Preparing and interpreting segment reporting disclosures is a crucial part of financial reporting, especially under the new 2025 financial statement standards. These disclosures provide investors and analysts with valuable insights into a company’s various business segments, helping them understand how each contributes to the overall financial performance and long-term prospects. With the introduction of Accounting Standards Update (ASU) 2023-07 by the Financial Accounting Standards Board (FASB) in November 2023, public companies are now required to disclose more detailed segment-level financial data, including significant segment expenses and other segment-related metrics. This update aims to enhance transparency and meet growing investor demands for more granular information.
Understanding segment reporting is not just about compliance; it’s about providing stakeholders with a clear picture of where value is being created and how resources are allocated across different business units. This is particularly important for companies diversifying into new markets or business streams. By offering detailed financial insights, segment reporting helps investors assess the effectiveness of these strategies and whether they contribute to sustainable growth. For instance, if a company is expanding into a new geographic region, segment reporting can reveal how this expansion impacts profitability and resource allocation.
Identifying Reportable Seggments #
The first step in preparing segment reporting disclosures is identifying which segments are reportable. A reportable segment is typically defined as a component of an entity that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with other components of the same entity. To be considered reportable, a segment must meet certain criteria, such as generating revenues of at least 10% of the combined revenues, internal and external, of all operating segments or having a reported profit or loss of at least 10% of the greater of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that reported a loss[2][5].
For example, if a company operates in both the technology and retail sectors, each sector would be considered a reportable segment if it meets the aforementioned criteria. This means that financial information for each sector would need to be disclosed separately, providing a clearer picture of how each contributes to the company’s overall financial health.
Preparing Segment Reporting Disclosures #
Once reportable segments are identified, the next step is preparing the disclosures. Under ASC 280, as updated by ASU 2023-07, public companies must provide detailed segment-level financial data, including revenue, profit or loss, and assets for each reportable segment. Additionally, they must disclose significant segment expenses, which are determined based on what the chief operating decision maker (CODM) deems material. This could include expenses related to research and development, marketing, or operational costs specific to each segment[3][6].
For instance, if a company has a technology segment with significant research and development expenses, these expenses would need to be disclosed separately for that segment. This provides investors with a clearer understanding of how resources are being allocated to drive innovation and growth in that area.
Interpreting Segment Reporting Disclosures #
Interpreting segment reporting disclosures involves analyzing the financial performance of each business segment to understand its contribution to the company’s overall financial health. Investors and analysts can use this information to identify areas of strength and weakness, assess the effectiveness of strategic decisions, and evaluate potential risks associated with individual segments.
For example, if a company’s retail segment shows a decline in profitability, while its technology segment is experiencing rapid growth, this information can help investors understand the strategic importance of each segment and how resources are being reallocated to support growth areas.
Practical Advice for Implementation #
Implementing the new segment reporting standards requires careful planning and coordination. Here are a few practical tips for companies:
Identify the CODM: Clearly define who the CODM is and ensure that their perspective is integrated into the segment reporting process. This is crucial because the CODM’s view determines which expenses are considered material and thus disclosed[6].
Align with GAAP: Ensure that at least one of the disclosed profit or loss measures aligns with GAAP. This helps maintain consistency and comparability across different segments and companies[9].
Enhance Transparency: Provide detailed qualitative and quantitative information about each segment’s performance. This includes explaining how the CODM uses the disclosed measures of segment profit or loss to manage segment operations[6].
Prepare for Recasting: If there are changes in the composition of reportable segments, be prepared to recast prior period segment information for comparability[2].
Challenges and Opportunities #
The new standards present both challenges and opportunities for companies. On one hand, preparing detailed segment-level financial data requires significant resources and may increase reporting complexity. On the other hand, enhanced transparency can build investor confidence and support sustainable growth by providing stakeholders with a clearer understanding of how each business segment contributes to overall performance.
For instance, companies that are diversifying into new markets can use segment reporting to demonstrate the strategic value of these new ventures. By providing detailed insights into how these new segments are performing, companies can attract investors who are interested in growth opportunities.
Conclusion #
Preparing and interpreting segment reporting disclosures under the new financial statement standards requires a deep understanding of the updated requirements and a strategic approach to implementation. By providing detailed financial insights into each business segment, companies can enhance transparency, build investor confidence, and support sustainable growth. Whether you’re an investor looking to understand a company’s strategic direction or a business leader seeking to optimize resource allocation, segment reporting is a powerful tool that offers valuable insights into the performance and potential of each business segment.