When reporting entities change the structure of their internal organization, the information regularly reviewed by the CODM may change. This could result in changes to operating segments and changes to the determination of reportable segments. If a reporting entity’s reportable segments change in the current period, corresponding information for earlier periods should be revised and disclosed in the current period financial statements, including information for interim periods, so that all segment disclosures are comparable. This requirement applies to all disclosures unless it is impracticable to do so. A change in reportable segments should be accompanied by disclosure of the reasons for the change and, when appropriate, that the change has been reflected retrospectively.
does not specify how to analyze organizational changes to determine when a change in operating or reportable segments is necessary. However, the determination of operating segments is based on the information regularly reviewed by the CODM. As a result, if there are changes in how the CODM allocates resources and assesses performance, or there are changes to how the information is presented to the CODM, a reporting entity will likely need to reassess its operating and reportable segments.
When determining whether there has been a change that could impact the determination of its operating segments, the reporting entity may consider whether there has been a change in the following:
- The CODM
- The information regularly reviewed by the CODM
- The organizational structure
- The individuals who regularly meet with the CODM
- The budgeting process or level at which budgets are reviewed by the CODM
- The information regularly reported to the board of directors
- The information the reporting entity communicates to external parties such as investors, creditors, and customers
A reporting entity may choose to change its measure of segment profit and loss (e.g., from operating income to EBITDA). In contrast to an organizational change that causes a change to segment reporting, a change in a segment performance measure may not require revision to previously reported segment disclosures. However, additional disclosure is required if prior years’ information is not revised, as described in ASC 280-10-50-36
Although restatement is not required to reflect a change in measurement of segment profit and loss, it is preferable to show all segment information on a comparable basis to the extent it is practicable to do so. If prior years’ information is not restated, paragraph 280-10-50-29(d) nonetheless requires disclosure of the nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.
Example FSP 25-10 provides an illustration of a change in segment performance measures.
EXAMPLE FSP 25-10
Change in segment performance measures
FSP Corp has five operating segments, which are also its reportable segments. Historically, the internal reporting package reviewed by the CODM included certain unallocated items, such as interest income/expense and pension costs. These unallocated items were disclosed in FSP Corp’s footnotes as part of its reconciliation of total segment profits/losses to consolidated net income. The CODM recently requested that pension costs be allocated to the five operating segments based on employee head count as the CODM believes pension cost should be considered in assessing segment performance and in making resource allocation decisions. The internal reporting package for the period reflected this change.
How should FSP Corp reflect this in its segment disclosures?
The change in allocation represents a change in the measure of segment performance. FSP Corp should reflect this new segment measure in the period the change occurred. Because this is not a change in the identified reportable segments, FSP Corp is not required to revise prior periods to reflect this change, but may elect to do so. In either case, FSP Corp should disclose the nature of the change in the segment performance measure and the effect the change has on the measure of segment profit or loss, as required by ASC 280-10-50-29
While the entity-wide disclosure provisions of ASC 280 do not discuss the revision of entity-wide disclosures, we believe that the entity-wide information from period to period should be comparable. Accordingly, we believe that the guidance contained in ASC 280-10-50-16
and ASC 280-10-50-17
, as well as the revision provisions of ASC 280-10-50-34
and ASC 280-10-50-35
, should be applied to entity-wide disclosures.
also requires revision of prior period segment information (unless impracticable) when a previously insignificant operating segment becomes significant (i.e., the operating segment meets one of the 10% tests).
Example FSP 25-11 illustrates an analysis of segments when their relative significance changes year over year.
EXAMPLE FSP 25-11
Change in segment significance
FSP Corp has eight operating segments, none of which qualify for aggregation. Five of the segments were disclosed as reportable segments in 20X1, based on the 10% tests. The aggregate external revenues of these reportable segments exceeded 75% of FSP Corp’s consolidated revenues. The remaining three operating segments were combined in an “all other” category. In 20X2, one of the three operating segments that was included in the “all other” category in 20X1 became quantitatively material (i.e., it exceeded the threshold for one of the 10% tests). Also, in 20X2, one of the five 20X1 reportable segments was no longer quantitatively material.
How should FSP Corp reflect these changes in its segment disclosures?
The operating segment that is now material should be presented as a reportable segment. Pursuant to ASC 280-10-50-17
, when FSP Corp presents prior period segment data in the 20X2 financial statements, segment data for all prior periods must be revised to reflect the new reportable segment as a separate reportable segment, unless it would be impracticable to do so.
For the operating segment that no longer meets the quantitative thresholds (assuming the operating segment is not considered to be of continuing significance), disclosure of its individual results need not be made in 20X2. In this case, prior period segment disclosures could also be revised to conform to the current period presentation (provided the threshold for the 75% revenue test is met for all periods). In accordance with ASC 280-10-50-16
, if management views the segment to be of continuing significance, that segment’s disclosures should continue to be made.
Example FSP 25-12 provides an illustration of factors to consider in assessing whether to revise previous periods’ segment information when a reporting entity changes its internal financial reporting without changing its organizational structure.
EXAMPLE FSP 25-12
Consideration of changes in internal financial reporting without changes in organizational structure
FSP Corp has four operating segments. It has decided to move one of its product lines from one operating segment (Segment X) to another (Segment Z) for internal reporting purposes. FSP Corp did not change its management structure, and has determined that it still has the same four operating segments. The only change to the CODM package as a result of the internal financial reporting change is the inclusion of the respective product line’s financial information within Segment Z reporting and its removal from Segment X reporting as of the date of the change.
How should this change in internal financial reporting be considered in FSP Corp’s segment assessment?
If the changes to the segment assets and operating results as a result of reclassifying the assets, liabilities, and results of operations materially affect the trend in asset balances and/or the reported results, FSP Corp should consider revising its previously disclosed segment information. If, however, the segment information does not materially change the segments’ financial information, generally a reporting entity is not expected to revise the previously reported segment information.
In determining whether the change to the Segment X and Z financial information is material, FSP Corp might consider, among other things, whether the CODM package (or other information regularly reviewed by the CODM) has been adjusted retrospectively or whether the product line is considered a separate asset group (as defined in ASC 360
). If the product line is a separate asset group, this may indicate that the composition of the segments has changed significantly and prior period segment information should be revised.