ASU 2023-07 Expansion of Segment Disclosure Requirements: What Accounting Teams Should Expect From Upcoming Changes

Heading into the final stretch of 2024, accounting teams at public companies are preparing for a significant expansion of segment disclosures, as published by the FASB in 2023 through ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.

Teams within accounting functions at public companies will need to keep this updated guidance top of mind as they approach financial year end beyond December 15, 2024. Though not as significant of a lift or impact as previously challenging rollouts of Revenue Recognition (ASC 606) or Lease Accounting (ASC 842), the new segment reporting requirements add another critical item to the year-end agenda for teams that may be already understaffed.

A Closer Look at ASU 2023-07

At its core, ASU 2023-07 seeks to provide more detailed information than public companies currently disclose about their reportable segments. The guidance addresses stakeholders’ requests for a further level of detail about significant segment expenses. The additional disclosures under the ASU are required to be reported in both interim and annual periods, and while the updated guidance doesn’t change how an entity determines or identifies its segments or how it aggregates its operating segments into reportable segments, it does bring an additional level of disclosure to public-company filings.

Below are key changes coming to segment reporting for SEC registrants:

• The ASU introduces the concept of a “significant expense principle” whereby public entities will be required to disclose the significant expense categories included in the reported measure of segment profit or loss that are regularly provided to, or easily computed from information provided to, the Chief Operating Decision Maker (CODM) for each reportable segment. Interpreting and applying what is both significant and regularly provided can be a highly judgmental exercise for financial reporting teams, and it would be helpful for the accounting teams to get a head start on the determination. Further adding complexity is that an expense category can be determined to be significant for one reportable segment and not others. Financial system capabilities, including the availability of data used to support the enhanced disclosure, will also need to be considered.
• The amendments permit entities to disclose more than one measure of segment profit and loss, provided each measure is regularly reviewed and used by the CODM to allocate resources and assess performance of the segment.  Where a CODM uses multiple measures, the ASU requires that one of the reported measures includes the segment profit or loss measure that is most consistent with GAAP measurement principles. Further, if more than one measure is disclosed, all disclosure requirements (including significant segment expenses) must be disclosed, along with reconciliations of each measure of segment profit and loss to income before income taxes and discontinued operations.
• Public entities with a single reportable segment will be required to provide all currently required segment disclosures in ASC 280 as well the incremental required disclosures under the new guidance. This aligns the segment information that public entities with a single reporting segment disclose with that of public entities comprising more than one reportable segment.  Prior to the release of the ASU, while entity-level disclosures were required, there wasn’t clarity as to whether segment-level disclosures were required.  This update eliminates the lack of clarity that many have existed under ASC 280 for entities with a single reportable segment and required segment disclosures.
• The current interim disclosure requirements have been updated to require that almost all of the annual numerical segment disclosures also be made on an interim basis. This includes all previously required disclosures along with the new disclosure requirements that ASU 2023-07 introduces. An example of a disclosure item required in annual but not required in interim reporting is the reconciliation of the total of reportable segments’ revenues and assets, reducing the interim reporting burden to a degree.

One note of importance is that ASU 2023-07 will require retrospective application unless it’s impractical to do so, meaning companies will need to recast prior period information to reflect the updated segment reporting guidance. As companies address this, they will likely notice some nuances that need further investigation.

In addition, public entities need to evaluate the design and operation of their controls to determine whether they support their segment-level disclosures in compliance with the new requirements. Teams must also determine whether sufficient evidence is available to support the expanded segment information now required to be disclosed.

Given segment reporting is a frequent area of comment by the SEC, we expect the SEC to continue to focus on compliance with the new disclosures.

As always, it will be important for public companies to work with their external auditors throughout this process and to engage with external consultants as they encounter nuances such as the above. 

Common questions and answers to consider pertaining to the new guidance include:

ASU 2023-07 Frequently Asked Questions

Q) My company has three reportable segments. Revenue and gross margin are provided quarterly to our CODM for each segment. Under this ASU, are any changes required in segment disclosures?

A) A company must assess whether expenses included in the reported measure of segment profit or loss are significant and regularly provided to the CODM when preparing disclosures. Additionally, expenses that are easily computable from the information provided to the CODM are treated as provided to the CODM. In this example, the company will need to consider that if cost of sales is significant – because cost of sales can be easily computed from revenue and gross margin amounts provided to the CODM – it would need to be disclosed as a significant segment expense. 

Q) My company has a single-reportable segment and we currently disclose entity-level results in line with ASC 280. Do I need to review and update my disclosures?

A) ASU 2023-07 requires that entities including those with a single reportable segment provide all disclosures under the existing Segment Reporting guidance in ASC 280 and the incremental disclosures required by the ASU. While Segment Reporting guidance under ASC 280 required entity-wide disclosures for single reportable segment entities, ASU 2023-07 clarifies the requirement to include segment disclosures and related reconciliations for such entities. The company should consider what’s being provided to the CODM and whether expanded disclosures of performance are required. This may involve a review of what are determined to be significant expenses and how they’re reported/analyzed internally, along with a review of profit and loss measures for the single segment. The outcome of this analysis may need additional disclosures in interim and annual external reporting.

Q) Do I need to report information previously disclosed annually in interim periods upon adoption of ASU 2023-07? 

A) Yes, ASU 2023-07 significantly expands disclosure requirements for interim financial statements. Prior to the ASU, while certain segment information was required to be disclosed in interim periods, the ASU expands the requirements such that most of the segment disclosures in annual periods are also required to be included in interim periods. Accordingly, most of the segment information currently required annually by Topic 280 as well as incremental disclosure requirements introduced by this update will need to be disclosed on both an interim and annual basis. Certain disclosures continue to be required in annual periods only, such as reconciliation of segment revenue and assets to their corresponding totals.

Q) What happens if there is a change in the composition of reportable segments or if expenses become “significant” from one period to the next?

A) Both of these instances will require recasting of segment information in comparative periods, including interim periods, unless it’s impracticable to do so. As reportable segments increase or decrease (i.e., a change in composition of the entity’s reportable segments), comparative financial disclosures are required. The requirement to conform comparative prior periods is “recast” rather than “restate” to avoid implication of a prior period error correction. Similarly, as expenses become “significant,” the comparative period segment information, including interim periods, must be recast to reflect the expense as significant in the comparative periods.

For expert support understanding and complying with ASU 2023-07, contact CrossCountry Consulting.