Preparing for FASB’s 2025 segment expense disclosures is crucial for public companies aiming to meet the new transparency requirements without scrambling at the last minute. The recent Accounting Standards Update (ASU) 2023-07, effective for fiscal years beginning after December 15, 2023, and interim periods starting after December 15, 2024, introduces important changes to how segment expenses must be reported. This article offers a practical guide to help you implement these changes smoothly, with actionable steps and real-world examples.
First, it’s important to understand what the new disclosure rules entail. The FASB now requires public entities to disclose significant segment expenses for each reportable segment. These are expenses that are material to the segment’s profit or loss and are regularly reported to the chief operating decision maker (CODM). This means you can no longer lump all expenses into broad categories without further breakdown. Instead, you must identify and report the specific expenses the CODM uses to evaluate segment performance, including direct costs, shared expenses, allocated corporate overhead, or even interest expense if they are regularly reviewed at the segment level[1][2][3].
The first step in preparation is to review how your internal reporting aligns with the CODM’s decision-making process. Since the ASU emphasizes the “substance over form” principle, your disclosures should reflect the actual expense information that the CODM relies on—not just what’s on the ledger. For example, if your CFO reviews segment profitability using an internal management report showing marketing and R&D expenses separately, your segment disclosures should reflect those categories, even if they are combined in your general ledger[2][5].
To implement this, start by mapping out the expense categories currently tracked at the segment level. Engage your finance team and CODM to understand which costs are considered significant. It helps to run a materiality analysis: identify which expense lines consistently represent a substantial percentage of segment profit or loss. For instance, if your technology segment regularly incurs large software licensing fees and support costs reviewed by the CODM, these should be disclosed separately.
Once you identify significant segment expenses, you’ll need to enhance your disclosure narratives. The ASU requires not only quantitative data but also explanations of how the CODM uses the disclosed measures. This means going beyond numbers to describe the role these expenses play in managing segment performance. A practical approach is to include management commentary on budgeting, forecasting, or operational decisions influenced by these expense categories. For example, if the CODM focuses on controlling logistics costs to improve segment margins, describe this focus in your disclosures[3][5].
Because the new rules apply to both annual and interim reporting periods, start updating your reporting processes early. Interim disclosures require the same level of detail, so your systems must be capable of producing accurate segment expense information quarterly. Automating data collection and reconciliation between segment reports and your general ledger will reduce errors and save time. Investing in robust financial reporting software or enhancing your existing ERP system to capture segment-specific expenses can be a game changer.
If your company has only one reportable segment, don’t overlook the changes. ASU 2023-07 removes previous exemptions for single-segment entities, meaning you must provide the same detailed segment expense disclosures as multi-segment companies[3][5]. This might feel like extra work, but it’s an opportunity to offer investors clearer insights into your cost structure and operational efficiency.
As you prepare, keep an eye on the SEC’s comments and feedback. Since segment reporting has been a frequent area of scrutiny, the SEC staff has issued guidance emphasizing compliance with the new disclosure requirements. They expect disclosures that are consistent, clear, and aligned with how the CODM manages the business[5]. Incorporating their insights early can help avoid costly comment letters later.
A useful tip is to conduct a mock disclosure review internally before your first filing under the new standard. Gather a cross-functional team—finance, legal, investor relations—and walk through your draft disclosures. This helps identify gaps or unclear explanations. You might discover, for example, that your expense categories need further granularity or that your narrative doesn’t fully explain the CODM’s use of the data. Adjusting these details upfront can streamline audit reviews and boost stakeholder confidence.
Lastly, document your judgments and methodologies thoroughly. Since the ASU requires judgment in determining what constitutes a significant expense, having clear documentation supports transparency and audit readiness. This includes how you decided which expenses to disclose, the nature of the expense information provided to the CODM, and any changes made in response to the new rules.
In summary, preparing for FASB’s 2025 segment expense disclosures involves:
Understanding the significant expense principle and how it applies to your segments
Aligning disclosures with the CODM’s actual expense reporting and decision-making processes
Identifying and materializing significant segment expenses through detailed analysis
Enhancing narrative disclosures to explain how expense data informs segment management
Updating systems and processes for accurate and timely quarterly reporting
Extending disclosures to single-segment entities with the same rigor as multi-segment companies
Monitoring SEC guidance and conducting internal reviews to ensure compliance
Thoroughly documenting judgments and methodologies behind your disclosures
Taking these steps not only ensures compliance with the new FASB standards but also improves the transparency and usefulness of your financial reporting. This can strengthen investor trust and provide management with clearer insights to drive business performance. The key is to start early, engage the right people, and treat the transition as an opportunity to sharpen your financial communication rather than just a compliance hurdle.
If you approach it thoughtfully, preparing for the 2025 segment expense disclosures can become a valuable part of your financial storytelling toolkit, making your reports more informative and your management decisions more data-driven.