Segment disclosures included in the notes to the financial statements provide users with insights into how the chief operating decision maker (CODM) allocates resources and assesses the performance of the company’s segments.
The disclosures are based on “management’s approach,” and are intended to provide stakeholders with a view of the business through the eyes of management. As a result, a company’s operating segments may be based on the nature of the business activities, the regulatory environment, the geographies in which it operates, or some combination of factors. Operating segments are based on how the CODM views the business, therefore, the segments and the segment performance metrics may not be comparable with peer companies.
When certain conditions are present, the segment reporting standard allows a company to aggregate its operating segments into reportable segments for financial statement disclosure. To aggregate operating segments, the segments must have similar economic characteristics and similar products or services, customers, distribution methods, production processes, and regulatory environments.
Future standard setting?
The segment reporting standard was issued in 1997. Since that time the FASB has considered making improvements to it. However, as a result of a post implementation review, in 2012 the Board concluded the standard was effective and no further action was necessary.
Recently however, the topic of segments was included within the FASB’s Agenda Consultation paper which sought feedback on the nature of projects the FASB should pursue. The FASB asked whether segment reporting is an area that should be considered for improvement and also provided some alternative presentations for consideration.
Segment information can help financial statement users to better understand a company’s performance, evaluate the sustainability and growth of a company, and monitor the performance of its management.
“Segment disclosures are often described as the unit of valuation by an analyst and arguably one of the most important disclosures in the financial statements.”
Dan Murdock, then SEC Deputy Chief Accountant,
December 8, 2014
Segment disclosures may form the building blocks for investor valuation models. However, when segments are changed, users may have to wait to get updated trend data to use in their analyses.
Further, some users have expressed concerns with the aggregation of segments for reporting purposes. These stakeholders suggest that the disclosure of additional operating segments could be useful and would provide more transparency especially into underperforming businesses