Implementing the new segment reporting rules

Public companies, including those that have only one reportable segment, will be required to follow new rules for segment disclosures for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. That means calendar year-end companies must follow the new guidance for 2024 annual reports, including all comparative periods.

Early application of the updated guidance is allowed. However, some companies have expressed concerns about implementing the changes before the looming effective date. Here are some answers to questions you might have about the updated guidance. ?

What is segment reporting?

The term “segment reporting” refers to the reporting of the operating units of a company in its financial statements. Under U.S. Generally Accepted Accounting Principles (GAAP), companies must report a segment if it has at least:

·?????? 10% of the company’s revenue,

·?????? 10% of the company’s profit or loss, or

·?????? 10% of the combined assets of the company.

Segment reporting is required for public companies but not for private entities.

What’s changing?

In November 2023, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The updated guidance significantly expands the existing disclosure requirements for segment reporting to provide more detailed and timelier information, but it retains the management approach.?

Under the updated guidance, companies will be required to disclose segment expense information based on what the chief operating decision maker (CODM) deems to be material. The CODM could be an individual or group.

The updated guidance introduces a disclosure principle based on the significant segment expense categories regularly provided to the CODM and included in the reported measure of segment profit or loss. It allows companies to report multiple measures of a segment’s profit or loss. If more than one measure is used, a company could disclose any of those measures as long as at least one is determined in accordance with the measurement principles most consistent with those used in measuring the consolidated financial statements.

An amount for other segment items by reportable segment and a description of its composition must be disclosed, too. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.

In addition, companies must disclose:

·?????? The title or committee that’s deemed to be the CODM and an explanation of how the reported measure is used to assess profitability and allocate resources.

·?????? The nature of the expense information the CODM uses to manage segment operations. For example, the company may disclose that the CODM uses consolidated or budgeted expense information. This change applies only to public companies that don’t regularly provide segment expenses to the CODM.

These additions significantly expand what’s required under the existing guidance. And the changes must be applied retrospectively.

How does the updated guidance improve transparency?

The FASB began work in 2018 on a project to enhance the disclosure requirements for reporting segments. The objective was to improve transparency about profits and losses, future cash flows and business unit operations.

The new standard aims to improve segment reporting by requiring disclosure of the significant segment expenses based on how management internally views segment information and disclosures of single-reportable segment expenses. It also expands the interim period segment disclosure requirements.

What issues may arise during implementation?

The updated guidance requires footnote disclosures that provide at least one measure of segment profit or loss based on what the CODM deems to be material. Managers often use non-GAAP measures — such as earnings before interest, taxes, depreciation and amortization — to give them a more complete picture of business operations. However, public companies are generally prohibited from including non-GAAP measures in the financial statements, including the footnotes. When non-GAAP measures are used by the CODM, the company may also need to present a GAAP measurement of earnings.

Another concern is the retrospective application of the new rule. This means that a company will need to recast or update its segment footnote for all years presented (typically three years) based on the current year presentation, even if segment expenses or other profit measures were different from those presented to the CODM in previous years.

Are you ready?

Implementing the new standard is expected to take significant time and effort. If your company must apply the new rule, DLA can assist in your implementation.