16 ASC 280 SEGMENT REPORTING
Restatement of Previously Reported Segment Information
PERSPECTIVE AND ISSUES
Subtopic
ASC 280, Segment Reporting, has one subtopic:
- ASC 280-10, Overall, that provides guidance to public business entities on how to report certain information about
- Operating segments in complete sets of financial statements and in
- Condensed financial statements of interim periods issued to shareholders.
ASC 280 also requires public entities to disclose certain information about:
- Their products and services,
- The geographic areas in which they operate, and
- Their major customers.
Overview
Benefits.
With many companies organized as conglomerates, the presentation of basic consolidated financial statements on an aggregated basis does not provide users with sufficient information for decision-making purposes. The objective of segment reporting, as set forth in ASC 280-10-1 is to
. . . Provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates to help users of financial statements:
The primary benefit of segment reporting is the release of “hidden data” from consolidated financial information. Different segments may possess different levels of profitability, risk, and growth. Assessing future cash flows and their associated risks can be aided by segment data. For example, knowledge of the level of reporting entity operations in a growing or declining product line can help in the prediction of cash flow, while knowledge of the scope of reporting entity operations in an unstable geographic area can help in the assessment of risk. In general, information about the nature and relative size of an enterprise's various business operations is considered useful by decision makers.
ASC 280 governs the way publicly held businesses are required to report disaggregated information in interim and annual financial reports to stockholders. The statement defines operating segments as distinct revenue-producing components of the reporting entity about which separate financial information is produced internally, and whose operating results are regularly reviewed by the reporting entity.
Management Approach.
The disclosure approach adopted by ASC 280-10-05-03 and 04 is the “management approach,” meaning it is based on the way management organizes segments internally to make operating decisions and assess performance. The management approach, in general, provides that external financial reporting will closely conform to internal reporting, thus giving financial statement users the ability to view the reporting entity's segments in the same manner as internal decision makers.
Financial information can be segmented in several ways: by types of products or services, by geography, by legal entity, or by type of customer. ASC 280 provides a methodology to identify the operating segments that are separately reportable (referred to as “reportable segments”) and requires that each reportable segment disclose, among other items, its profit or loss, certain specific revenues and expenses, and its assets. Management is required to reconcile segment information with its consolidated general-purpose financial statements.
In addition, ASC 280 requires that all public companies report information on a company-wide basis about revenues for each product and service, about countries in which revenues are earned and assets are held, and about its major customers, even if this information is not used by management in making operating decisions.
The Codification does not limit segment reporting to purely financial information. It also requires a description of the company's rationale or methods employed in determining the composition of the segments. This description includes the products or services produced by each segment, differences in measurement practices between segments and the consolidated entity, and differences in the segments' measurement practices between periods.
Practice Alert
Segment reporting is a frequent topic of SEC comment letters. While SEC rules only apply to public entities, preparers of financial statements can benefit from the findings of SEC reviewers. For segment reporting, these are some of the topics found in SEC comment letters:
- How operating segments were identified
- The basis of aggregation of operating segments
- Confirmation that prior periods were revised so that information is consistent
- Lack of quantitative disclosure about products and services
- Lack of disclosure about geographic information.
DEFINITIONS OF TERMS
Source: ASC 280-10-20, unless otherwise noted
Chief operating decision maker (CODM). The person(s) at the reporting entity level whose general function (not specific title) is to allocate resources to, and assess the performance of, the segments. Within a reporting entity, this authority does not necessarily need to be vested in a single individual; rather, the responsibilities can be fulfilled by a group of individuals. (ASC 280-10-50-5)
Operating segment. A component of a reporting entity that earns revenues and incurs expenses, about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance has all of the following characteristics:
- It engages in business activities from which it may earn revenues and incur expenses (including revenue and expenses relating to transactions with other components of the same entity).
- Its operating results are regularly reviewed by the public entity's chief operating decision maker to make disclosures about resources to be allocated to the segment and assess its performance.
- Its discrete financial information is available.
Source: ASC 280-10-50-1
Public entity. A business entity or a not-for-profit entity that meets any of the following conditions:
- It has issued debt or equity securities or is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the counter market, including local or regional markets).
- It is required to file financial statements with the SEC.
- It provides financial statements for the purpose of issuing any class of securities in a public market.
Segment manager. The person(s) accountable to the reporting entity's CODM (defined earlier) for one or more operating segment's activities, financial results, budgets, forecasts, and operating plans. The reporting entity's CODM can also serve as segment manager for one or more operating segments. (ASC 280-10-50-7 and 8)
CONCEPTS, RULES, AND EXAMPLES
Applicability of ASC 280
ASC 280 applies to issuers (i.e., public companies). The statement does not mandatorily apply to not-for-profit organizations or to nonissuers (i.e., nonpublic companies)—which are, nevertheless, encouraged to voluntarily provide the segment disclosures prescribed by ASC 280. It also does not apply to “parent entities, subsidiaries, joint ventures, or investees accounted for by the equity method if those entities' separate company statements also are consolidated or combined in a complete set of financial statements and both the separate company statements and the consolidated or combined statements are included in the same financial report.” However, ASC 280 does not apply to those entities if they are public entities, whose financial statements are issued separately. (ASC 280-15-3)
Operating Segments
Operating segments frequently have a segment manager function that communicates on an ongoing basis with the reporting entity's CODM. The segment manager is not necessarily a single individual but rather the segment management responsibility can vest functionally in a committee or group of designated individuals. Additionally, an operating segment may not be revenue generating from its inception, as it may be in a start-up phase.
Not all activities that occur within the reporting entity are allocable to its operating segments. Activities that are non-revenue-producing or that are incidental to the reporting entity, such as corporate headquarters or certain service or support departments, are not to be attributable to operating segments. ASC 280 specifies that the reporting entity's pension and other postretirement benefit plans are not considered to be operating segments. (ASC 280-10-50-4)
Reportable Segments
An operating segment is considered to be a reportable segment if it is significant to the enterprise as a whole because it satisfies one of the three quantitative 10% tests described below. (ASC 280-10-50-12)
Revenue test.
Segment revenue (unaffiliated and intersegment) is at least 10% of the combined revenue (unaffiliated and intersegment) of all operating segments.
Profit and loss test.
The absolute amount of segment profit or loss is at least 10% of the greater, in absolute amount, of:
- Combined profits of all operating segments reporting a profit
- Combined losses of all operating segments reporting a loss.
ASC 280-10-55 clarifies that, if the CODM uses different measures of profit or loss to evaluate the performance of different segments (e.g., net income versus operating income), the reporting entity is to use a single, consistent measure for the purposes of this profit and loss test. This does not, however, affect the requirement that the reporting entity disclose the measure of profit or loss used by the CODM for the purposes of decision making regarding the segment's performance and resources to be allocated to the segment.
Assets test.
Segment assets are at least 10% of the combined assets of all operating segments. Segment assets include those assets used exclusively by the segment and the allocated portion of assets shared by two or more segments. Assets held for general corporate purposes are not assigned to segments.
Comparability.
Interperiod comparability must be considered in conjunction with the results of the 10% tests. If a segment fails to meet the tests in the current reporting period but has satisfied the tests in the past and is expected to in the future, it is considered as being reportable in the current year for the sake of comparability. Similarly, if a segment which rarely passes the tests does so in the current year as the result of an unusual event, that segment may be excluded to preserve comparability.
75% Test.
After the 10% tests are completed, a 75% test must be performed. The combined external revenue of all reportable segments must be at least 75% of the combined unaffiliated revenue of all operating segments. If the 75% test is not satisfied, additional segments must be designated as reportable until the test is satisfied. The purpose of this test is to ensure that reportable segments account for a substantial portion of the entity's operations.
The following example illustrates the three 10% tests and the 75% test.
Summary of Test Results
Note that the aggregate revenues of the reportable segments that passed the 10% tests are $58 short of providing the required coverage of 75% of external revenues. Consequently, an additional operating segment (A, B, or G) will need to be added to the reportable segments in order to obtain sufficient coverage.
Aggregating Segments.
Certain other factors must be considered when identifying reportable segments. Management may consider aggregating two or more operating segments if:
- They have similar economic characteristics,
- Aggregation is consistent with the objective and basic principles of ASC 280, and
- The segments are similar in all of the following areas:
- The nature of the products and services
- The nature of the production processes
- The type of customer for their products and services
- The methods used to distribute their products or provide their services
- The nature of the regulatory environment.
This aggregation can occur prior to performing the 10% tests if management desires.
Management may optionally combine information on operating segments that do not meet any of the 10% tests to produce a reportable segment, but only if the segments being combined have similar economic characteristics and also share a majority of the five aggregation criteria listed above (ASC 280-10-50).
Note that information about operating segments that do not meet any of the 10% thresholds may still be disclosed separately. (ASC 280-10-50-15) By utilizing the aggregation criteria and quantitative thresholds (10% tests) for determining reportable segments, ASC 280 uses what should be considered a modified management approach.
The number of reportable segments should not be so great as to decrease the usefulness of segment reporting. As a rule of thumb, FASB suggests that if the number of reportable segments exceeds ten, segment information may become too detailed. In this situation, the most closely related operating segments should be combined into broader reportable segments, again, however, subject to the objectives inherent in ASC 280's requirements. (ASC 280-10-50-18)
Refer to the “Alternative Statement of Financial Position Segmentation” section and the accompanying diagram that follows. It provides an example of the different components of a reporting entity used for various accounting and reporting purposes.
Measurement Issues
Transfer pricing.
Since segment revenue as defined by ASC 280 includes intersegment sales, transfer pricing becomes an issue. Rather than establishing a basis for setting transfer prices, FASB requires companies to use the same transfer prices for segment reporting purposes as are used internally. Since most segments are organizational profit centers, internal transfer prices would generally reflect market prices, but even if this is not the case, these same transfer prices must be used for segment disclosures.
Common costs.
Another issue in determining profit or loss is the allocation of common costs. Common costs are expenses incurred by the reporting entity for the benefit of more than one operating segment. Again, segment reporting is required to conform to internal management reporting. Accordingly, these costs are only allocated to a segment for external reporting purposes if they are included in the measure of the segment's profit or loss that is used internally by the CODM.
General corporate expense.
Difficulties can arise in distinguishing common costs from general corporate expenses. General corporate expenses are not direct expenses from the point of view of any operating segment; they are incurred for the benefit of the corporation as a whole and cannot be reasonably attributed to any operating segment. Common costs, on the other hand, benefit two or more segments and can be allocated to those segments in a manner determined by management to support internal decision making by the reporting entity.
Corporate assets.
Similarly, only those assets that are included internally in the measure of the segment's assets used to make operating decisions are reported as assets of the segment in external financial reports. If management allocates amounts to segment profit or assets internally and those amounts are used by the CODM, then those amounts are to be allocated on a reasonable basis and disclosed.
Segment Disclosures
ASC 280 requires disclosures regarding the reporting entity's reportable segments that include
- General information—Explain how management identified the reporting entity's reportable segments, including whether operating segments have been aggregated.
Alternative Balance Sheet Segmentation
Additionally, describe the types of products and services from which each reportable segment derives its revenues. (ASC 280-10-50-21)
- Certain information about reported segment profit and loss, segment assets and the basis of measurement—This will include:
- Revenues from external customers
- Revenues from transactions with other operating segments of the same public entity
- Interest revenue
- Interest expense
- Depreciation, depletion, and amortization expense
- Unusual items as described in paragraph 225-20-45-16
- Equity in the net income of investees accounted for by the equity method
- Income tax expense or benefit
- Extraordinary items
- Significant noncash items other than depreciation, depletion, and amortization expense.
(ASC 280-10-50-22)
- Disclose the basis of measurement for these items. (ASC 280-10-50-29)
- Reconciliations—Management must reconcile the segment amounts disclosed to the corresponding consolidated reporting entity amounts. (ASC 280-10-50-30)
- Interim period information—Although the interim period disclosure requirements are not as extensive as those that apply to the annual financial statements, certain segment disclosures are required in interim financial statements. Public entities must disclose revenues from external customers, intersegment revenues, measure of segment profit or loss, total assets where there have been a material change from the last annual report, description of differences from the last annual report in the segmentation basis or basis of profit and loss measurement, reconciliation. (ASC 280-10-50-32)
See the comprehensive illustration of the disclosures required for segment reporting provided later in this chapter. Additionally, ASC 280 provides an illustrative example.
Entity-Wide Disclosures
In addition to segment data, ASC 280-10-50-38 through 42 mandates that certain entity-wide disclosures be made. The entity-wide disclosures are required for all reporting entities subject to ASC 280, even those that have only a single reportable segment.
Products and services.
Revenue from external customers for each product and service or each group of similar products and services is to be reported by the reporting entity unless impracticable. If deemed to be impracticable, disclose that fact. If the company's reportable segments have been organized around products and services, then this disclosure will generally not be required.
Geographic areas.
A reporting entity separately discloses revenues from external customers and long-lived assets attributable to its domestic operations and foreign operations. If the reportable segments have been organized around geographic areas, then these disclosures will generally not be required because they would be duplicative.
Domestic operations are those operations located in the reporting entity's home country that generate either unaffiliated or intersegment revenues. Foreign operations are similar operations located outside of the home country of the reporting entity. For the purposes of these disclosures, US reporting entities' operations in Puerto Rico are not considered to be foreign operations, although management is not precluded from voluntary disclosure regarding Puerto Rican operations (ASC 280-10-55).
If the reporting entity functions in two or more foreign geographic areas, to the extent revenues or assets of an individual foreign geographic area are material, then separately disclose these amounts. In addition, disclosure is required of the basis for attributing revenue to different geographic areas. A geographic area is defined as an individual country. If providing this information is impracticable, disclose that fact.
Major customers.
If the reporting entity earns 10% or more of its revenue on sales to a single external customer, disclose that fact and the amount of revenue from each such customer. Also, disclose the segment making these sales. This disclosure provides information on concentrations of risk.
For the purpose of this disclosure, a group of customers under common control, such as subsidiaries of a common parent, is regarded as a single customer. Similarly the various agencies of a government are considered to be a single customer. An insuring entity (such as Blue Cross) is not considered to be the customer unless that entity (rather than the patient) controls the decision as to the doctor, type of service, etc.
Restatement of Previously Reported Segment Information
ASC 280-10-50-34 requites that segment reporting on a comparative basis when the associated financial statements are comparative. Therefore, restate the information to preserve comparability whenever the reporting entity has changed the structure of its internal organization in a manner that causes a change to its reportable segments. Management must explicitly disclose that it has restated the segment information of earlier periods.
The following illustration is provided for a hypothetical company, Resources Unlimited. The illustration provides segment disclosures by legal entity.
NOTE: ASC 280 provides illustrative segment disclosures by product line.
Description of the types of products and services from which each reportable segment derives its revenues. Resources Unlimited has four reportable segments: Wholesale Corporation, Retail Corporation, Library Corporation, and Software Corporation. Wholesale Corporation buys and resells used elementary and college textbooks. Retail Corporation operates 200 college book stores and a related e-commerce Web site selling both new and used college textbooks, trade books, sports apparel, and other sundries. Library Corporation sells library books primarily to elementary school libraries. Software Corporation develops and sells library systems application software.
Measurement of segment profit or loss and segment assets. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except the first-in, first-out (FIFO) method of inventory valuation is used for segment reporting. In addition, Resources Unlimited allocates interest expense to each segment based on the segment's average borrowings from the corporate office. However, the related debt is not allocated to the segments and remains on the corporate statement of financial position. Resources Unlimited evaluates performance based on profit or loss before income taxes not including nonrecurring gains and losses.
Resources Unlimited accounts for intersegment sales and transfers as if the sales or transfers were transacted with third parties (i.e., at current market prices).
Factors management used to identify reportable segments. Resources Unlimited's business is conducted through four separate legal entities that are wholly owned subsidiaries. At the company's inception, each entity was founded and managed by a different Resources Unlimited stockholder/family member. Each corporation is still managed separately, as each business has a distinct customer base and requires different strategic and marketing efforts.
Information about profit and loss and assets. The amounts in the illustration are assumed to be the amounts in reports used by the CODM. Resources Unlimited allocates interest expense to the segments; however, it does not allocate income taxes and unusual items to them.
Reconciliations. An illustration of reconciliations for revenues, profit and loss, assets, and other significant items is shown below. In general, this illustration assumes that there are no unreported operating segments, but there is a corporate headquarters, thus most reconciling items relate to corporate revenues and expenses.
As discussed previously, the company recognizes and measures inventory based on FIFO valuation for segment reporting. The consolidated financial statements are assumed not to include discontinued operations or the cumulative effect of a change in accounting principle.
The reconciling adjustment is the amount of expenditures incurred for additions to the corporate headquarters building, which is not included in the segment information.
Major customers. No single customer represents 10% or more of the consolidated revenues. Consequently, management believes that the Companies' sales are appropriately diversified.
Other Sources
| See ASC Location – Wiley GAAP Chapter | For information on... |
| ASC 350 | Information to be disclosed about goodwill in each reportable segment and significant changes in the allocation of goodwill by reportable segments |
| ASC 350 | Segment disclosures related to each impairment loss recognized related to an intangible asset |
| ASC 420-10-50-1 | Segment information to be disclosed in the period in which an exit or disposal activity is initiated |
| ASC 908-280 | Segmentation in the airline industry |
| Segment guidance in the casino industry |