Segment disclosures - going beyond the basics

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Point of view , PwC US Nov 02, 2016

Find out how management can voluntarily enhance segment reporting disclosures.

Actions companies can take to enhance their disclosures

  • Segment disclosures are intended to provide a view of the business through the eyes of management. This information can help financial statement users to enhance their understanding of a company’s performance, better assess its prospects for future net cash flows and make more informed judgments about the company as a whole.
  • Some stakeholders have raised concerns over management’s aggregation of segments for reporting purposes, the number of segment realignments, and the lag in providing recasted segment data to the market following any realignment.
  • The Financial Accounting Standards Board (FASB) is currently evaluating whether the segment reporting standard is an area that should be considered for improvement. In the interim, there are a number of actions companies can consider now to enhance their disclosures beyond existing requirements.
  • Transparent discussion of segment performance provides stakeholders with insight into how the company is structured to run its business. Management has an opportunity to voluntarily take action now around transparency, consistency and comparability to enhance their segment reporting beyond the current requirements and provide more useful and meaningful information to stakeholders.

A view of the business


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.

Determining operating systems
Information regularly reviewed by CODM Organizational charts
Board of directors reports Basis on which compensation is determined
Annual budgeting process Financial information regularly presented by component managers

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.

Stakeholder perspectives

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 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.

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

Through the eyes of management

What can companies do today?

While the FASB considers whether changes are necessary to the standard, companies can take actions now that could supplement their segment reporting beyond existing requirements.

Transparency – Aggregation of two or more segments is currently permitted because the FASB decided that separate reporting of operating segments with similar characteristics and essentially the same future prospects would not add significantly to an investor’s understanding of the reporting entity. While the standard allows aggregation into reportable segments under certain circumstances, users have indicated that they would generally find more disaggregated information beneficial. As such, companies can consider whether voluntarily disaggregating their reporting segments into the operating segment level would provide useful information. For example, management might consider whether it would be beneficial to disaggregate a segment that, although immaterial today and reported in “all other” as allowed under the standard, is expected to be an area of growth for the company in the future.

For companies that choose to aggregate (when permitted), enhanced disclosure of management’s reasons for presenting its segments on an aggregated basis would provide further insight into how management considers the products/services, customer, distribution models, process and regulatory environments to be similar.

Similarly for companies that realign their segments, meaningful disclosures as to the reasons for the change may help users understand what has happened in the underlying business that warrants a change in segments. For example, disclosures could explain that the segments have changed as a result of an acquisition or expansion into a new product or new geography. Alternatively, disclosures may indicate that management shed significant products within a segment, therefore, it no longer warrants separate analysis as the remaining activities are not significant to the overall results, and management won’t be managing the business at that level going forward.

Comparability and Consistency – Stakeholders may use segment information to assess historical results and consider future cash flow prospects. As such, an ability to link the past segments to current segment disclosures can be helpful when segments have changed. In these situations, the accounting standard requires that the segment information for prior periods presented be recast to be consistent with the new segment reporting, unless it is impracticable to do so.

For example, if a company changes its segments during its second fiscal quarter, its disclosures in its quarterly filing will reflect the new segments for both the current and comparable prior quarter and corresponding year to date periods included in the interim financial statements (e.g., the three and six month periods ended June 30th). The annual disclosures for prior years are typically recast to reflect the new segment structure in the next Form 10-K filing.

Financial statement users might find it beneficial if companies voluntarily provide comparative information for prior quarters and annual periods on a more timely basis rather than waiting for the next annual filing or registration statement. This disclosure could be achieved by providing supplemental information in a Current Report on Form 8-K or putting the information on the company’s website.

In addition to providing the recast comparable periods in a timely fashion, companies may want to consider voluntarily providing historical data for the new segments for more interim periods than required as this could provide additional trend data, especially for those with seasonal businesses.

Management Discussion & Analysis (MD&A) – Companies are required to provide an analysis of the consolidated financial condition, operating performance and liquidity of the company. This disclosure should include segment information when it is material to understand the consolidated financial results. Enhanced disclosures by segment may be meaningful when a segment is impacted by a significant acquisition or disposition, material non-recurring gains or losses, or other trends that are different from the consolidated trends. It may also be beneficial to discuss cash flows by segment if there are specific limitations, restrictions, or funding requirements.

The accounting standard requires disclosure of a segment performance measure. The performance measure disclosed is not standardized. Rather the measure to be disclosed is the measure of profit used by the CODM in making decisions about allocating resources and assessing performance. If more than one measure is used for this purpose, then generally only one measure can be disclosed in the footnotes to the financial statements.

In discussions with users we have learned that they typically would like more information by segment including gross margin, cash flow information, and other key performance metrics used by the company.

Management could consider utilizing MD&A to provide additional voluntary segment performance measures when they believe the disclosure would be meaningful. Depending on the nature of the business, this could include certain balance sheet and cash flow metrics or key performance metrics which could enhance the ability of the user to understand the past and potential future performance of the segment or the return generated on invested capital. However, companies should consider whether any additional segment measures are non-GAAP financial measures and therefore subject to the SEC's rules and regulations on non-GAAP financial information.

Final thoughts

Segment disclosures are intended to provide a view of the business through the eyes of management, and provide insight into how management has structured the company to monitor and manage its businesses. These disclosures can help users better understand a company’s performance, its prospects for future cash flows and make more informed judgments about the company.

Management has an opportunity to voluntarily take action now around transparency, consistency and comparability to enhance their segment reporting. Enhancements to the communication of a company’s performance at the segment level may provide additional useful information for a company’s stakeholders.


John May

SEC Services Leader, National Professional Services Group, PwC US


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Heather Horn

Heather Horn

US Strategic Thought Leader, National Professional Services Group, PwC US

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