The SEC Division of Corporation Finance has a filing review process to monitor and enhance compliance by registrants with applicable disclosure and accounting requirements. Under this process, the SEC Staff reviews registrants’ periodic reports and issues comment letters to registrants. One area of frequent comment by the Staff is segment reporting under generally accepted accounting principles (“GAAP”).
In November 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which was intended to improve reportable segment disclosures by public companies. ASU 2023-07 amended and significantly expanded what is required to be disclosed under FASB Accounting Standard Codification Topic 280 (the “Segment Reporting Standard”). Among other things, ASU 2023-07 requires companies to disclose segment expense information based on what the chief operating decision maker (CODM) deems to be material and introduces a disclosure principle based on the significant segment expense categories regularly provided to the CODM and included in the reported measure or measures of segment profit or loss. Companies are also required to disclose the nature of the expense information that the CODM uses to manage segment operations. Additionally, for public companies that only have one reportable segment, in addition to the existing segment disclosures called for under the Segment Reporting Standard, they must provide the same disclosures that are required for companies with multiple segments. ASU 2023-07 became effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
Commencing in 2025, the SEC Staff has begun issuing comment letters that address companies’ compliance with the new disclosure requirements of ASU 2023-07. Below is a discussion of some of the significant or recurrent issues raised to date in the Staff comment letters, with links to the cited comment letters.
Are you reconciling the total of the segments’ amounts for the measure of profit or loss to consolidated income before taxes?
The Staff has reminded registrants that GAAP requires such a reconciliation, and that the reconciliation should include a single amount for the subtotal of the reportable segments’ measures of profit or loss with a reconciliation of that amount to consolidated income before income taxes. The companies that received this comment from the Staff, including for example AMC Networks and Guess Inc. (among others), agreed to provide the required reconciliation in future filings.
How does your Chief Operating Decision Maker (“CODM”) use the segment performance measure?
The Staff has reminded registrants that ASU 2023-07 requires disclosure of the CODM’s title and position, as well as an explanation of how the CODM uses each reported measure of profit or loss. The Staff issued comments to two registrants (ACV Auctions and Huntsman Corp.) that had failed to disclose how their CODM uses the segment performance measure. A correction simply requires an additional sentence or two in the segment footnote, which the companies agreed to provide on a going forward basis.
Single segment registrants: are you sure you don’t really have multiple segments?
Compliance with the Segment Reporting Standard requires an analysis of the registrant’s operating segments and reporting segments. Operating segments reflect how an entity manages its business (e.g., by products and services or geographically). Important aspects of an operating segment include that it has available financial information and its operating results are regularly reviewed by the CODM. Each operating segment may become a reportable segment if it meets certain size thresholds included in the Segment Reporting Standard (e.g., 10% of combined segment revenues). Two or more operating segments also may be combined for this purpose if they are sufficiently similar in certain characteristics listed in the Segment Reporting Standard (e.g., nature of products and services, production processes or customers). Many registrants have determined that they operate only one reportable segment.
Registrants that have determined that they have a single reportable segment sometimes receive a comment from the staff challenging that determination. Historically, this has been one of the most frequent topics for comments on segment reporting. Occasionally the Staff will request to see the reports that the registrant provides to the CODM to understand how management evaluates segment performance. Responding to such comments requires a detailed analysis of the application of the Segment Reporting Standard, which analysis is fact-specific for each registrant.
GXO Logistics and SFL Corporation (among others) received such a comment this year (questioning the determination that the company had a single operating segment) and provided an analysis in response supporting the determination, apparently to the satisfaction of the Staff. In addition, Atlanticus Holdings, which had two reportable segments, was able to support the aggregation of two of its operating segments into one reportable segment.
Have you provided the new required information on significant segment expenses and other segment items?
ASU 2023-07 added a requirement to disclose significant segment expenses by segment if they are regularly provided to the CODM and included in each reported measure of segment profit or loss. In addition, ASU 2023-07 added a requirement to disclose an amount of “other segment items,” which is calculated as the difference between reported segment revenues and the significant segment expenses, less the reported measure of segment profit or loss. The registrant also must include qualitative disclosure describing the composition of the other segment items.
Historically, GAAP had few segment disclosure requirements for registrants that had only a single reportable segment. ASU 2023-07 added disclosure requirements for registrants with a single reporting segment, including the significant segment expenses and other segment items as described above.
The Staff has challenged some registrants on the lack of disclosure of significant segment expenses and other segment items. For instance, Signet Jewelers and Huntsman Corp. agreed to provide additional disclosure of such items. WK Kellogg agreed to add a statement that the expenses provided to the CODM were consistent with the consolidated statement of income and that no additional expense information for its single operating segment was provided to the CODM. GoDaddy Inc. agreed to add clarification that the CODM uses consolidated expense information to manage operations and is not regularly provided with disaggregated expenses for each of the segments.
ASU 2023-07 also added a requirement to include the new significant segment expense and other segment items disclosures in interim financial statements (in addition to annual financial statements). In response to a Staff comment, Voyager Technologies agreed to add such interim disclosure.
Is your segment performance measure also a non-GAAP financial measure (“NGFM”)?
It’s complicated! Prior to ASU 2023-07, the Segment Reporting Standard required registrants to disclose only one measure used by the CODM to evaluate profitability of each reportable segment. The measure would be disclosed for each segment together with a subtotal of all reportable segments’ measures. Many registrants used a measure that was different from any measure shown in the consolidated financial statements. In that instance, a reconciliation of the subtotal of segment measures to the comparable consolidated measure was required within the segment reporting footnote to the financial statements. Although such a segment performance measure is similar in concept to a NGFM, because disclosure of the segment performance measure was required under GAAP, NGFM disclosures under Item 10(e) of Regulation S-K were not required. If the registrant discussed the segment performance measure for each segment outside of the segment footnote (e.g., in the MD&A section), the segment performance measure likewise was still not treated as a NGFM for purposes of the disclosure requirements of Item 10(e). However, the Staff took the position that if the registrant disclosed the total of all of the segments’ measures outside the context of the segment footnote, then this combined measure would be a NGFM requiring all of the required non-GAAP disclosures under Item 10(e). In addition, if the registrant disclosed any additional segment measures of profitability anywhere in the filing, each of those would be treated as NGFMs, and if they were included in the segment footnote, the Staff would object because they were not provided for under GAAP. See Non-GAAP Financial Measures Compliance & Disclosure Interpretations Section 104.
ASU 2023-07 added the option to allow registrants to report multiple segment profit or loss measures for a reportable segment if the CODM uses more than one measure to assess segment performance and allocate resources. All registrants must disclose the measure used by the CODM that management believes is most consistent with GAAP measurement principles. For registrants that choose to report multiple measures of profit or loss for a segment, any additional measures of profit or loss reported for the segment that are not GAAP measures will be treated by the Staff as NGFMs that must be accompanied by requisite non-GAAP disclosures under Item 10(e), because such additional measures are permitted but not required under GAAP. See Center for Audit Quality Joint Meeting with SEC Staff (3/5/25).
In recent comment letter correspondence, AMC Networks and Tyler Technologies, Inc. agreed to remove additional measures of profit or loss from the segment note to the financials where the filing did not include the required NGFM disclosure for those measures. In addition, Dana Incorporated and Guess, Inc. agreed to remove the total of reportable segments’ measure of profit and loss from its disclosure outside of the segment footnote.
Conclusion
We expect segment disclosure to continue to be an area of focus for the SEC Staff, with comments reflecting increasing scrutiny of registrants’ compliance with ASU 2023-07. We recommend registrants review carefully their segment disclosures to ensure such compliance.
