The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, to improve disclosures about a public entity’s reportable segments and provide additional information about a segment’s expenses.
ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Entities are required to apply the new disclosure guidance on a retrospective basis unless it is impracticable to do so. As a result, calendar-year-end public entities are required to include the new disclosures in their 2024 financial statements and recast all prior period information presented (i.e., segment information presented for annual periods ended December 31, 2023 and 2022) to conform with the information provided in the adoption period.
What are the new requirements?
ASU 2023-07 requires incremental segment line item disclosures but does not change or remove any existing requirements for disclosure of specific items (such as depreciation, amortization or depletion expenses). The amendments in the ASU also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.
While ASU 2023-07 clarifies the scope of Topic 280 for entities with certain characteristics (single reportable segment entities), the ASU does not alter the scope of entities who are required to apply the guidance in Topic 280. Therefore, all for-profit entities that meet the definition of public entity, including such entities as non-issuer broker dealers, are required to comply with the ASU.
The primary change to existing guidance is the introduction of the significant expense principle, which requires disclosure of segment expenses (including those that are direct, shared, or allocated corporate overhead) that meet all of the following criteria:
- Regularly provided to the chief operating decision maker (CODM).
- Included within the segment’s reported measure(s) of profit or loss.
- Determined to be significant by management.
An expense category can be determined to be significant for one reportable segment and not others. In these situations, the FASB noted that for the reportable segment for which the segment expense was determined to not be significant, a public entity could either (1) separately disclose the segment expense as if it were significant or (2) include the segment expense as part of the other segment items line item.
Unlike most of the other segment line items currently required by Topic 280, the significant expense line items do not need to be reconciled back to the corresponding consolidated expense amounts. However, the significant expense line items are subject to similar recasting (previously referred to as “restating” in Topic 280) requirements as other segment information.
ASU 2023-07 does not define the term “significant” as part of the new guidance as it is expected that management will be able to apply judgment in a manner similar to how the threshold is already applied in other parts of Topic 280. However, management should consider both quantitative and qualitative factors when evaluating which segment expenses are significant under the principle.
Other than the significant expense principle, the ASU includes the following notable changes to existing guidance:
- Other segment items disclosure – For each reportable segment, an amount for other segment items and a description of its composition should be disclosed. The “other segment items” amount is the difference between the segment revenue and the total of the segment significant expenses and the reported measure of segment profit or loss. It should be disclosed regardless of whether any segment expenses are required to be disclosed under the significant expense principle.
- Disclosure of multiple measures of a segment’s profit or loss – In addition to the measure of segment profit or loss that is most consistent with the measurement principles under generally accepted accounting principles (GAAP), a public entity is not precluded from reporting additional measures of a segment’s profit or loss as long as all reported measures are used by the CODM in assessing segment performance and deciding how to allocate resources. Each measure of a segment’s profit or loss disclosed will need to be reconciled back to the corresponding consolidated expense amount.
- RSM Commentary: At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff discussed how public entities should consider the interaction between the new guidance permitting disclosure of additional measures of a segment profit or loss in ASU 2023-07 and the SEC’s rules and interpretive guidance on the use of non-GAAP financial measures (such as Regulation G and Regulation S-K Item 10(e)). The SEC staff clarified that additional measures of segment profit or loss permitted to be disclosed under ASU 2023-07 that are not calculated in accordance with GAAP would be subject to SEC non-GAAP measure requirements, including the prohibition of presenting non-GAAP financial measures on the face of the financial statements or in the accompanying notes. The SEC staff also encouraged companies early adopting ASU 2023-07 and planning to disclose additional measures of segment profit or loss that would be considered non-GAAP financial measures to consult with the Division of Corporation Finance’s Office of the Chief Accountant about their fact pattern. Companies considering disclosing an additional measure of profit or loss should thoroughly review whether that additional measure would be considered a non-GAAP financial measure. Companies should also closely monitor whether there are further developments in this area, including any further guidance from the SEC, before the effective date of the ASU.
- Single reportable segment entities – Clarifies that all segment disclosure requirements in Topic 280, including the new requirements in ASU 2023-07, apply to public entities with a single reportable segment. The ASU also provides a new illustrative example of the required disclosures for a public entity with a single reportable segment in accordance with the ASU and certain other guidance in Topic 280. In situations in which the requirements in the ASU as well as existing segment disclosure requirements would result in the duplication of information from the primary financial statements (for example, when the CODM utilizes a consolidated profit or loss measure presented in the income statement), the FASB explained that an acceptable alternative would be to refer to the primary financial statements in the segment footnote.
- Interim disclosures – Expands the scope of interim disclosures to include all required annual disclosures about a reportable segment’s profit or loss and assets, including significant expenses and other segment items disclosures.
- Qualitative disclosures – Requires a public entity to disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
- Implementation guidance – Updates the existing illustrative example in Topic 280 to demonstrate the new requirements of the ASU, including circumstances in which a public entity chooses to disclose multiple measures of a segment’s profit or loss.
