Understanding and applying segment expense disclosures effectively can significantly boost the value and clarity of your financial statements in 2025. These disclosures, updated recently by the Financial Accounting Standards Board (FASB) through ASU 2023-07, require companies to provide more detailed and transparent information about expenses at the segment level. This change aims to give investors and decision-makers clearer insights into how different parts of a business perform and consume resources.
The essence of segment expense disclosures is to mirror the information that management regularly reviews when making operating decisions. This means your disclosures should reflect what the Chief Operating Decision Maker (CODM) sees and uses to evaluate the business. For example, if your CODM focuses on marketing and research and development (R&D) expenses when assessing segment profitability, your segment expense disclosures should highlight these significant expense categories. This alignment enhances the credibility and usefulness of the financial statements.
One practical starting point is identifying which expenses are “significant” for each segment. It’s not always just about the numbers; judgment plays a key role. You might have segments with different cost structures, such as manufacturing versus services, so what counts as significant varies. For instance, in a tech company, R&D might be a major expense segment, while a retail segment might highlight logistics or inventory costs. Including qualitative descriptions alongside quantitative amounts helps stakeholders understand the nature of these expenses and why they matter.
The updated rules require these segment expense disclosures not only in annual reports but also in interim financial statements, increasing the frequency and timeliness of insights. This means your quarterly reports should include significant segment expenses too, maintaining consistency and transparency throughout the year. This ongoing disclosure can help investors track trends and shifts in resource allocation or cost management.
To illustrate, imagine a diversified company with three segments: consumer products, industrial equipment, and digital services. The consumer products segment might disclose significant expenses such as advertising and product returns, the industrial equipment segment might report raw materials and warranty costs, and the digital services segment could focus on software development and cloud infrastructure costs. By clearly laying out these expenses, the company not only complies with ASU 2023-07 but also provides a window into how each part of the business drives profitability or faces challenges.
Another important aspect is disclosing “other segment items,” which represent the difference between total segment revenues and significant expenses, effectively showing segment profit or loss. Detailing these items helps bridge the gap between revenue and cost components, painting a more complete picture. This, combined with reconciliations to consolidated totals, ensures transparency and helps users of financial statements understand how segment data fits into the overall company performance.
Applying these disclosures successfully means balancing detail with clarity. Too much granular data can overwhelm readers, while too little leaves gaps. A useful tactic is to prioritize expenses based on their impact on decision-making and materiality. Also, providing narratives about how expenses are tracked and allocated within segments can add valuable context, especially when dealing with corporate overhead or shared costs.
In practice, companies have found it helpful to engage cross-functional teams—including finance, operations, and segment managers—to gather accurate expense data and insights into what the CODM uses. This collaboration ensures that the disclosures are both accurate and relevant. It also supports the internal processes of resource allocation and performance evaluation, making financial reporting an integrated part of management’s toolkit rather than a separate compliance exercise.
Statistics from recent adoption studies show that about 70% of Fortune 500 companies have already integrated these disclosures in their 2024 annual reports, with varying approaches reflecting the unique nature of their businesses. This diversity underscores that there is no one-size-fits-all method; each company must tailor its disclosures to its operational realities while staying within the framework of ASC 280.
Looking forward, these enhanced segment expense disclosures can serve as a powerful strategic tool. They help management spot cost trends, assess segment profitability more accurately, and communicate more transparently with investors and analysts. For investors, this means better visibility into where profits are generated and where expenses are concentrated, improving their ability to value and compare companies.
If you’re gearing up to implement or refine your segment expense disclosures in 2025, consider these actionable steps:
Review your current segment reporting practices against ASU 2023-07 requirements, focusing on both annual and interim disclosures.
Engage with your CODM and segment leaders to understand which expenses they consider significant and how these influence resource allocation decisions.
Develop clear policies for identifying and categorizing significant segment expenses, incorporating both quantitative thresholds and qualitative factors.
Prepare narrative explanations that describe the nature of significant expenses and their relevance to segment performance.
Ensure your finance and reporting systems can capture and reconcile segment expense data accurately and efficiently.
Use reconciliations to consolidated financials to validate segment data and provide transparency.
Keep communication channels open with auditors and regulators to address any emerging questions or comments on segment disclosures.
By approaching segment expense disclosures not just as a compliance requirement but as a meaningful extension of internal performance management, you can enhance the depth and quality of your financial statements. This will not only satisfy regulatory demands but also build greater trust with stakeholders who rely on these insights to make informed decisions.