Impacts of segment disclosures in deals and beyond

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Reorganization following a merger, acquisition, divestiture or other major deal has many strategic implications. One key consideration is the way organizational changes impact how a company communicates about its business operations to stakeholders and potential investors by way of segment disclosures—a crucial intersection of business strategy and accounting.

The goal of segment reporting is to help financial statement users understand how the business is run—from performance to future cash flow prospects to overall strategy. The breadth of segment disclosures underscores how important it is to coordinate reporting across your organization. For dealmakers, considering segment reporting implications at the front end of a deal is often beneficial, especially for cross-sector transactions between two companies from different industries (see below).

Segment alignment

Getting segment disclosures right is important. Not only do regulators care—and challenge disclosures with some frequency—but the disclosures also provide an important window into the company for investors and other stakeholders.

The FASB’s segment reporting requirements, detailed in ASC 280, Segment Reporting (“ASC 280”), are designed to allow financial statement users to see public companies through management’s eyes.

Segment reporting complexity

How deals can increase segment reporting complexity

Innovation, transformation, and disruption mean that business models and corporate structures are shifting with even greater frequency. Strategic acquisitions, including mega-deals and cross-sector acquisitions, are also on the rise. There are many recent examples of large vertical acquisitions, whereby a large or established company in one industry targets a company in an entirely different industry. Often, following a significant acquisition — particularly a cross-sector acquisition — companies will divest a business or portion of a business for regulatory reasons or otherwise. These developments create new challenges for segment reporting, making planning and collaboration all the more important.

Chief Operating Decision Maker

Who makes the call?

The accounting guidelines place segment reporting responsibility on the Chief Operating Decision Maker (CODM), the person or entity in charge of allocating resources and assessing company performance. The CODM could be the CEO, the COO, both of these individuals together, or some other individual or group of individuals.

Acquisitions can impact not only the company’s structure, but also the identity of the CODM and the information that the CODM reviews to manage the business. A structural shift, or management reshuffle, often necessitates a fresh look at the person or persons determining the allocation of resources to and assessing the performance of the operating segments.

Aligning operations and segment reporting: Six focus areas

In our experience, six critical areas of business operations warrant close alignment with segment reporting. For each area, close collaboration among relevant functions (including corporate development, investor relations, the controller group, and the C-suite) will go a long way toward smoothing the segment disclosure process. Companies should carefully assess the impact of an acquisition on each of the following:

1. Financial reporting

How well does your segment reporting align with other financial reporting across your organization? Consistency is important because SEC staff often consider an entity’s segment disclosures in tandem with publicly available information (beyond public filings), such as earnings calls, company websites, and industry presentations.

Deals insight: Certain acquisitions are done with the intent of divesting non-core businesses shortly after closing to appease regulators and avoid antitrust concerns. These deals can further raise the stakes for getting segment reporting details right.If information on resource allocation and performance assessment is changing, it’s important to review for consistency as segment information is required to be retrospectively adjusted.

Changes to segments could result in additional financial reporting complexities for goodwill. Properly identifying operating segments affects the recognition and measurement of goodwill within reporting units and potential future impairment.

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2. Integration

Following a merger or acquisition, integration decisions are closely intertwined with the determination of the combined entity’s segments. Understanding how a buyer anticipates integrating a newly acquired business, including any potential future restructuring, is essential for assessing an acquisition’s impact on segment reporting. Coordination and communication will help optimize the symbiotic relationship between merger integration and segment reporting decisions.

Deals insight: Integration may involve changing the CODM and/or the information the CODM uses to manage the business. Including segment reporting in communications about acquisition integration can also demonstrate the value of a merger or acquisition.

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3. Treasury: future financing and capital raising

Accounting guidance calls for retrospective restatement of audited periods when segment disclosures are comparatively presented in the annual financial statements that include the segment change. Retrospective restatement may also be triggered when a registrant files a new or amended registration statement to raise capital. This would accelerate the timing for both the retrospectively revised financial statements and the related audit procedures.

Deals insight: Because of the retrospective restatement requirement, ripple effects from segment changes can complicate reporting around raising capital. With this in mind, a company’s treasury department may want to carefully consider when to file a registration statement, relative to the entity reporting new segments.

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4. Investor relations and communications

Segment reporting is an important opportunity for management to tell the business’s story. Analysts view segment information, along with other publicly available information (financial statements, earnings calls, IR reports/ supplements), as an integral component of their overall understanding of the company.

Deals insight: When completing acquisitions, particularly across sectors, reconsider communication about expected segment metrics, performance, and returns. The value of segment reporting to analysts and other financial statement users comes largely from its disaggregated approach. Selecting the right level of disaggregation and disclosing the right amount of information are particularly challenging when a company is reorganizing its segments and wants to avoid revealing too much to competitors. Be wary of jeopardizing negotiating positions, especially when competitors can forgo segment disclosures if they are private or do not report under GAAP.

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5. Internal controls

Entities need to consider effective internal control over financial reporting (ICFR) to support their application of segment guidance, which requires the use of reasonable judgment. Reasonable judgments are needed when determining operating segments, aggregation, and entity-wide disclosures. Also, monitor for differences in management’s approach or other details that might change segment reporting.

Deals insight: Segments (and segment reporting) that include significant post-acquisition integration can expedite the SOX integration process.

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6. Data strategy

Once a company has finalized its approach to segment reporting and technical accounting considerations, data limitations often prove equally challenging. Because segmented data must be auditable, completeness and accuracy are essential.

By creating efficient and sustainable data segmentation processes, companies can periodically repeat data extraction and analysis. Management can then evaluate segment performance, make resource allocation decisions, and facilitate financial reporting.

Deals insight: Additionally, some companies may want data readily available for potential deals activity or business reorganizations.

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A note about aggregating operating segments

Operating segments

Accounting guidelines require a company to disclose if it aggregates operating segments, and the SEC views the aggregation criteria as a high hurdle. SEC staff frequently ask registrants to explain their decision to aggregate, including justification that the segments share similar quantitative and qualitative characteristics. The SEC has also challenged the position that decisions can be made about performance and resources for the company as a whole, without evaluating discrete, disaggregated financial information.

Comparability is an additional consideration. Applying the aggregation criteria may yield different results by company, even when the entities’ operating segments are similar. For additional guidance on aggregation, identifying operating segments and more, listen to our podcast: Segments: Back to the basics with 5 things you need to know.

The bottom line

Regulators and investors continue to focus on segment disclosures. Looking beyond the numbers, management’s view of the business — including key drivers, resources, and how best to allocate those resources to promote sustainable growth and profitability — is essential to managing stakeholder expectations.

Recent deals trends, including an increase in cross-sector deals and acquisitions followed by significant divestitures, can create further complexities. As companies use strategic acquisitions to inorganically grow shareholder value, segment reporting and potential realignment will warrant special attention. The business implications are vast, cutting across multiple functional areas from financial reporting to control procedures. To get segment reporting right, management needs a measured and holistic approach that incorporates input from across the organization.

How PwC can help

PwC has deep expertise in many aspects of segment reporting. Our Deals advisors can assist clients with financial reporting questions, as well as the broader business implications, particularly for acquisitions or divestitures. To complement our segment expertise, our suite of tools streamlines technical accounting analysis and presents various interactive visualizations. We can help management deploy these tools to more efficiently automate their evaluation of operating segment performance, as well as to build segment disclosures for periodic reporting.

The assistance we can provide includes:

  • Accounting and financial reporting analysis and advice
  • Data extraction and analysis, including system diagnostics
  • Integration strategy and support

Contact one of our Deals professionals to have a deeper conversation about your organization’s segment reporting challenges and how we can be of assistance.

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PwC’s approach to segment analysis

When assisting clients with segment analysis, our Deals professionals have access to PwC’s web-based program that helps automate the identification reportable segments, as defined in ASC 280. Our approach automates quantitative tests and helps evaluate various segment reporting scenarios with interactive visualizations. Contact one of our Deals professionals to learn more about how we can assist with segment analysis.

Note: Due to PwC’s independence obligations as a public accounting firm, this offering may not be available to restricted entities.

Segment disclosures

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Jeff Kotowitz

Capital Markets and Accounting Advisory Services leader, PwC US

Robert Young

Partner, Capital Markets, Deals Practice, PwC US

Brandon Campbell Jr.

Deals Director, PwC US

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