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FASB Votes to Finalize Proposed Changes to Segment Expense Disclosure Rules

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

The FASB on July 26, 2023, voted to finalize proposed changes to segment reporting, wrapping up about six years of discussions aimed at providing investors with better information about a company’s business unit expenses from the viewpoint of management.

The full board voted to clarify and finalize most of proposed Accounting Standards Update (ASU) No. 2022-ED100Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures, with added illustrations for some issues. A transition disclosure will be removed.

At the core of the guidance is a significant expense principle that will require public companies to disclose: a) significant expense information that is regularly provided to the chief operating decision-maker (CODM); and, b) is included in the measure of segment profit or loss. The title of the CODM will need to be provided, the board affirmed.

The revisions – the most substantial set on segment reporting in 25 years – are aimed at providing investors with better information about a company’s profit and loss, future cash flows and business unit operations on an interim and annual basis.

A majority of the board felt the guidance will be an improvement from what investors get now.

“We all bring our own perspectives to these things but at the end of the day I guess my ultimate litmus test is ‘are we better off without the standard or with it’ and that’s the choice,” FASB Chair Richard Jones said. “When I look at it overall I do believe we’re better off with this standard and I do think it moves the needle,” he said.

Similarly, FASB Vice Chair James Kroeker said the guidance will provide better information at manageable cost. The “significant expense” principle, for example “is directly responsive to the post-implementation review about concerns about expenses that decision-makers are getting that aren’t reported; I think the most significantly cited one was cost of sales or the cost of your project,” he said. “My experience is that is in CODM packages and I think this is a very low cost way to get that information to investors.”

Companies will be required to apply the changes to fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024, the board agreed. Early application will be permitted. The changes will require retrospective application but the rules will include an impracticability exception as part of the transition guidance.

Trying to Strike the Right Balance

Each FASB member has preferences on certain items, but there was not enough dissent on any issue to hold up the proposal, the discussions revealed.

Among other notable items affirmed include that the segment expense disclosure package will apply to all public companies, including those that have a single reportable segment. Further, entities will be allowed to report multiple measures of a segment’s profit or loss; and the full disclosure package will be required on an interim basis.

Ultimately, the disclosure rules are expected to provide investors with added information that will help in understanding the nature and qualitative characteristics of each reportable segment and bring context to the segment and the consolidated information as a whole.

“We’re not trying to disclose information that will change the operations of a business or cause them to have a different experience with their customers or their suppliers – I think we struck a good balance there,” FASB member Marsha Hunt said. “I think we’re getting some incremental disclosure for users which was the primary purpose, I think it’s not at the expense of Suzie shareholder in that company because I don’t think we’ve gone so far that it’s going to impact at the end of the day natural operations of a company and I feel good about that,” she said. “I know we’ve looked at everything – we’ve looked at whether we got the segment definitions right, we looked at whether is the management approach right, and I think we’ve come down like I said with an approach that’s doable.”

In agreement, FASB member Susan Cosper said the amendments are responsive to the concerns from investors who said they need more disaggregated information and will tie-in with other board projects that hold a similar goal such as disaggregation of income statement expenses.

Further, newly appointed FASB member Joyce Joseph said the rules will be beneficial, as investors “will have enhanced transparency around segment expenses as well as the management of those expenses, greater consistency in how single reportable segments are treated with how multiple reportable segments are treated, timelier information on a quarterly basis as well as the multiple measures that will be displayed.”

Might Need a Sequel

Although they did not dissent to the issuance of the standard, FASB members Frederick Cannon and Christine Botosan expressed skepticism that investors got enough of what they asked for, stressing that a sequel standard might be needed.

“I don’t believe that we’re done with the segment standard; I believe that what we also heard from investors is there is a certain amount of skepticism about whether we will get incremental information so I think it behooves us to monitor what comes out and to ensure the optimistic view that I have and others on the board have is matched by reality,” Cannon said. “Second, I don’t think the standard overall has evolved with the economy over the last 25 years and what I mean by that is that businesses in the United States have gotten more complex and more concentrated throughout that time period – both anecdotally and shown by academics,” he said. “At the same time, the number of segments reported by companies has stagnated in some ways even declined. So essentially economic reality and our standard in my view is going in different directions, so I believe we’re likely to continue to hear from users that we do need to more substantially drive at and try and figure out a way to get more segments reported for users and I think we’ve heard that consistently.”

Moreover, Botosan expressed skepticism that the “significant expense principle” will yield the necessary improvement and segment information that financial statement users have asked for.

“I really do hope that once this standard is implemented that we will monitor very closely the real effects of this standard and I really, really hope that my concerns are unfounded and that this will result in a significant improvement in disclosure for investors,” she said. “But if that’s not what we end up seeing, I really do hope that we will stand ready to take this project back on and do something else that’s actually going to move the needle for investors in a way that they’ve been asking for decades.”


This article originally appeared in the July 27, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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