Segment disclosure standard affirmed by FAF review team

A Financial Accounting Foundation (FAF) review released Monday has affirmed the general effectiveness of a FASB statement that establishes standards for the way public companies report information about operating segments in annual and interim financial statements.

But the report on the post-implementation review also revealed room for improvement in Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, which is codified in ASC Topic 280, Segment Reporting. Some of the challenges include the effect of changes in technology on the determination of what information is reviewed by the company’s chief operating decision-makers (CODMs).

FASB Chairman Leslie Seidman said in a statement that the board will consider the reported findings and provide its initial response in coming weeks. She said that before FASB proceeds, it also will consider the International Accounting Standards Board (IASB) review of IFRS 8, Operating Segments, which is converged with Statement No. 131.

The IASB’s review is expected to be finished this year.

Post-implementation reviews of FASB standards, such as the review of Statement No. 131, are conducted by FASB and GASB staff members and overseen by the FAF board of trustees.  

Statement No. 131 was approved in 1997 as a response to concerns that useful information about the operations of some companies had been eliminated by the consolidation requirements contained in Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, which was issued in 1987.

The demand from users and other stakeholders for disaggregated information on global entities and diversified entities resulting from mergers and acquisitions led to the creation and approval of Statement No. 131.

The post-implementation review concluded that Statement No. 131 provides more information about companies’ different business activities than did the previous segment reporting standard, Statement No. 14, Financial Reporting for Segments of a Business Enterprise. The additional information and increased relevance allow investors to better understand companies’ activities and prospects for growth, the report said.

As a result of Statement No. 131, companies’ reported segment information is better aligned with their internal structures and more consistent with financial information reported outside the financial statements, according to the report.

Some companies, though, are not reporting a sufficient number of segments, the review found. This was particularly found to be the case for companies that report just one segment. Investors also would like more information about segments, such as gross margin and cash flow, according to the report.

In addition, some companies may have difficulty applying the guidance for determining and aggregating operating segments, partly because of advances in technology and the standard’s principles-based nature, the report said. Preparers, practitioners, and regulators continue to discuss these difficulties, according to the report.

A part of one definition in Statement No. 131 says an operating segment is a component of an enterprise whose operating results are “regularly reviewed” by the enterprise’s CODM to assess performance and decide about resources to be allocated to the component.

According to the post-implementation review, though, technological advances have made more detailed information available to the CODM, which makes it difficult to differentiate between information the CODM “regularly reviews” and information that merely is “received” by the CODM. As a result, the report said, the technology may make it more challenging to determine operating segments and how to aggregate them.

The analysis of Statement No. 131 was FAF’s second post-implementation review. It included a survey that generated 288 responses—48% from financial statement users, 22% from accounting practitioners, 19% from preparers, and 11% from academics.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.