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Identifying operating segments continues to be a common area of comments from the SEC staff. The proper determination of operating segments begins with understanding:
  • the reporting entity’s organizational structure and how individuals within the organization are compensated
  • the reporting entity’s operations, including its budgeting process
  • the individual or individuals responsible for allocating resources and assessing performance (referred to as the chief operating decision maker, or CODM)
  • the information regularly reviewed by the CODM to carry out this function
ASC 280-10-50-1 defines an operating segment as a component of a reporting entity with three characteristics. Figure FSP 25-2 lists these characteristics, along with references to the relevant guidance, and indicates where in this chapter those characteristics are discussed.
Figure FSP 25-2
Characteristics of an operating segment
Requirement
ASC reference
Section
It engages in business activities from which it may recognize revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity).
Its operating results are regularly reviewed by the public entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
Its discrete financial information is available.

25.4.1 Business activities

Business activities are ongoing economic and operating activities that create value for a reporting entity, such as the production and sale of a product to a customer. Identifying operating segments that engage in business activities is usually straightforward and is primarily based on a reporting entity’s revenue streams and its organizational structure. As discussed in ASC 280-10-50-1(a), to engage in business activities, a component of a reporting entity does not require dedicated assets to recognize revenues and incur expenses and does not require externally-generated revenues and expenses (i.e., the transactions could be intercompany).

25.4.1.1 Components without revenue

As discussed in ASC 280-10-50-3, certain components may meet the requirement to engage in business activities even if they do not yet recognize revenue.

ASC 280-10-50-3

An operating segment may engage in business activities for which it has yet to recognize revenues, for example, start-up operations may be operating segments before recognizing revenues.

For example, research and development business units that do not recognize revenues, but whose results are regularly reviewed by the CODM, may be considered operating segments. Although research and development centers do not typically recognize revenues, their activities may not be incidental to the activities of the reporting entity, as they may serve as an integral component of the reporting entity’s business.
Reporting entities may have a corporate headquarters that carries out centralized functions, such as accounting, treasury, information technology, legal, human resources, environmental, and internal audit. As discussed in ASC 280-10-50-4, corporate departments that do not recognize revenues or recognize revenues that are only incidental to the activities of the reporting entity would not be considered operating segments. If not considered an operating segment, the revenues and expenses of corporate departments should be reported in the reconciliation of reportable segment totals to the reporting entity’s consolidated totals. For further guidance on the presentation of reconciling items in segment disclosures, see FSP 25.7.5.
Question FSP 25-1
Can a vertically-integrated operation of a reporting entity that does not have external revenues (i.e., it sells primarily, or even exclusively, to other components of the same entity) be considered an operating segment?
PwC response
Generally, yes. In defining an operating segment as a component of a reporting entity that engages in business activities from which it may recognize revenues and incur expenses, the FASB acknowledged that not all business activities of a reporting entity may generate revenues. While, in many cases, transfer prices are charged by one component of an entity to another, the fact that transfer prices are not charged would not necessarily exempt such operations from being considered operating segments.

In some cases, a manufacturing entity is managed as an operating cost center that does not recognize separate revenues because overall customer revenues are not allocated to it. Provided that all the other criteria under ASC 280-10-50-1 are met, the cost center would be considered an operating segment.

25.4.1.2 Run-off operations

A reporting entity may have a disposal strategy that involves a “run-off” of operations (i.e., it will cease accepting new business but continue to provide service under existing contracts until they expire or are terminated). Run-off operations should be evaluated to determine if they meet the definition of an operating segment.
Example FSP 25-1 provides an illustration of the segment determination for a component that is being run off.
EXAMPLE FSP 25-1
Run-off operations or operations in liquidation
FSP Corp, an insurance reporting entity, discontinues its workers’ compensation line of business and is no longer writing new workers’ compensation policies. However, existing customers can continue to renew policies for indefinite periods under the original policies’ conditions. The run-off operations do not meet the criteria for discontinued operations and the workers’ compensation line of business is being maintained as a result of contractual requirements. For internal reporting, separate financial results are maintained for the run-off operations and are reviewed by the CODM.
Does FSP Corp’s workers’ compensation line of business meet the definition of an operating segment?
Analysis
Because the operating component’s performance is regularly reviewed by the CODM, it meets the definition of an operating segment. See FSP 27.5.1.4 for information about the segment disclosure requirements of a discontinued operation.

25.4.2 Information reviewed by the CODM

The information regularly reviewed by the CODM is integral to identifying operating segments.

25.4.2.1 Determination of the CODM

Proper determination of the CODM is critical to the application of ASC 280. As discussed in ASC 280-10-50-5, the CODM is a function (not necessarily an individual) that allocates the resources of the reporting entity and assesses the performance of its segments.
Often, the CODM will be an individual who is either the chief executive officer (CEO) or the chief operating officer (COO) of a reporting entity. Reporting entities should consider which individual is acting in this role and be able to explain the rationale for their conclusion. While the CEO or COO may receive input from others within the reporting entity, decisions to assess performance and allocate resources are usually made by one individual. However, in some cases, the decision-making power does rest with a group and not with any specific individual within the group. When considering whether a group is the CODM, it is important to evaluate how decisions are made, including in circumstances in which not all group members agree.
In some instances, the SEC staff has questioned whether an identified individual can act alone in the CODM function when the information used by the CODM to manage the business may not appear sufficient. In some of these cases, an additional member or group of members may be determined to be part of the CODM function.
When a group with joint decision-making authority is the CODM, consideration should be given to the information that the group uses to assess performance and allocate resources. Judgment is required to determine whether the information received by only certain members of the CODM group should be considered part of the information that is regularly reviewed by the CODM group.
The guidance does not require the CODM to have ultimate decision-making authority. The SEC has indicated that in certain instances, key operating decisions (e.g., expanding into new territories, pursuing new products, or entering into significant contracts) may not be made at the strategic or ultimate decision-maker level (e.g., by the CEO), but rather by someone responsible for running the day-to-day operations of the reporting entity (e.g., by the COO).
When preparing carve-out financial statements or separate financial statements of a subsidiary, determination of appropriate segment disclosures should be made at the carve-out entity or subsidiary level, which usually will not be the same as the segments reported in the parent company’s consolidated financial statements. This analysis would entail identifying the CODM at the carve-out entity or subsidiary level and determining what information that CODM regularly reviews to allocate resources and assess performance.

25.4.2.2 Understanding the information regularly reviewed by the CODM

One of the requirements to be an operating segment is that operating results for the component must be regularly reviewed by the CODM to allocate resources and assess performance. We believe that the operating results reviewed by the CODM would generally include a measure of profitability.
Understanding all of the information the CODM regularly reviews to assess performance and allocate resources is critical, regardless of how the CODM receives this information. In many instances, the information used by the CODM can be found in reports that are available in the reporting entity’s information systems and/or distributed on a regular basis. The CODM might also receive information in periodic meetings with segment managers.
Determining what financial information the CODM uses to assess performance and allocate resources can be challenging because management typically has access to a significant amount of readily available information through the reporting entity’s information systems. Information received by the CODM, regardless of how it is obtained, is generally used in some way to measure performance and/or make resource allocation decisions.
For certain components, the CODM may only receive limited financial information, such as revenue-only data by product line or by customer. For most reporting entities, revenue-only data would not be considered sufficient financial information for decision making related to resource allocation or performance evaluation. For instance, revenue-only information may be used to allocate resources within a component, but may not be sufficient to evaluate the component’s performance. However, for certain components, revenue-only data may serve as an adequate performance measure, such as when cost of sales or services are minimal. Therefore, for all components, it is important to obtain a thorough understanding of how they operate, what financial information is sufficient to measure performance, and how the CODM utilizes the information received.
Question FSP 25-2
If a CODM is accountable for Sarbanes-Oxley 302 and 906 certifications for wholly-owned subsidiaries that issue standalone financial statements, would that indicate that each separate subsidiary should be treated as an operating segment in the parent company’s consolidated financial statements?
PwC response
Not necessarily. The existence of Sarbanes-Oxley 302 and 906 certifications for wholly-owned subsidiaries that issue standalone financial statements does not necessarily cause the subsidiaries to be considered operating segments if the consolidated reporting entity can demonstrate that resources are allocated and performance is assessed on a different basis. This evidence may include, among other things, the reporting entity’s organizational structure, financial information regularly reviewed and used by the CODM, the compensation incentives for segment management, the level of information included in capital and operating budgets and the reporting package provided to the board of directors. For example, if a reporting entity demonstrates that a CODM regularly receives financial information at a more aggregated level than the subsidiary level at which the certifications are issued, and uses this information to assess performance and allocate resources, these more aggregated components may be considered the reporting entity’s operating segments. However, in this circumstance, the reporting entity should also evaluate whether the information provided to the CODM for Sarbanes-Oxley 302 or 906 certifications is being used for resource allocation or performance assessment purposes.
Multiple sets of information received by the CODM
In some cases, the CODM may receive multiple sets of component operating results to assess performance and allocate resources. ASC 280-10-50-9 indicates that, in situations in which a reporting entity is geographically dispersed and has a variety of products, and the CODM reviews operating results by geography and by product line, the internal reporting based on product lines would constitute the operating segments.
In other cases, the CODM may receive multiple sets of component operating results based on something other than product line and geography. Other factors, including the nature of the business activities for each component, the existence of segment managers responsible for the components, and the information presented to the board of directors, may be helpful to identify the reporting entity’s operating segments.
The nature of an entity’s business activities is usually apparent from its external communications. Business activity discussions in the reporting entity’s other publicly available information, such as press releases, the reporting entity’s website, and other SEC filings, are important considerations when assessing how management views the business. However, external communications may not always align with how the CODM assesses performance and allocates resources. For example, if the CODM reviews operating results at a more disaggregated level, this could indicate the operating segments are also at a lower level.
As discussed in ASC 280-10-50-7, operating segments are typically managed by a segment manager who has direct accountability to, and maintains regular contact with, the CODM. Like the CODM, the segment manager is a function and not necessarily a manager with a specific title. In some instances, a segment manager can manage more than one operating segment, or the CODM can also be a segment manager. Segment managers who are held accountable for the operating results of a segment usually have compensation arrangements that incorporate the segment’s performance. ASC 280-10-50-8 indicates that if there is only one set of components for which segment managers are held responsible, that set of components constitutes the operating segments. However, there may be times when the CODM assesses performance and allocates resources at a level lower than that of the immediate segment managers reporting to the CODM. It would be difficult to conclude that the operating segments exist at a higher level (i.e., the level at which segment managers are identified) when performance is assessed and resources are allocated by the CODM at a lower level.
Additionally, if multiple sets of information are reviewed by the CODM, the information provided to the reporting entity’s board of directors could indicate the level at which performance is assessed and resources are allocated. It would be unusual for the board to receive information at a level below that of a reporting entity’s operating segments. Conversely, reporting entities often have operating segments at a level lower than the information reviewed by the board of directors.
Example FSP 25-2 and Example FSP 25-3 illustrate the determination of operating segments when the CODM receives two overlapping sets of information.
EXAMPLE FSP 25-2

Matrix form of organization
FSP Corp has identified its CEO as the CODM. In assessing performance and deciding how to allocate resources, the CEO reviews two overlapping sets of financial information. The first set contains disaggregated information based on product lines, and the second set contains disaggregated information based on geographic area. The reporting entity has vice presidents who are responsible for each of the product lines and has other vice presidents who are responsible for the geographic areas. All vice presidents report directly to the CEO. In addition, both sets of information are provided to the reporting entity’s board of directors.
How should FSP Corp determine which set of financial information is most indicative of its operating segments?
Analysis
ASC 280-10-50-9 indicates that, in situations in which a reporting entity has a matrix form of organization, the internal reporting based on product lines would constitute the operating segments. Therefore, in this example, the product lines would be the reporting entity’s operating segments.
EXAMPLE FSP 25-3
Organization with overlapping sets of information
FSP Corp operates four product lines in North America and the same four product lines in several international markets. The North American operations comprise 90% of the reporting entity’s revenue. The CODM reviews two overlapping sets of financial information—the first set contains information for North America disaggregated by product lines while the second set contains worldwide information disaggregated by location (i.e., each worldwide location, including North America). The reporting entity has vice presidents who are responsible for each of the four North American product lines as well as a vice president responsible for the North American market and a vice president responsible for the remaining international markets. All vice presidents report directly to the CODM. In addition, both sets of information are provided to the reporting entity’s board of directors.
How should FSP Corp determine which set of financial information is most indicative of its operating segments?
Analysis
Although product lines would typically constitute the operating segments, there could be circumstances in which a combination of the product lines and geographic locations are identified as operating segments. In this example, each of the four product lines in North America are most likely operating segments. Each of the international locations may be an operating segment, depending on the level at which performance is reviewed and resources are allocated by the CODM, or the international market itself may be an operating segment.

CODM review of investments in unconsolidated entities
As discussed in ASC 280-10-55-2, reporting entities may have investments in unconsolidated entities that meet the definition of an operating segment. The assessment to determine this is the same as that used for identifying other operating segments.
Example FSP 25-4 illustrates the determination of whether activities of a reporting entity conducted through joint venture arrangements or equity method investees are operating segments.
EXAMPLE FSP 25-4
Joint venture arrangements and equity method investees
FSP Corp is a multinational telecommunications provider whose foreign wireless-service businesses are jointly owned by FSP Corp and various foreign companies. FSP Corp is not the sole shareholder of the foreign businesses due to local restrictions on US companies having a majority ownership. FSP Corp accounts for its investment in these joint venture arrangements using the equity method. The CODM, however, reviews the full financial results of each joint venture for decision-making purposes and has a vice president in charge of managing and monitoring the foreign wireless services.
Do the joint venture operations qualify as operating segments?
Analysis
To the extent FSP Corp manages its joint venture operations separately and conditions (a) through (c) of ASC 280-10-50-1 are met (see FSP 25.4), the joint venture operations would qualify as operating segments. When the full financial results of an equity method investee are reviewed by the CODM, the asset and operating measures regularly reviewed should be disclosed.
If the financial results reviewed by the CODM are prepared on a proportionate basis (i.e., based on FSP Corp’s proportionate ownership of the investee), the external segment reporting of the joint venture activities should also be presented on a proportionate basis.
Since the total of all reportable segments’ financial amounts must be reconciled to the corresponding amounts reported in the consolidated financial statements, appropriate eliminations would need to be reflected to reconcile amounts reported for segment purposes to those amounts reflected in the consolidated financial statements. For example, since the joint ventures’ revenue information is not included in the revenue amount reported in the consolidated financial statements under the equity method, an elimination of the revenue amount disclosed for the joint ventures would need to be reflected as a reconciling item. For further guidance on the presentation of reconciling items in segment disclosures, see FSP 25.7.5.
The analysis would be the same for an equity method investment that is not a joint venture.

Question FSP 25-3
Do the segment disclosures a reporting entity provides for separately managed joint ventures or other equity method investees also satisfy the disclosure requirements of ASC 323, Investments—Equity Method and Joint Ventures?
PwC response
Not necessarily. ASC 323-10-50-3(c) requires that summarized financial information of joint ventures and other investments accounted for under the equity method be provided, if certain thresholds are met. Accordingly, the disclosures required by ASC 323 may need to be provided in addition to any segment disclosures.

25.4.3 Discrete financial information

One of the requirements to be an operating segment is that discrete financial information must be available for the component. Discrete financial information can consist of limited operating information, such as revenue and operating expenses, and need not include balance sheet information.
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