Changes in reportable segments as a result of changes in organization, the information regularly reviewed by the CODM, the significance of an operating segment (from immaterial to material), or the aggregation of operating segments should only be reflected when the financial statements include the period in which the change occurred. Changes in reportable segments arising after a reporting entity’s period-end but before the issuance of the reporting entity’s financial statements should be treated as an unrecognized (i.e., “Type II”) subsequent event (see FSP 28.6). However, the reporting entity should disclose that a change in reportable segments will occur in subsequent periods and the reasons for the change.
Example FSP 25-13 and Example FSP 25-14 provide illustrations of the timing of disclosure of segment reporting changes.
EXAMPLE FSP 25-13
Change in segment structure subsequent to year end
In the fourth quarter of 20X1, FSP Corp’s management determined that it will change the way it manages and operates the reporting entity and is in the process of modifying FSP Corp’s information system to produce financial information to support the new structure. The changes will require FSP Corp to revise its segment reporting. It is anticipated that the modification to the system will be completed in the first quarter of 20X2, at which point management will reorganize its operations and reporting structure and begin to manage its operations under its new segment structure.
How should this planned change affect FSP Corp’s 20X1 segment disclosures?
FSP Corp should disclose its 20X1 reportable segment information under the reporting structure in place during 20X1. It should not revise its segment disclosure using the new reporting structure until the first quarter of 20X2, the period in which management changes the way it manages and operates the business.
EXAMPLE FSP 25-14
Changing operating segments for financial reporting purposes prior to changing the CODM package
FSP Corp manufactures watches in three product lines: low-, medium-, and high-end. Each of these product lines has two distinct watch types (sport and formal). FSP Corp identified each product line as an operating segment. Each of the product lines has a vice president who reports to the CEO, who is the CODM. Monthly meetings are held between the vice presidents of the three product lines and the CODM to discuss the results for each product line. The CODM package and information reviewed at the monthly meetings consists of revenue and expenses by product line.
During 20X1, the existing CEO retired and the new CEO became the new CODM. The new CODM changed certain aspects of FSP Corp’s internal reporting roles and marketing strategy and began meeting with the product managers to assess performance of each of the watch types (sport and formal) within each product line in order to gain better insight into how the business is operating. In addition, the CODM implemented a new marketing campaign which focused on the sport and formal type watches versus the previous marketing campaign, which focused only on the three distinct product lines. The new CODM began allocating resources at the watch-type level (sport and formal) rather than at the product-line level (low-, medium-, and high-end). Although no changes have yet been made to the CODM reporting package, the CODM is now regularly receiving watch-type operating profitability information through regular meetings with the six product managers. The product managers oversee the financial results of each watch type and provide additional reports to the CODM. In the first quarter of 20X2, FSP Corp intends to change the formal CODM package to reflect the information on the six distinct businesses that the new CEO is reviewing, rather than just the three that the previous CEO reviewed.
What impact should the change in information being reviewed by the CODM have on FSP Corp’s determination of operating segments?
The change in the CODM warrants a review of the operating segments given the new CODM’s different management style and regular review of new or different information when assessing performance and allocating resources. In order to support a change in operating segments prior to a formal change in the CODM package, FSP Corp would need to demonstrate that significant changes have been made in how the CODM is managing the business.
In this example, FSP Corp changed the manner in which operating results are regularly reviewed by the CODM in 20X1. In addition to meeting with the vice presidents of the three distinct product lines, the new CODM now also meets with the product managers of the six individual watch types. Additionally, FSP Corp changed the way that it markets its products, and the CODM is using more disaggregated financial information to manage the business. FSP Corp does not view these changes as temporary and intends to make the change to the CODM package in the near future to reflect the way the new CODM views the business.
Based on these factors, it would appear appropriate to conclude that FSP Corp had a change in its operating segments during 20X1.