The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, in November 2023 amending Topic 280, Segment Reporting, to require all public entities, including those that have a single reportable segment, to provide expanded segment disclosures. The amendments in ASU 2023-07 will be effective for fiscal years beginning after Dec. 15, 2023 (FY 2024), and interim periods within fiscal years beginning after Dec. 15, 2024 (FY 2025). Early adoption of the amendments in ASU 2023-07 is permitted, and we expect that some public entities may choose to apply the expanded segment reporting disclosure provisions in their FY 2024 interim financial statements to align their interim and annual segment disclosures in FY 2024.

The FASB update will require public entities to disclose certain information including significant expenses and “other segment items,” regardless of whether they have a single reportable segment or multiple. These incremental disclosures will be required in addition to legacy segment disclosure about revenues, segment profit or loss, and total assets by reportable segment. Further, all segment disclosures will be required more frequently than in the past: in interim financial statements in addition to annual ones and be applied retroactively to prior comparative financial statements in the period of adoption.

Disclosure of significant segment expenses

The new guidance requires a public entity to disclose, for each reportable segment, the significant expense categories and amounts that are regularly provided to the chief operating decision-maker (CODM) and included in each reported measure of a segment’s profit (loss) measure.

We recommend that each public entity develop its own accounting policy as to what segment expenses would be deemed “significant” using relevant quantitative and qualitative criteria to help ensure consistent and objective disclosure from period to period. Such accounting policy should contemplate circumstances that could change the identification of an entity’s significant segment expenses; especially where such a change would result in the recast of historical disclosures of significant segment expenses to the extent it is practicable to do so.

Further, it should be noted that the disclosure of significant segment expenses includes those significant expenses that are “easily computable” from information regularly provided to the CODM. For instance, if the information regularly provided to the CODM includes segment revenue and segment “gross margin,” then the significant expense category “cost of sales” would be considered “easily computable” therefrom.

The FASB does not define the frequency of “regularly provided” in Topic 280, as amended. However, SEC staff have indicated at conferences and through their comment letters, that a public entity should look to the frequency of segment financial information provided to the CODM internally within the company (ordinarily in the format of monthly or quarterly management reporting packages), when establishing what is “regularly provided” in their accounting policy.

Segment measures of profit or loss

If the CODM uses only one measure of segment profit or loss in assessing segment performance and deciding how to allocate resources, then only that measure should be reported within the segment disclosures to the annual and interim financial statements. The FASB acknowledged that due to the management approach to the segment reporting model in US GAAP, such single measure of profit or loss may be a non-GAAP measure that is specifically tailored and designed by the public entity’s management. 

If the CODM uses more than one measure of segment profit or loss, then the segment measure that is required to be reported is the one determined in accordance with the measurement principles most consistent with US GAAP. An entity may voluntarily disclose additional measures of segment profit or loss that the CODM uses for assessing segment performance and resource allocation. An entity that discloses multiple measures of segment performance will reconcile each measure to its consolidated results.

The Chief Accountant of the SEC’s Division of Corporation Finance announced at the December 2023 AICPA and CIMA Conference on SEC and PCAOB Developments in Washington DC, that such additional measures of segment profit or loss would be considered “non-GAAP measures” because Topic 280 does not (1) require them nor (2) expressly permits them by prescribing, or otherwise specifying, such additional measures. Accordingly, any such additional measures in the segment notes to the financial statements, which are not consistent with US GAAP, should be accompanied with the full suite of non-GAAP disclosures required by Regulation G, Item 10(e) of Regulation S-K and related SEC staff interpretations on non-GAAP measures in the MD&A section of the same filing where the financial statements reside.

What does CohnReznick think?

We encourage public entities to take a proactive approach to the amendments in ASU 2023-07 and begin their implementation work now. Thinking through the appropriate disclosures would entail collaboration between the CODM, those in charge of financial reporting, and other stakeholders within the organization. Further, financial reporting departments may have to modify their internal controls over financial reporting and related workflows to accommodate the incremental segment disclosures that will be required by the update, particularly with respect to quarterly reporting on Forms 10-Q.