Segment disclosures are an essential part of financial reporting that help investors, analysts, and other stakeholders understand the diverse parts of a business. Instead of viewing a company as a single monolithic entity, segment disclosures break down financial results by distinct business units or geographic areas. This transparency provides a clearer picture of where a company’s revenues and profits come from, enabling better decision-making and investment analysis. If you’ve ever wondered how to interpret or prepare these disclosures, this guide will walk you through the key concepts, practical tips, and recent changes in segment reporting rules.

At its core, segment reporting answers a simple but powerful question: How does each piece of the business perform? Imagine a multinational corporation operating in technology, healthcare, and consumer goods. Without segment disclosures, all revenues and expenses get lumped together, masking which divisions are thriving or struggling. By contrast, segment disclosures reveal the financial health and trends within each division, offering a more nuanced view that aligns with how management actually runs the business.

The foundation of segment reporting is the “management approach.” This means that segments are identified based on how the company’s chief operating decision maker (CODM)—often the CEO or senior management—organizes and reviews the business internally. For example, if management evaluates the company’s performance by product lines or geographic regions, those become the reportable segments in the financial statements. This approach ensures segment disclosures reflect real operational insights rather than arbitrary accounting categories.

Under US Generally Accepted Accounting Principles (GAAP), specifically ASC 280, public companies must disclose segment information in their annual and interim reports. Similarly, IFRS 8 governs segment reporting for companies following international standards. Both standards require qualitative and quantitative information for each reportable segment, including revenues, profit or loss, assets, and reconciliations to consolidated totals. The goal is to enable users of financial statements to understand the entity’s performance, assess future cash flows, and make informed judgments about its prospects[3][2].

A recent update to segment reporting rules, issued by the Financial Accounting Standards Board (FASB) in 2023 as ASU 2023-07, has brought important changes. This update requires companies to provide more detailed disclosures about significant segment expenses, such as cost of goods sold or selling expenses, rather than just overall segment profit or loss. It also extends these enhanced disclosures to entities with a single reportable segment, ensuring even simpler companies provide granular insight to investors. Moreover, the update improves interim period reporting by requiring annual-level segment disclosures to be included in quarterly filings, making information timelier and more consistent[1][3][6].

To illustrate, consider a technology firm with three reportable segments: software, hardware, and consulting services. Under the new rules, the firm must disclose not only the revenue and profit for each segment but also key expenses that significantly impact segment results. For instance, the software segment might show high research and development costs, while the hardware segment’s largest expense could be manufacturing. Providing this breakdown helps investors understand the drivers behind profitability and compare segments more effectively.

One practical tip when analyzing segment disclosures is to pay close attention to how the company defines its CODM and segments. Because the management approach is subjective, companies may differ in their segment definitions even within the same industry. It’s useful to review the narrative disclosures explaining the basis of segment identification, whether by product, geography, or regulatory environment, and any aggregation of segments with similar economic characteristics[2]. This context can explain why segment results look the way they do and highlight management’s strategic priorities.

Another actionable insight is to focus on the reconciliation between segment amounts and consolidated financials. Since segment results are prepared based on internal management information, they might not match the numbers in the consolidated statements exactly. Reconciliation disclosures reveal adjustments or eliminations made at the corporate level, which can be crucial for understanding the overall financial picture[4].

For companies with a single reportable segment, the new FASB guidance clarifies that these entities must disclose segment-level information similar to multi-segment companies. This means even if a firm operates in only one business area, it should provide detailed expense and profit data that management uses internally. This enhanced transparency benefits investors by offering deeper insight into the company’s cost structure and profitability drivers[1][7].

From a preparer’s perspective, segment disclosures require thoughtful coordination between finance teams and management. Since segment reporting reflects internal organizational views, finance professionals must ensure that segment data is consistent, reliable, and reconciled with external financial statements. They also need to stay updated on evolving standards like ASU 2023-07 to meet new disclosure requirements. Leveraging technology and data analytics can streamline gathering and validating segment data, particularly for companies with complex structures[5][6].

To sum up, segment disclosures provide a window into the inner workings of a company’s operations, revealing performance and risks at a granular level. They help investors see beyond aggregate numbers and make more informed decisions. Recent regulatory updates have raised the bar for transparency, especially around segment expenses and interim reporting. Whether you’re an investor trying to analyze a company or a financial professional preparing reports, understanding segment disclosures is vital for unlocking the full story behind the financial statements.

In practice, when you review a company’s financial report, look beyond the headline revenue and profit figures. Dive into the segment notes to see how different parts of the business are performing, what costs are driving those results, and how management views its own operations. This approach can uncover opportunities and risks that might otherwise remain hidden. And if you’re involved in preparing these disclosures, embrace the management approach fully and ensure your segment data tells a clear, consistent story aligned with how your company makes decisions. The clarity and insight that come from well-prepared segment disclosures benefit everyone—from management and investors to regulators and analysts.