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Research Needed on Segment Reporting Issues Before Improvement Project Can Achieve Results

June 15, 2018

The FASB on June 13, 2018, began its effort to improve how businesses report their operating segments, an area of accounting that long has frustrated investors and is a frequent source of inquiries to SEC officials.

The board asked its staff to conduct research on changing the order of the process to determine reportable segments and whether to move the quantitative thresholds in the steps earlier in the decision process.

FASB project manager Lauren Mottley said the staff would need at least two to three months to conduct outreach before returning to the board with a plan.

The FASB is not in a hurry; the board has issued several major accounting standards in recent years and does not want to propose a significant change to another area of accounting in the near future. FASB Chairman Russell Golden said he did not expect the board to start making formal decisions until 2019 and expected the board to need several months before it can issue a proposal for public comment.

Investors often complain that the requirements of FASB ASC 280, Segment Reporting , formerly SFAS No. 131, leaves them with too little information. Investors say large multinationals often report one or two business segments when other evidence indicates they should report more. They 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, ASC 280’s disclosure requirements are somewhat limited. Yet businesses are wary about offering too much information that could give competitors information about trade secrets.

The FASB does not want to rewrite FASB ASC 280, which is largely derived from SFAS No. 131 , Disclosures About Segments of an Enterprise and Related Information. The standard advises businesses to connect the information for reporting segments based on the person or group of people described by the disclosure requirements and implementation guidance as the chief operating decision maker (CODM).

Generally, the FASB wants to improve the detail businesses provide about their segments. Businesses are required to disclose certain information about their segments if the information is regularly reviewed by the CODM. Segment totals have to be reconciled to the consolidated amounts if the segment totals are “significant.”

The standard requires a business to report information about an operating segment if its revenue, including sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments. Segment information also has to be reported if the segment’s profit or loss is 10 percent or more of the greater of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss. A segment that includes assets that are 10 percent or more of the combined assets of all operating segments also has to appear in the financial statements.

“Investors generally understand that a certain level of aggregation is permitted, but they also noted that entities use the flexibility in the standard to obscure certain segments that otherwise would be helpful if reported separately,” according to FASB background materials.

In addition, not all segment totals are reconciled to consolidated amounts. The reconciliations are not required to be reported in a way that connects the segment data to the consolidated amounts. FASB ASC 280 does not require companies to give shareholders an explanation or context about operating segments, which often frustrates securities analysts who are trying to develop forecasts about a company’s earnings growth or long-term financial health.

“They’re frustrated because they’re not getting the connection between the consolidated financial statement and the segment information,” FASB member Harold Schroeder said.

Schroeder advised his fellow board members to resist the impulse to simply require businesses to provide more segment information. The addition of extra information may not satisfy investor demands.

“The simple response is more, but you can easily tip that scale too much for them,” he said. “They may not appreciate that because they’re so frustrated with the situation today.”

The application of the aggregation criteria is a compliance challenge for businesses, which are often questioned by regulators.

Identifying segments is a six-step process. The approach the FASB is considering would retain many of the steps in FASB ASC 280 but reorder them. The quantitative threshold tests may be performed at an earlier stage, which could increase a company’s reportable segments and lessen the subjectivity in determining when to lump together business segments.

“In effect, it would ensure that the largest operating segments are separately reported and are not aggregated with other segments,” the FASB’s research staff said.

FASB Chairman Russell Golden, Vice Chairman James Kroeker, and board members Marsh Hunt and Schroeder support the general plan to reorder the steps for identifying segments. Marc Siegel abstained from the vote because his second five-year term on the accounting board ends on June 30.

Christine Botosan dissented and backed an alternative that would remove the aggregation criteria from FASB ASC 280.

“It would take a lot of cost out of the system and also increase the number of segments that are being reported by those that are currently aggregating to get from two operating segments to one reportable segment, and so forth,” Botosan said in explaining her preferred approach.