Getting ready for the ASU 2023-071 segment expense disclosures in your 2025 financial reporting may feel daunting at first, but with the right approach, it becomes manageable and even an opportunity to enhance your financial transparency. ASU 2023-07, issued by FASB in November 2023, fundamentally changes how public entities disclose segment information, especially around significant expenses at the segment level. Since these changes took effect for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024, companies reporting their 2025 financials will be fully expected to comply with these updated requirements.
First, it’s crucial to understand what ASU 2023-071 demands. The update introduces the significant expense principle, which means companies must disclose expense categories and amounts for each reportable segment that are:
- Regularly provided to the chief operating decision maker (CODM),
- Included in the segment’s reported profit or loss measure,
- Considered significant by management.
This is a shift from prior guidance that focused mainly on revenues, profit or loss, and assets by segment. Now, companies must dig deeper into segment expenses and provide more detailed disclosure to help users of financial statements better understand the drivers behind segment profitability[1][2][3][4].
To prepare effectively for these disclosures in 2025, start by reviewing your internal reporting processes. The key is to ensure that segment-level expense data is accurate, complete, and regularly communicated to the CODM. This means your finance team should collaborate closely with segment managers and the CODM to identify which expense categories are tracked and reviewed consistently. For example, if your CODM regularly reviews marketing, research & development, and administrative expenses by segment, these categories are candidates for significant expense disclosures if they meet your significance thresholds[1][2].
Determining which expenses are significant requires both qualitative and quantitative assessment. Quantitatively, many companies set a threshold (e.g., expenses representing a certain percentage of segment profit or total segment expenses) to flag significance. Qualitatively, consider the nature of the expense—some categories might be crucial for understanding the segment’s economics even if they are not large in absolute terms. For instance, legal settlements or restructuring costs might be significant despite their size because they affect segment operations or profitability materially[2][4].
Once you identify significant segment expenses, document your assessment process carefully. This documentation will be invaluable for audit purposes and for addressing SEC or other regulator inquiries, as the SEC has shown active interest in segment reporting compliance and often comments on the adequacy of these disclosures[5].
An important practical step is to update your financial reporting templates and systems. Your reporting software should be able to capture and present segment expenses by category according to the new requirements. Since these disclosures apply both annually and in interim periods starting with 2025 interim reports, automation and consistency are key to avoiding last-minute scrambles. Consider running parallel reporting in late 2024 to iron out any issues before your first fully compliant 2025 reports[2][4].
Also, remember that single-segment companies are no longer exempt from these enhanced disclosures. They must provide the same level of segment expense detail as companies with multiple segments. If your entity falls into this category, you’ll need to broaden your disclosure scope beyond the previous entity-wide focus[3][5].
Another practical tip is to clearly identify and disclose the CODM—the individual or group responsible for segment decision-making—and describe how the CODM uses the segment profit or loss measures. This transparency helps users understand the basis for your segment reporting and expense disclosures[3][5].
Let’s put this into a simple, real-world example: Suppose you run a company with three reportable segments—Consumer Products, Industrial Equipment, and Services. The CODM regularly reviews segment profit and loss reports that include expenses like cost of goods sold, selling expenses, and general administrative costs by segment. After quantitative and qualitative review, you find that selling expenses and administrative costs are significant for the Consumer Products and Industrial Equipment segments but not for Services. You would then disclose those significant expenses by segment in your 2025 filings, explaining how these expenses impact segment profitability and how the CODM uses this information to manage performance.
You might be wondering about the level of granularity needed. The ASU does not prescribe an exact number of expense categories to disclose; instead, it emphasizes management’s judgment based on what is regularly provided to the CODM and what is significant. This means your disclosures should reflect how your business operates internally and how management views segment performance. This flexibility, while helpful, means companies should be prepared to explain their judgment and methodology clearly[2][4].
From a broader perspective, adopting these changes is not just about compliance—it’s also a chance to enhance your company’s financial storytelling. Detailed segment expense disclosures provide investors and other stakeholders with a more nuanced view of where costs arise and how they affect profitability. This transparency can build trust and potentially improve your company’s valuation[1][6].
In preparing your team, consider training finance staff and segment managers on the new requirements and the importance of consistent data collection. It’s also wise to engage your auditors early in the process to align expectations and address any concerns about the sufficiency of your disclosures. Many companies found value in conducting mock audits or dry runs of the new disclosures before their first required filings under ASU 2023-07[2][4].
To sum up, preparing for the ASU 2023-071 segment expense disclosures involves:
- Understanding the significant expense principle and its criteria,
- Collaborating internally to identify and collect segment expense data regularly provided to the CODM,
- Applying qualitative and quantitative judgment to determine significance,
- Updating reporting systems and templates for annual and interim disclosures,
- Including single-segment entities in scope,
- Disclosing the CODM’s identity and how segment profit/loss measures are used,
- Documenting your processes and judgments thoroughly,
- Training your team and engaging auditors proactively.
By taking these practical steps, you’ll not only meet regulatory expectations for your 2025 financial reporting but also provide richer insights into your business’s segment performance that benefit both internal decision-making and external stakeholders.