On July 26, 2023, the Financial Accounting Standards Board (FASB or Board) tentatively decided to issue a final accounting standards update (ASU) to improve disclosures about a public entity’s reportable segments and provide more information about a segment’s expenses. The final ASU is expected to be issued in the fourth quarter of 2023.
The ASU will be effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption of the new standard will be permitted. Entities will be 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 will be required to include the new disclosures in their 2024 financial statements and recast 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.
The final ASU is expected to be largely consistent with the proposed ASU, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures; however, the Board decided to include additional clarifying and implementation guidance in the final ASU related to the significant expense principle, single reportable segment entities, and disclosing multiple measures of a segment’s profit or loss. See items marked as New Decision in the next section for further details on these additions.
What will be the new requirements once the final ASU is issued?
The final ASU will require incremental segment line-item disclosures but will not change or remove any of the existing requirements for disclosure of specific items (such as depreciation, amortization or depletion expenses). The amendments in the final ASU also will 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 the Board clarified the scope of Topic 280 for entities with certain characteristics (single reportable segment entities), the final 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, will be required to comply with the amendments once the final ASU is issued.
The primary change to existing guidance will be the introduction of the significant expense principle. The significant expense principle will require disclosure of segment expenses that meet all of the following criteria:
- Regularly provided to the chief operating decision maker (CODM)
- Included within the segment’s reported measure of profit of loss
- Determined to be significant by management.
New Decision: The final ASU is expected to clarify that the significant expense principle will also apply to allocated overhead expenses by segment.
Other notable aspects of the significant expense principle include clarifications on how it is to be applied. For example, the Board noted that an expense category can be determined to be significant for one reportable segment and not others, and thus only disclosed in that one segment. Additionally, 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 would be subject to similar recasting (previously referred to as “restating” in Topic 280) requirements as other segment information.
The final ASU will 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.
New Decision: The final ASU is expected to require management to consider both quantitative and qualitative factors when assessing significance under the principle; however, the guidance will not be overly prescriptive.
Other than the significant expense principle, the final ASU will also include 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.
- Interim Disclosures – The scope of interim disclosures will be expanded to include all required annual disclosures about a reportable segment’s profit or loss and assets, including significant expenses and other segment items disclosures.
- Disclosure of Multiple Measures of a Segment’s Profit or Loss - Clarifies that in addition to the measure of segment profit or loss that is most consistent with GAAP measurement principles, a public entity is not precluded from reporting additional measures of a segment’s profit or loss.
- New Decision: The final ASU is expected to include an illustrative example of what is required when an entity discloses multiple measures of a segment profit or loss. It will also require disclosure about how the CODM uses each reported measure of a segment’s profit or loss to allocate resources and assess performance.
- Single Reportable Segment Entities – Clarifies that all segment disclosure requirements in Topic 280 apply to public entities with a single reportable segment.
- New Decision: The final ASU is expected to include additional implementation guidance and illustrative examples specific to single reportable segment entities.