In November 2023, FASB issued updates on segment reporting. The amendment was designed to “improve reportable segment disclosure requirements, primarily through enhanced disclosures” in segment expenses. The purpose of the update is to enable investors to have a clear understanding of an entity’s performance and assess its cash flows. The board noted that although segment information on an entity’s revenue, profit, and loss are often disclosed on a company’s financial statements under the current requirements, there is limited information on an entity’s expenses. Therefore, investors supported enhanced disclosures on significant costs. FASB issued an update to improve disclosures regarding an entity’s reportable segment to meet the investors’ needs. Segment reporting breaks down an entity’s operations into manageable operation segments. While the consolidated financial statements provide an overall outlook of a company’s financial health and prospects, they do not give insight into the segmented operations of an entity. Segment reporting aims to increase transparency for investors and lenders, particularly on critical operational units of an entity.
The amendment on segment reporting affects all public entities. The update requires all public entities to disclose significant expenses separately, including all amounts provided to the chief operating decision maker. If the entity does not separately report significant expenses, it is required to explain the amount and qualitative nature of the expense information. Segment reporting on expenses will assist accountants in promoting transparency. The updated requirements allow segments to be measured and discussed on a segment-to-segment basis outside the required consolidated financial statements. Segment information is prepared under the management approach in that segment information depends on how management internally organizes the segments, allocates resources, and assesses performance within public entities. For accountants, the data on segment information helps them better understand responsibilities related to parties in assessing performance and allocating resources (Jiang & Lin, 2017). Improved segment reporting will assist in analyzing sources and drivers of segment revenues, expenses, and assets to help in the optimal allocation of resources. It also helps exploit segment strategies and align them with a company’s mission and goals.
On the other hand, segment reporting can present some challenges for accountants. It can be challenging to identify relevant segments that are comparable and consistent while complying with accounting standards. The updated accounting standards on segment reporting provide clarity on reportable segments. It requires all public entities to provide information on significant segment expenses, report amounts, and the qualitative nature of other segment expenses.
Concept statements
The primary purpose of financial accounting is to provide valuable data about an entity’s financing to internal and external stakeholders. Such information influences management’s actions that impact the company’s economic resources. Concept Statement 8 addresses the qualitative characteristics of useful financial information and redefines the concept of materiality. It also includes guidance on the differences between materiality and relevance, evaluation of the omission of information, and guidance on who can judge materiality (FASB, 2018). The board decided that materiality would be decided by individuals with knowledge of the entity’s facts and conditions. As a basis for accountants’ or auditors’ opinions, the concept of materiality is helpful in determining whether omission or misstatement of information in a financial report is useful for making decisions. The concept of materiality is, therefore, fundamental to financial accounting and reporting.
References
FASB (2018). Conceptual Framework for Financial Reporting Chapter 3, Qualitative Characteristics of Useful Financial Information Amendments to Statement of Financial Accounting Concepts No. 8. https://www.fasb.org/standards/concept-statements
FASB (2023). Accounting Standards Update: Segment Reporting (Topic 280). https://www.fasb.org/standards/accounting-standard-updates
Jiang, X. & Lin, L. (2017). Improving internal control over segment reporting. Journal of Accountancy, 1. https://www.journalofaccountancy.com/issues/2017/nov/improve-internal-control-over-segment-reporting.html
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