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.
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.
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.
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.
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.
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.