Disclosing Disaggregated Information

How companies and auditors have met the challenge.


  • IN AN EFFORT TO PROVIDE MORE USEFUL INFORMATION to financial statement users, FASB issued Statement no. 131, Disclosures about Segments of an Enterprise and Related Information. It replaces Statement no. 14, Financial Reporting for Segments of a Business Enterprise. Statement no. 131 adopts a management approach to segment reporting in place of the industry approach required by Statement no. 14.
  • STATEMENT NO. 131 REQUIRES ALL PUBLIC COMPANIES to report segment data in external financial reports so that the information will correspond to the way management organizes segments within the enterprise for making operating decisions and assessing performance.
  • A COMPANY’S MEASUREMENT OF EACH SEGMENT ITEM it reports should be the measure reported to the chief operating decision maker for purposes of deciding how to allocate resources to the segment and assess its performance. A company need not provide segment information in accordance with the same GAAP it uses to prepare consolidated financial statements.
  • STATEMENT NO. 131 CONTAINS SOME POINTS that likely will result in increased risks both for management and for independent auditors. For its part, management is wary of opening a larger window into the company’s inner workings that may help competitors.
  • THE SEC ALREADY HAS BEGUN POLICING THE SEGMENT reporting of its registrants to ensure compliance with Statement no. 131. The SEC staff may challenge a registrant’s determination that part of the company is not a segment for purposes of Statement no. 131 when the staff finds evidence to the contrary.
LARRY DEPPE, CPA, PhD, CMA, is associate professor of accounting at Weber State University in Ogden, Utah. His e-mail address is ldeppe1@weber.edu . S. CRAIG OMER, CPA, is a partner with KPMG in Salt Lake City. He is a member of the AICPA council. His e-mail address is comer@kpmg.com .

or many years, analysts and other users of external financial reports have expressed concern about the form and usefulness of the segment reporting companies include in these statements. Analysts believe that understanding the components of a multifaceted enterprise is vital to obtaining a complete understanding of that business.

The SEC Chief Accountant on Segment Disclosures

Let’s start with the three R’s of quality…relevance, reliability and representational faithfulness.

A high-quality accounting standard requires relevant accounting information. Information is relevant if investors can use it when they make investment decisions. Relevance requires sufficient and appropriate disaggregated information…[and] whether it is provided in sufficient and appropriate ways, showing the major risks and rewards associated with components of the business to allow the reasonable investor to make reasonable decisions about the business as a whole as affected by its component parts.

The level of aggregation/disaggregation of data must serve to enable investors to understand the major risks and rewards associated with the business.

Adapted from “A QT Report Card for High-Quality Financial Reporting,” delivered by Lynn E. Turner, chief accountant, SEC, at the Hylton Lecture Series in Accountancy, Wake Forest University, April 25, 2000.

Financial statement users expressed great dissatisfaction with the information companies presented in financial reports prepared in compliance with FASB Statement no. 14, Financial Reporting for Segments of a Business Enterprise, issued in 1976. Because the definition of an industry segment under Statement no. 14 was imprecise (to accommodate a wide variety of businesses subject to the rule) the result was that companies provided only limited information. Disclosures made under Statement no. 14 were not helpful to financial statement users. In some cases, businesses exploited the imprecision of the industry segment definition to avoid providing useful information.

Both the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research noted the importance of segment data and the shortcomings of Statement no. 14. The groups stressed the need for a company to present segment data in the same way it organized and managed its business. FASB responded by issuing Statement no. 131, Disclosures about Segments of an Enterprise and Related Information.

Statement no. 131 was effective for fiscal years beginning after December 15, 1997. While it appeared, at first reading, to be straightforward, Statement no. 131 has proven to be quite subtle and complex. Quality disclosures do not come easily. The nature of the required disclosures increases the level of risk for management and auditors alike.

Management faces increased competitive risk as a result of competitors knowing more about the company. Most companies guard information on the profitability of segments carefully. If too much information is revealed in financial statements, the company could lose its negotiating advantage in an acquisition. Auditors, in turn, face the risk of not knowing how the SEC will respond to disclosures on which the auditor had rendered an opinion. If the auditor discloses too much information, the client faces a competitive disadvantage. Disclosing too little might raise the ire of the SEC. Prepared properly, however, the required disclosures can prove useful to both management and statement users, particularly when compared to Statement no. 14.

A number of issues have arisen since companies began applying Statement no. 131, including implementation issues confronting both financial managers and outside auditors. To help CPAs better understand them, this article offers some examples of how some businesses have applied Statement no. 131.


The exhibit below summarizes the requirements of Statement no. 131. The statement adopts a management approach to defining segments and uses the term operating segment rather than industry segment. An operating segment is a component of an enterprise

  • That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the enterprise).

  • Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to decide how to allocate resources to the segment and assess its performance.

  • For which discrete financial information is available.

This definition includes reporting separately segments that sell their products or services primarily or exclusively to other operating segments of the enterprise if management reports these segments separately for decision-making purposes. Statement no. 131 requires information only about reportable operating segments. Companies must disclose additional information about products and services and about geographic areas of operations for the enterprise as a whole if the basic segment disclosures do not provide such information.

FASB developed the new definition in response to user requests about segment reporting. Users asked that segment reporting reflect the way individual business enterprises are organized and managed. While FASB designed the new definition to provide more relevant information to financial statement users, it sacrificed some measure of comparability as a result of the different approaches to managing an enterprise.

Statement no. 131 requires a company to measure the information it reports about each segment in the same way as the company’s chief operating decision maker uses the information to allocate resources to segments and to assess segment performance. A company need not provide segment information in accordance with the GAAP it uses to prepare its consolidated financial statements. A company should allocate amounts to a segment on a reasonable basis rather than based on consolidated amounts. It must disclose any differences in the basis of measurement between the consolidated and segment amounts. If the company allocates an expense to a segment without also allocating the related asset, it must also disclose that fact.

An enterprise also must reconcile the consolidated totals in financial statements to the reportable segment assets, revenues, profit or loss and any other significant segment information it discloses. Statement no. 131 also requires disclosure of limited segment information in condensed financial statements be included in quarterly shareholder reports.

In issuing Statement no. 131, FASB cited the significant advantages of a company’s reporting information in the same form as the company’s chief operating decision maker uses it to run the business. External financial statement users will have information that is consistent with that used by a company’s internal organization. Since most enterprises already use such information to manage the entity, it should be readily available, thus minimizing costs and the time a company might spend generating it. Giving outsiders the same information executives use to operate the enterprise will ostensibly help these outsiders identify the risks and opportunities management deems important. Despite these purported advantages, however, managers and auditors have found some significant challenges in meeting the segment reporting requirements.

Segment Reporting
Issue Statement no. 131 Approach
Defining segments Modified management approach.
Quantitative thresholds Report segments constituting 10% or more of reported revenues, assets, or profit or loss. Reportable segments must account for 75% of external revenues.
Limit on number of segments to be reported Not specifically stated, but more than 10 probably too many.
Information to be disclosed about segments Using the modified management approach:

Internal and external revenues.

Profit or loss.

Depreciation, depletion and amortization expense.

Unusual items.

Total assets.

Equity in vertically integrated, equity-method investee net income.

Investment in equity-method investees.

Total capital expenditures (additions to property, plant and equipment).

Information about major customers.

Information (revenues, operating profit or loss, identifiable assets) about foreign operations and export sales.

Significant noncash items, other than depreciation, depletion and amortization expense:

  • Interest revenue.
  • Income tax expense.
  • External revenues for each product and service for the enterprise as a whole.
  • Revenues and long-lived assets for the enterprise’s country of domicile and all foreign countries (and for individual foreign countries where amounts are material).
Interim period Disclosure required of the following items in interim reports:
  • Segment revenues from external customers.
  • Intersegment revenues.
  • Measure of segment profit or loss.
  • Material changes in segment assets.
  • Differences in basis of segmentation or way segment profit or loss was measured in previous annual period.
  • Reconciliation to enterprise’s total profit or loss.
Accounting principles Segment information may be presented on same basis as reported for internal purposes; disclosure must be made of the basis on which information was prepared, including any differences in the basis of measurement between consolidated and segment amounts. Segment totals must be reconciled to consolidated totals in financial statements.
Information about major customers If 10% or more of enterprise revenue is derived from sales to a single customer, disclosure of that fact and the amount of revenue from each such customer is required.
Restatement of previously reported information If an enterprise changes the structure of its internal organization, resulting in a change in the composition of reportable segments, then corresponding information for earlier periods (including interim periods) should be restated.



Implementing Statement no. 131 has put new demands on the managers of some enterprises such that they now must step back and ask: How do we manage this business? Do we manage it on the basis of segments? For some managers, the standard requires a different orientation in that they must examine how they see the entire company as well as how they view each line of business to assess each segment’s profitability, risk and potential.

Management must identify objectives for the lines of business and how the company meets them. In some instances, managers have discovered that the lines of business they use for management purposes do in fact correspond with the segments defined in Statement no. 131 and that they use these segments to manage the business.

Conversely, some managers have recognized that they do not manage on the basis of segments. Indeed, experience has shown that if management cannot tell the auditor what the segments are, it probably does not manage the company by segments. These managers need to identify what they do look at in running the business and how that information corresponds with the segment concept the standard requires. In some instances, particularly in the first year of applying the new rules, managers were faced with converting the information they used into something resembling a segment. The process of segment identification and reporting required companies to change their internal management reporting systems, which cost more in terms of time, money and internal resources.

One of FASB’s main premises in issuing Statement no. 131 was that most businesses would have the required segment information readily available because they already used it for management purposes. While this undoubtedly is true of many major corporations, it is less true of smaller enterprises. Independent auditors, therefore, have a major role to play in assisting and educating companies about the development of segment information. For companies that do not manage, or even think of, their business in terms of segments, determining the number and composition of segments can be a difficult task.

Some managers are uncomfortable with Statement no. 131’s requirements. Disclosing segment information opens a larger window into a business’ inner workings by allowing outsiders access to more information. Improved segment information may give shareholders a basis for challenging management on retaining or disposing of specific segments. If a segment fails and investors lose money, they will hold management responsible.

The level of success or failure of the business—as portrayed by segment reporting—will be determined in large measure by how management identifies segments. For example, management may identify segments in such a way as to conceal a money-losing operation (perhaps the segment is the CEO’s pet project). Poor segment performance ultimately reduces the value of the company’s debt and equity securities. Investors and creditors are likely to respond forcefully and negatively. Consequently, management must report segments and results accurately, as investors will have little tolerance for errors or deception.


Independent auditors also are subject to new risks and responsibilities as a result of Statement no. 131. Just as management must ask itself how the business is managed and if it is segmented, auditors must ask the same questions of management and perform different tests and make added inquiries to substantiate management’s responses.

To get the information required for offering an opinion on segment information, auditors must understand the nature and operations of the client’s business in greater depth than ever before. Auditors must identify the market segments the business operates in and the dynamics of these markets, as well as the competitive issues confronting the business. They must be aware of key business processes as well as management’s operational tools. And they must see the organization as management sees it, which means they must have access to the highest management levels.

Auditors traditionally have had access to client personnel at or below the CFO level and have had limited interaction with operating managers. To have a basis for expressing an opinion under Statement no. 131, auditors must sit in on management, board and executive committee meetings. Top managers, in turn, must understand the nature of the disclosures and assertions being made and be honest and forthright with the auditor about what they do. Auditors must help senior management understand that the Statement no. 131 disclosures are not optional. They are part of the GAAP auditors must follow and are a necessary step if a company wants access to capital markets. Since the nature of the new segment disclosures has changed the level and breadth of access, auditors need the knowledge and interpersonal skills to deal with managers at the highest levels, and top management must be cooperative. To do less is to imperil both management and the auditor.

In forming an opinion on segment disclosures, the auditor must compare the actual methods used with management’s description of what they do. Management presumably uses its description of how it manages the business as the basis for segment disclosures. Auditors must determine that management’s description reflects actual events. Auditors also must trace footnote disclosures for segment information to internal reporting documents that management produces and uses regularly throughout the year. External disclosures and internal information must be consistent.

The auditor must test allocations to identified segments for propriety and accuracy. The auditor also must determine that the standard’s quantitative thresholds are met and that all required disclosures have been made. Additionally, the auditor should identify risks specific to any segment, such as environmental risks.

Testing segment disclosures requires extra work and extra fees. Companies clearly will not welcome the latter. Many companies do not see the benefits of the segment disclosures (particularly nonpublic companies whose managers have shown a distinct aversion to any voluntary disclosure of segment information). They are particularly concerned about divulging information on the profitability of segments. Auditors must be sensitive to these concerns while gathering the evidence necessary to support an opinion on segment disclosures and the company’s compliance with professional standards. Auditors may have to help their clients understand that the additional information Statement no. 131 requires adds value to the financial statements. Without the disaggregation the pronouncement requires, no means exists for analysts and others to predict the overall amounts, timing or risks of the entire enterprise’s cash flows.


In implementing Statement no. 131, different issues arise based on each company’s peculiarities. Complying with the standard requires considerable judgment and careful analysis of how a business is managed and how decisions are made. No single model will apply to every industry. Consider the following examples.

Example 1. Banks A and B are regional banks. Bank A manages by geographical segments (by states in which the bank operates). It has a president and an executive management group responsible for each region. Human resources, investment capital and other resources are allocated geographically. Financial reporting flows through the organization based on geographic structure. Although the company reports secondary information along business and product lines, management runs the business based on geography.

Bank B, on the other hand, uses a more traditional management approach for the industry—lines of business. Bank B has the following reportable segments based on its business lines: community banking, retail lending, business banking, capital markets, treasury, investment management and parent and other.

Example 2. Company C is in the oil and gas industry and will soon complete a public offering of debt securities. It has “downstream” businesses in the form of a refinery, retail fuel sales, truck stops, convenience stores, restaurants and motels. The company sells the fuel it refines to its own retail fuel outlets and truck stops. It has defined separate segments for its refinery and retail operations, has separate management groups for refining and retailing and discrete financial reporting for each segment, however, major competitors such as Chevron, Conoco and others with similar downstream operations report all downstream operations as one segment.

Example 3. Company D operates several restaurants based on different concepts, including a Mexican caf, a steak house and a Chinese buffet. This company deploys assets, measures profit and loss and defines segments by restaurant concept.

Example 4. Company E is in the physical therapy market. It operates plants and sells products in one western state and in the southeast. One product line applies electricity to muscle injuries to stimulate tissue regeneration. Another is a device to rearrange cellulite. A third product line consists of therapy tables sold to physical therapists and chiropractors. Yet another line is soft goods, such as knee braces. Interestingly, the company reports all of its products as one segment. Management sees the company as one line of business addressing a common customer base through the same distribution system. Headquartered in the western state, the company makes decisions on all lines of business based on consolidated information. Budgeting is based on the entire company, but revenue for the different lines is budgeted separately.

Example 5. Company F is a public company with three basic products: a line of flashlights, household goods (manufactured by another company) and telephone accessories (primarily represented by a telephone shoulder pad). This company has identified a separate segment for each product line and reports separate profit and loss information for all three. Different managers oversee each line and make significant operating decisions. The company allocates resources based on product line.


The SEC has formally adopted technical amendments to bring its rules on management’s discussion and analysis and the description of the business into conformity with Statement no. 131. The interim reporting requirements in Statement no. 131 are now required for financial statements filed on form 10-Q and 10-QSB. The commission has not limited itself to these formalities, however.

The SEC has said its staff may challenge a registrant’s determination that a component is not a segment for purposes of Statement no. 131 if the chief operating decision maker receives reports on the component’s operating results on a quarterly or more frequent basis (unless reports of other overlapping sets of components more clearly represent how the business is managed). The SEC has, on occasion, requested copies of all reports furnished to the chief operating decision maker when the reported segments did not appear realistic relative to management’s assessment of a company’s performance or when they conflicted with the chief operating officer’s public statements. The SEC staff also has reviewed analysts’ reports, press interviews by management and other public information to evaluate the consistency of such information with segment disclosures in the financial statements. When inconsistencies appeared, the SEC required registrants to amend their filings to comply with Statement no. 131.

The SEC has advised registrants to be sure to identify the products and services from which each reportable segment derives its revenues. Registrants also should report total revenues from external customers from each product or service or each group of similar products and services. Further, the commission says it will require disaggregation of disclosures of products and services that are not substantially similar and will object to overly broad views of what constitutes a similar product. It will use public disclosures and marketing materials describing a registrant’s products to determine whether a company has aggregated dissimilar products.

The SEC advises registrants to quantify and explain each material reconciling item in the reconciliation of segment elements to consolidated financial statements. Registrants should identify the effects of measurement differences and explain asymmetrical allocations among segments.


Companies implementing Statement no. 131 face several important issues, among them the different approaches to segment reporting. Statement no. 131 requires judgment and careful analysis from both management and the auditor of how a business is managed and how managers make decisions. The SEC has weighed in with its opinions and managers and auditors should take note of its views. One thing seems clear: Segment reporting is still in the development stage. Managers and auditors likely will still have to devote time and effort to this evolving area of financial reporting.


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