBar
Separately, the FASB is also working on a related project to disaggregate income statement expenses, including separate disclosure of labor costs/employee compensation. Of course, as reported by Bloomberg (here and here), there has been a push for disaggregation of expenses on the income statement since at least 2016, but in 2019, the FASB voted (5 to 2) "to put its once-high priority financial reporting project on pause." It's been quite a lengthy pause, but, in February 2022—perhaps hearing the call from investors and others—the FASB decided to restart work on the project to "improve the decision usefulness of business entities' income statements through the disaggregation of certain expense captions."
Currently, companies typically include in their income statements expense captions for selling, general and administrative (SG&A) expenses, cost of services and other cost of revenues, and cost of tangible goods sold. Total compensation costs are rarely disclosed—only about 15% of companies disclose that data, according to testimony at the SEC's Investor Advisory Committee. In February, the FASB considered several potential approaches to addressing the topic through various disaggregation principles and quantitative thresholds, and determined to conduct outreach. At the FASB meeting on July 27 (see the Board meeting handout, beginning p. 6), the Board discussed the feedback received through its outreach efforts, as well as potential approaches to disaggregation. A loose consensus appeared to form around a two-pronged hybrid approach: a prescriptive component that would require disaggregation of some specific costs, including labor, depreciation and amortization and, in some cases, materials or purchases; and a principles-based component for disaggregation of other costs, which might involve management judgment or a quantitative threshold or backstop. (See this PubCo post.) At a subsequent meeting in October, the FASB continued its deliberations by discussing the disaggregation approach for income statement expenses, settling on an expense disaggregation approach that would require an entity to "reconcile any disaggregated information to the relevant expense caption presented in the income statement. The Board decided not to require disclosure in total for any additional specific expenses or costs incurred." Additionally, the FASB directed the staff to perform additional research on a separate presentation of selling expenses. (See these tentative decisions.)
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