FASB Publishes New Segment Expense Disclosure Rules for Public Companies

The FASB issued a new accounting standard on November 27, 2023, which makes the biggest changes in 25 years to segment expense disclosure requirements for public companies. Six of seven FASB members approved the changes. FASB member and academic Christine Botosan dissented.

The guidance was issued as Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, to require public companies to provide more transparency in both quarterly and annual reports about the expenses they incur from revenue generating business units.

The rules are among those investment analysts have asked the FASB to provide, some stressing that companies aren’t providing enough details about expenses for business units that generate the most profit or loss.

Several changes have been introduced to enable investors in the US marketplace to get a quicker understanding of what could boost or hit at a public company’s earnings, why, and who in the company are among the first to know, according to the reporting provisions.

The standard will take effect for annual periods beginning after December 15, 2023 — i.e. next year.

“The new segment reporting guidance is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses,” FASB Chair Richard Jones said in a statement. “It will improve financial reporting by providing additional information about a public company’s significant segment expenses and more timely and detailed segment information reporting throughout the fiscal period.”

Investors Pressed for the Changes

Under the changes, public companies must disclose in both annual and quarterly reports to the SEC, any significant expense that is regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss. The title and position of the CODM must be disclosed plus an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

The company must disclose – both quarterly and annually – an amount for “other segment items” by reportable segment and a description of its composition. The “other segment items” category is “the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss,” a text explains.

The changes also heighten current requirements so that public companies must disclose on a quarterly basis information that was only required annually about a reportable segment’s profit or loss and assets that are currently required by Topic 280, Segment Reporting.

Further, the standard clarifies that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, the company may report one or more of those additional measures of segment profit. However, “at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.”

The standard also introduces requirements for public companies that only have a single reportable segment, stipulating that they must provide the same new disclosures that are required for companies with multiple segments, plus all of the existing segment disclosures in Topic 280.

Botosan’s Dissent

In her dissent, Botosan – among other remarks – said that the “modest improvement” the rules will bring “falls far short of financial statement users’” need for a finer partitioning of entities’ operating activities into reportable segments and more financial line items about each segment.

The ASU does not adequately address that need because the “structure of the significant expense principle, specifically, and the management approach, more generally, allow for too much discretion by a public entity to manage reporting outcomes, resulting in diminished quantity, quality, and comparability of segment information,” she wrote. And the “current guidance that requires reconciliation of segment amounts to the corresponding consolidated amounts is not extended to amounts disclosed under the significant expense principle.”

Botosan said she “would have preferred an alternative approach that would have required that a public entity disclose expense items that are regularly provided to the CODM,” as this “would not have required that an entity identify a measure of segment profit for purposes of applying the principle,” nor would it have required the application of judgment to assess whether an expense item is “significant.”