Preparing for and implementing the new segment expense disclosures under ASU 2023-07 requires a thoughtful and proactive approach, especially as the effective dates have already begun for public companies with fiscal years starting after December 15, 2023, and interim periods after December 15, 2024. If you’re gearing up for compliance in 2025, understanding what the update demands and how to integrate these changes into your reporting processes is crucial.
At its core, ASU 2023-07 updates ASC 280 to improve transparency by requiring public companies to disclose significant segment expenses that the chief operating decision maker (CODM) uses to evaluate segment performance. This means companies must now provide more granular data on expenses within each reportable segment, not just revenue and profit or loss figures. These disclosures must be included in both annual and interim financial statements, with retrospective application to prior periods presented[2][3].
First things first: the definition of significant expenses is key. The ASU emphasizes judgment—both qualitative and quantitative—in determining which segment expenses are significant. These are expenses regularly reviewed by the CODM when assessing segment profitability. For example, a manufacturing company might identify raw materials, labor costs, and depreciation as significant expenses for its product segments, whereas a service company might highlight personnel costs and technology expenses. It’s not one-size-fits-all; your internal reporting must align with how management actually reviews and allocates resources[3][4][6].
To prepare effectively, start by mapping your internal reporting processes to the new disclosure requirements. Make sure your financial systems can capture and segregate significant expenses by segment consistently. This might involve collaborating closely with your accounting, finance, and operations teams to update data collection methods. For example, if your CODM reviews marketing expenses at the segment level, ensure these costs are tracked and reported accordingly. This alignment avoids surprises during audits and SEC reviews[4][5].
Another important step is evaluating the composition of “other segment items.” ASU 2023-07 requires companies to disclose amounts for other segment items, which represent the difference between segment revenue and the significant expenses disclosed. This disclosure provides clarity on how segment profit or loss is calculated. Be ready to break down this category so that users of your financial statements can understand what’s included and excluded[2][6].
For companies with multiple segments, the complexity increases. You’ll need to disclose various measures of segment profit or loss, ensuring they reflect the way the CODM manages and reviews the business. This might mean revisiting segment definitions or performance metrics to maintain consistency and transparency. Companies have reported a wide variety in how many and which expenses are identified as significant, even among peers in the same industry, so benchmarking can help but tailor your disclosures to your facts and circumstances[3][4].
Don’t overlook the retrospective application aspect. The ASU requires applying these new disclosures to prior periods presented, which means you may need to restate segment disclosures for comparative years. This can be resource-intensive but is essential for compliance and comparability. Planning for this early—perhaps by running parallel reporting for some periods before the official adoption date—can ease the burden[3][4].
Interim reporting is another area demanding attention. ASU 2023-07 extends the enhanced segment disclosures to interim periods, such as quarterly reports. This means your teams must be prepared to produce detailed segment expense disclosures not just annually but throughout the year. Automation and robust internal controls are helpful here to ensure timely and accurate reporting[2][3][6].
From a practical perspective, engaging with your auditors early is critical. They can provide guidance on applying judgment around significant expenses and help ensure your disclosures meet SEC expectations. The SEC has signaled increased scrutiny on segment reporting, emphasizing the need for complete and transparent disclosures, including for companies with a single reportable segment[4][5].
Let’s talk about some common challenges and how to overcome them:
Identifying significant expenses: Some companies struggle with deciding which expenses qualify as significant at the segment level. To tackle this, gather input from the CODM and segment managers on which expenses drive their decision-making. Quantitative thresholds can help, but qualitative factors like the nature of expenses matter too.
Aligning internal and external reporting: Often, internal management reports differ from external disclosures. Bridging this gap requires updating reporting processes and training teams to ensure consistency in what’s reported and how it’s presented.
Data granularity and systems: Your accounting system must be capable of capturing detailed expenses by segment. If not, consider upgrades or interim manual processes while longer-term solutions are implemented.
Educating stakeholders: Prepare presentations or training sessions for management, auditors, and board members to explain the changes, their impact, and the rationale behind significant expense selections.
In terms of benefits, while the ASU introduces more disclosure complexity, it also provides an opportunity. By offering more detailed segment-level expense information, companies can demonstrate transparency, improve investor confidence, and potentially attract better capital terms. Investors appreciate understanding how resources are allocated and which costs drive segment profitability.
Here’s a quick example to illustrate:
Imagine a technology company with three segments: hardware, software, and services. Under the new rules, it identifies research and development (R&D) costs, sales commissions, and warranty expenses as significant segment expenses. For each segment, the company discloses these expenses separately, showing how much is spent on R&D in software versus hardware. It also explains “other segment items,” such as general administrative costs allocated across segments. This level of detail gives investors a clearer picture of where money is going and which segments are most resource-intensive, facilitating better investment decisions.
Statistically, early adopters in the Fortune 500 have shown a wide range in the number of significant expenses disclosed, reflecting the diversity in business models and management approaches. This variability highlights the importance of tailoring your disclosures to your company’s unique situation rather than simply mimicking peers[3].
Lastly, keep in mind that the ASU encourages ongoing evaluation. As your business evolves, so might your segment structure and the nature of significant expenses. Regularly revisit your disclosures to ensure they remain aligned with how the CODM reviews performance and makes decisions. This dynamic approach keeps your financial reporting relevant and compliant.
In summary, preparing for and implementing the new segment expense disclosures involves understanding the ASU’s requirements, aligning internal reporting with management’s views, applying judgment carefully, and ensuring timely, transparent disclosures both annually and interim. By approaching this methodically, you not only comply with regulations but also strengthen your company’s financial communication and investor relations.