ASC 280 sets the segment reporting requirements that public companies follow when they break out revenue, profit, assets, and expenses by business line or region. The standard uses a “management approach”: segments in the financial statements have to match the way the Chief Operating Decision Maker actually runs the business internally. ASU 2023-07, effective for fiscal 2024 annual reports, added significant new disclosures on top of the existing framework, most notably a requirement to report significant segment expenses.
Who Has to Comply
ASC 280 applies to public entities, which the FASB defines broadly to include any business or not-for-profit that has publicly traded securities, files with the SEC, or issues financial statements to support a public securities offering. Nonpublic entities and not-for-profits are exempt, though the FASB encourages them to disclose segment information voluntarily.
A parent, subsidiary, or joint venture does not have to repeat segment disclosures in its own separate financial statements when those statements are also included in a consolidated report within the same filing. A subsidiary that is itself a public entity and issues standalone financial statements has to comply on its own.
Identifying Operating Segments
Segment reporting starts with internal structure, not external categories. If leadership organizes and evaluates the business by product line, segments follow product lines. If leadership organizes by geographic region, segments follow regions.
At the center of that approach is the Chief Operating Decision Maker, or CODM. The CODM is a function rather than a job title. It refers to whoever allocates resources across the business and evaluates how the different parts of the company perform. Often that is the CEO or COO, but it can also be a group, such as an executive committee, when the group collectively makes the resource decisions.
An operating segment is a component of the company that meets all three of the following criteria:
- It engages in business activities that generate revenue and incur expenses, including transactions with other parts of the same company.
- The CODM regularly reviews its operating results to allocate resources and assess performance.
- Discrete financial information is available for it, even if that information is not prepared under GAAP.
All three have to be satisfied. A division that generates revenue but whose results the CODM never reviews does not qualify. A corporate support function the CODM watches but that earns no revenue generally does not qualify either, unless management runs it as a distinct business unit.
Which Operating Segments Become Reportable
Not every operating segment gets reported separately. After identifying operating segments, the company applies quantitative thresholds. A segment becomes reportable if it meets any one of three 10% tests:
- Revenue test: its total revenue, including external sales plus intersegment transfers, is at least 10% of the combined revenue of all operating segments.
- Profit or loss test: the absolute value of its profit or loss is at least 10% of the greater of the combined profit of all profitable segments or the combined loss of all losing segments.
- Assets test: its assets are at least 10% of the combined assets of all operating segments.
Meeting one test is enough.
Aggregating Similar Segments
Before running the 10% tests, two or more operating segments can be combined into a single reportable segment if they share similar economic characteristics and are similar in all five of the following areas:
- The nature of their products and services
- The nature of their production processes
- The type or class of customer
- Their distribution methods
- The nature of the regulatory environment, where applicable
Both the economic similarity and the five qualitative factors have to line up. Similar economics alone are not enough, and qualitative similarity does not compensate for dissimilar economics.
The 75% Coverage Requirement
Once the segments that pass the 10% tests are identified, the company checks whether they together account for at least 75% of consolidated external revenue. If they do not, additional operating segments have to be designated as reportable, even if they failed all three 10% tests, until the 75% floor is cleared. Any remaining operating segments that stay non-reportable are combined into an “all other” category in the disclosures.
Required Segment Disclosures
For each reportable segment, the disclosures center on the measure of segment profit or loss that the CODM actually uses to evaluate performance. That measure has to be the real internal metric.
If the CODM uses more than one profit measure for a segment, the company may report additional measures, but at least one has to be determined using measurement principles consistent with GAAP as applied in the consolidated financial statements.1Financial Accounting Standards Board. Accounting Standards Update 2023-07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures When multiple measures are disclosed, each one has to be reconciled to the consolidated financials.
Beyond profit or loss, the company has to disclose total segment assets that the CODM regularly reviews for resource allocation. Revenue has to be split between external customers and intersegment sales, with the basis for pricing intersegment transactions explained.
Significant Segment Expenses
ASU 2023-07’s headline change is a requirement to disclose significant segment expenses. An expense category qualifies as significant if it is regularly provided to the CODM and included in the reported measure of segment profit or loss. Significance is evaluated using both qualitative and quantitative factors, and the categories reported at the segment level do not have to match income statement line items.
The process runs in two steps. First, identify the expense categories from the information regularly provided to the CODM. Then disclose the ones that are significant. An expense that is “easily computable” from CODM-level reports also counts, even if the CODM does not review that specific line item routinely.
After disclosing significant expenses, the company also presents an “other segment items” figure representing the difference between segment revenue, the significant expenses, and reported segment profit or loss. These disclosures apply on both an annual and interim basis.1Financial Accounting Standards Board. Accounting Standards Update 2023-07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures
Disclosing the CODM
Under ASU 2023-07, the company also has to disclose the title and position of the individual identified as the CODM, or the name of the group if the function is held by a committee, along with an explanation of how the CODM uses the reported profit or loss measures to assess segment performance and decide where to direct resources.1Financial Accounting Standards Board. Accounting Standards Update 2023-07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures
Interest, Depreciation, and Capital Spending
Several other financial items have to be disclosed when they are included in the segment profit or loss measure the CODM reviews. Interest revenue and interest expense are generally reported separately for each segment. A company may report net interest instead of gross amounts only when a majority of the segment’s revenues come from interest and the CODM primarily relies on net interest to evaluate that segment. Even then, if interest expense qualifies as a significant segment expense, it has to be disclosed separately.
Depreciation and amortization expense, material non-cash items other than depreciation, and capital expenditures for long-lived assets like property and equipment also have to be disclosed when they are included in the CODM’s review.
Single-Segment Companies
A company that operates as a single reportable segment is not exempt from ASU 2023-07. It has to provide all the same disclosures, including significant segment expenses, the CODM’s title and role, and the required reconciliations, on top of the existing segment and entity-wide disclosure requirements in ASC 280.
Entity-Wide Disclosures
Certain disclosures apply at the entity level, no matter how the segments are organized, and are required only if the information is not already provided within the segment data.
Companies have to disclose external revenue by product or service, or by groups of similar products. A geographic breakdown of revenue is also required, splitting out the home country from each foreign country where the company earns material revenue. Long-lived assets, excluding financial instruments and deferred tax assets, have to be disclosed by geographic location when the amounts are material.
Major Customer Threshold
If revenue from any single external customer is 10% or more of total revenue, the company has to disclose that fact, the total revenue amount from that customer, and which segment or segments report it. The customer does not have to be named. For this test, a group of entities under common control counts as a single customer, and each level of government (federal, individual state, local municipality, foreign) counts as a single customer.
Reconciling Segments to the Consolidated Statements
Segment totals have to be tied back to the consolidated financial statements through four reconciliations:
- Total reportable segment revenue to consolidated revenue
- Total reportable segment profit or loss to consolidated income before income taxes and discontinued operations (a company that allocates income taxes to segments may instead reconcile to consolidated income after those items)
- Total reportable segment assets to consolidated total assets
- Total reportable segment amounts for every other significant disclosed item to the corresponding consolidated amount
All significant reconciling items have to be separately identified and described.2Financial Accounting Standards Board. Proposed Accounting Standards Update – Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures Common reconciling items include the elimination of intersegment revenue and expenses, unallocated corporate overhead, and centrally managed assets that sit outside any individual segment. When multiple measures of segment profit or loss are reported, each one is reconciled separately.
Interim Reporting
ASU 2023-07 substantially expanded interim segment disclosures. The annual requirements in ASC 280 now generally apply at interim as well, with a few exceptions.
Interim filings have to include segment profit or loss, total segment assets, significant segment expenses, other segment items, and a reconciliation of each segment profit or loss measure to consolidated income before income taxes and discontinued operations.2Financial Accounting Standards Board. Proposed Accounting Standards Update – Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures Reconciliations of revenue and assets to consolidated totals are permitted but not required at interim, and the explanation of how the CODM uses segment profit measures is not required at interim. Entity-wide disclosures on products, geography, and major customers remain annual-only.
Handling Changes in Segment Structure
When a company reorganizes internally in a way that changes the composition of its reportable segments, it has to recast prior-period segment data to match the new structure. Recasting also applies when the information regularly provided to the CODM changes enough to alter which segment expenses qualify as significant. In either case, the company has to disclose whether it recast the prior-period data.
A practicability exception applies. The company recasts each individual disclosure item it reasonably can, but is not required to recast items where doing so is impracticable, as can happen after a fundamental corporate reorganization. When an operating segment first crosses the quantitative thresholds and becomes reportable in the current period, prior-period data for that segment is recast to the extent practicable.
Effective Dates
The ASU 2023-07 amendments took effect for annual periods beginning after December 15, 2023, so fiscal 2024 annual reports were the first to reflect the new requirements.3Financial Accounting Standards Board. Effective Dates The interim disclosure requirements follow for periods beginning after December 15, 2024. Early adoption was permitted.