By Denise Lugo
The FASB on January 20, 2021, advanced discussions to operationalize the disclosure principle it decided to develop last year for the reporting of significant segment expense categories.
The disclosure principle is based on the significant segment expense categories that are regularly provided to the chief operating officer, and are included in the reported measure of segment profit or loss.
Under Topic 280, Segment Reporting, public companies are required to disclose one measure of segment profit or loss. However, a chief operating decision maker (CODM) may use more than one measure to allocate resources and assess performance of operating segments. If a company reports a single measure of segment profit or loss, it should choose the measure that is calculated in accordance with the measurement principles most consistent with those used in the consolidated statements.
Many public companies voluntarily report more than one profit measure by reportable segment such as operating income, income before tax, and net income by segment. Staff members told the board that during outreach on the issue, several financial statement preparers sought clarification on how the principle applies when multiple segment profit or loss measures are reported.
Board members decided against answering the issue directly but said that the expenses need to be within a reporting measure. A company, for example, that reports gross profit by segment and net income by segment, would choose between those two measures, but the expenses need to be in one of the measures the company reports, according to board discussions.
“I do not believe the scope of this project is in any way to address a company’s or entity’s determination of what their separate performance measure is,” FASB member Marsha Hunt said.
Some board members also observed that entities could manipulate the applications of the principle by strategically choosing between the alternative income measures that they are reporting. “Because it’s very easy to get out from under the principle, I personally don’t think it really matters what we do in this case,” FASB member Christine Botosan said. “Based on how the principle is currently crafted it’s going to be very easy for companies to avoid having to report segment expenses,” she said.
The board said it recognized that the principle needs clarity about the ordering of operations – meaning the steps that come first, and discussed four alternatives that represent different orders of operations. Ultimately, board members decided that a company would identify its expenses from the information it internally reports to its chief operating officer and then it would apply a significance threshold. That alternative was simpler and was the purer CODM approach, board members said.
Any alternative would work “as long as we have reconciliation for the consolidated income statement level from my perspective as an investor recognizing that today most companies already have a reconciliation,” FASB member Gary Buesser said. “You have segment A, segment B, C, corporate, unallocated, and then consolidated income statement,” he said. “So, that’s already ongoing and to me, the real issue is how do I get more expense information versus the CODM approach which we all realize and recognize has some ability to restrict the information that investors see.”
The board said it would not provide more guidance about a significance threshold.
Deliberations on the project will continue next month, the discussions indicated. Staff accountants will put together board views regarding the form in which expenses are regularly provided to the CODM – an issue that was also discussed without conclusion.
This article originally appeared in the January 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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