Navigating the new FASB Accounting Standards Update (ASU) 2023-07 can feel like trying to decode a complex puzzle, especially when it comes to segment disclosures in your 2025 financial statements. But understanding and preparing for these changes doesn’t have to be overwhelming. This update, effective for fiscal years starting after December 15, 2023, and interim periods beginning after December 15, 2024, fundamentally reshapes how public companies disclose segment information, aiming to give investors a clearer picture of a company’s financial health and decision-making processes[1][2].
So, what exactly does ASU 2023-07 change, and how can you prepare and analyze the new segment footnote with confidence? Let’s break it down in a straightforward way, with practical examples and tips you can apply right away.
At the heart of ASU 2023-07 is the significant expense principle. Previously, companies disclosed segment revenues, profits or losses, and assets, but detailed information about segment expenses was often sparse. Now, companies must disclose significant segment expenses regularly provided to the chief operating decision maker (CODM), the individual or committee responsible for resource allocation decisions[1][3][5]. This change responds directly to investor requests for more transparent, decision-useful information.
Imagine a company with three reportable segments: Consumer Products, Industrial Equipment, and Digital Services. Under the new standard, each segment must disclose not only revenue and profit but also significant expenses like raw materials, labor costs, or research and development expenses, if these are regularly reviewed by the CODM. For example, if the CODM reviews labor costs as a key expense in Digital Services but not in Consumer Products, only Digital Services needs to disclose labor costs in the segment footnote. This emphasis on how the CODM views and manages expenses adds a layer of substance over form, requiring companies to exercise judgment based on their internal management practices[2].
One practical step in preparing for this is to conduct a detailed internal review of what segment expense information the CODM regularly uses. Pulling together this data might require collaboration between finance, segment managers, and the executive team. Documenting these discussions ensures your disclosures reflect how the business is truly managed and can stand up to auditor and SEC scrutiny. Remember, the goal is transparency about how the CODM assesses segment performance, which investors value highly.
Another important change is that single reportable segment entities now must provide the same comprehensive segment disclosures as companies with multiple segments. Historically, these companies provided fewer disclosures, but under ASU 2023-07, they must disclose significant segment expenses, other segment items, the CODM’s title or name, and how the CODM uses segment profit or loss measures[3][4]. This levels the playing field and enhances comparability across companies.
For example, a tech startup with only one reportable segment, “Software Solutions,” will now need to disclose the major expense categories the CODM tracks, such as cloud infrastructure costs or customer support expenses. They must also identify the CODM, which could be the CEO or a management committee, and explain how segment profit is used in decision-making. This added clarity helps investors understand the company’s operational priorities.
The ASU also requires that companies disclose the title and position of the CODM and explain how the CODM uses the disclosed segment profit or loss measures to make decisions[1][3]. This might sound like a small detail, but it adds valuable context, giving investors insight into the governance and management approach behind the numbers. When preparing your footnote, be sure to include a clear statement about who the CODM is and how their role influences the segment reporting measures.
Interim period disclosures also see enhancements. Previously, some segment disclosures were only annual, but ASU 2023-07 extends many of these requirements to interim reports starting in fiscal years after December 15, 2024. This means your quarterly filings must reflect the same level of transparency as the annual report, which requires early coordination in your reporting calendar and systems[1][2][5].
The standard also permits the disclosure of more than one measure of segment profit or loss under certain conditions, which can be helpful if the CODM uses multiple metrics for different purposes. For instance, a company might disclose both operating income and adjusted EBITDA for a segment if these metrics provide complementary insights into performance. However, these disclosures must be consistent and accompanied by explanations to avoid confusing users of the financial statements[1][2].
To help illustrate these principles, consider a manufacturing company that reports segments for Automotive, Aerospace, and Energy. The CODM tracks operating income as the primary profit measure but also looks at segment-adjusted EBITDA for internal performance reviews. Under ASU 2023-07, the company can disclose both measures for each segment, explaining that operating income is used for external reporting while EBITDA supports internal budgeting and incentive compensation. This dual disclosure supports investor understanding and aligns with management’s decision-making[2].
When it comes to analyzing the new segment footnote, look beyond the headline numbers. The enhanced disclosures provide richer detail about where costs are incurred and how resources are allocated across segments. For example, if a segment’s significant expenses are growing faster than revenues, it could signal margin pressure or operational challenges worth investigating. Conversely, a segment with stable or declining significant expenses relative to revenue might indicate efficiency improvements or successful cost management.
Another tip is to pay attention to the CODM’s description and the rationale for selecting particular expense categories. This narrative can reveal management’s focus areas and strategic priorities. For instance, if R&D expenses are highlighted as significant in a tech company’s segment disclosure, it signals investment in innovation that might drive future growth.
From a compliance perspective, companies should ensure their segment footnotes are well documented and internally reviewed before filing. The SEC has emphasized the importance of these disclosures and has been active in commenting on segment reporting practices, so robust internal controls and audit trails are essential[4]. Early engagement with auditors and legal counsel can help identify any gaps or risks.
For companies preparing their 2025 financial statements, here are some actionable steps:
Identify the CODM and document their regular reporting packages, focusing on which expenses are considered significant for each segment.
Review and update internal accounting and reporting systems to capture and aggregate significant segment expenses consistently across reporting periods.
Train finance and segment leaders on the new disclosure requirements to ensure clear, consistent communication and data gathering.
Prepare narrative disclosures explaining how the CODM uses segment profit or loss and the rationale for significant expenses included.
Coordinate with auditors early to align on interpretation and presentation of the new disclosures, reducing the risk of last-minute changes.
Plan for interim disclosures by integrating segment expense data into quarterly reporting processes well ahead of time.
In summary, ASU 2023-07 reflects a meaningful evolution in segment reporting, emphasizing transparency around significant expenses and management’s decision-making lens. While it introduces new work, it also offers a chance to tell a more detailed story about your business’s segments and how management drives performance. By approaching the update thoughtfully and proactively, you can turn these requirements into an advantage that builds investor confidence and supports strategic insights.
Remember, the key is to focus on how your CODM views and manages the business, not just the numbers themselves. That perspective will guide you in preparing disclosures that are both compliant and genuinely useful for financial statement users.