Last year, the Financial Accounting Standards Board (FASB) opened the question of how to improve the information public companies report about their business segments. Then in February, the FASB announced that it plans to reach out to more investors to ask what data they’d like to see disclosed. It appears that any proposed rule change is still a long time away.
Tweaking the guidance
The FASB has spent more than six 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, known as the “management approach” advises businesses to connect the information for reporting segments based on 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.
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
- Its profit or loss is 10% or more of the greater of either a) the combined reported profit of all operating segments that didn’t report a loss or b) the combined reported loss of all operating segments that did report a loss
A segment with assets that are 10% or more of the combined assets of all operating segments must also appear in the financial statements.
Looking for more
Investors often complain that the financial reporting under ASC 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. Businesses, on the other hand, are wary about offering too much data that could give competitors information about trade secrets.
In June 2018, FASB staff began surveying issuers on ways to improve segment reporting. They explored three options for changing the current approach to 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 infrequently.
FASB members want more investors to be consulted as part of the ongoing study. In particular, member Gary Buesser advocated that the research study should focus on both the companies who report and investors who use the information.
The study continues…
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 us and Weaver can help you get connected.
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