Decoding and comparing segment disclosures in financial statements is a crucial skill for investors and analysts looking to gain a deeper understanding of a company’s performance and strategic direction. With the Financial Accounting Standards Board (FASB) introducing new requirements through Accounting Standards Update (ASU) 2023-07, there’s never been a more important time to master this skill. This update enhances transparency by requiring more detailed disclosures about segment expenses, even for companies with a single reportable segment. Let’s break down the process into four practical steps that will help you accurately benchmark your competitors in 2025.
Understanding segment disclosures is essential because it allows you to see a company through the eyes of its management. Segment reporting is based on the “management approach,” which means it reflects how the company organizes itself internally to make operational decisions and assess performance. This approach is designed to provide investors with insights into the company’s operations and future cash flow prospects. For instance, if a company has multiple business segments, such as retail and manufacturing, segment disclosures will show how each segment contributes to the overall revenue and profitability of the company.
To begin decoding segment disclosures, you need to identify the reportable segments of the companies you are analyzing. This involves looking at the company’s annual and interim financial statements to find the segments that management considers significant. For example, a company might have segments like North America, Europe, and Asia-Pacific if these regions are deemed important for operational decisions. The new ASU 2023-07 requires that even companies with a single reportable segment provide detailed disclosures, including significant segment expenses and other segment items. This means that even if a company operates primarily in one segment, you will still get valuable insights into its internal financial reporting measures.
Once you’ve identified the reportable segments, the next step is to analyze the disclosures provided for each segment. This includes examining revenues, profit or loss measures, and assets. The ASU 2023-07 also introduces the requirement to disclose significant segment expenses, which can give you a better understanding of how costs are allocated across different segments. For instance, if a segment shows high revenue but low profitability, it might indicate high operational costs. Additionally, the ASU allows companies to disclose multiple measures of segment profit or loss if these measures are used by the chief operating decision maker (CODM) to evaluate performance and allocate resources.
To compare segment disclosures effectively, you need to ensure that you are comparing apples to apples. This means aligning the disclosures of different companies based on similar metrics and timeframes. For example, if you are comparing two companies in the same industry, you should ensure that both companies are reporting their segment data in a similar manner. The ASU 2023-07 enhances interim reporting requirements, which means that companies will now provide more detailed segment information during interim periods as well. This will help you get a more consistent picture of a company’s performance throughout the year.
Finally, to make your analysis actionable, you should consider how the segment disclosures align with the company’s overall strategy and market position. For example, if a company is investing heavily in a new segment, you might expect to see increased expenses initially but potentially higher returns in the future. By understanding these strategic moves, you can better assess the company’s competitive position and future prospects. Additionally, comparing the segment disclosures of different companies can help you identify trends and opportunities in the market that might not be immediately apparent from consolidated financial statements alone.
In practice, let’s say you’re analyzing two tech companies, each with segments focused on software and hardware. By comparing their segment revenues and profit margins, you can identify which company is performing better in each segment. If one company’s software segment is generating higher margins than the other’s, it might indicate stronger competitive positioning or more efficient operations. This kind of analysis can inform investment decisions or strategic business moves.
In conclusion, decoding and comparing segment disclosures in 2025 requires a deep understanding of the new reporting requirements and a strategic approach to analysis. By following these four steps—identifying reportable segments, analyzing segment disclosures, ensuring comparability, and integrating strategic insights—you can gain a more nuanced view of a company’s performance and make more informed decisions. As the financial reporting landscape continues to evolve, mastering these skills will become increasingly important for anyone looking to stay ahead in the world of finance.