On November 27, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07 (ASU 2023-07 or the “Update”), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The FASB issued ASU 2023-07 to improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses.

What ASU 2023-07 Means for Public Entities With a Single Reportable Segment

For single reportable segment entities, there is no precedence around the upcoming enhancements to segment disclosures due to the previous lack of disclosure requirements. As such, the below provides a summary of the Update with a focus on single reportable segments.

Prior to the Update, single reportable segment entities were required to apply the entity-wide disclosures from ASC 280-10-50-38; however, the Topic was silent about whether those entities were required to apply the other existing segment disclosures and reconciliation requirements on an annual or interim basis.

One of the key amendments from ASU 2023-07 is that public companies with a single reportable segment are now required to meet (1) all existing disclosure requirements of Topic 280 and (2) all disclosures required by the amendments in the Update. A likely driver of this change is due to research which indicated that an approximate one-third of public entities report their results as a single reportable entity.

Companies will need to apply the Update retrospectively to all periods presented in the financial statements unless it is impracticable to do so. If impracticable, companies must disclose that fact and explain why retrospective application is impracticable; however, this is not expected to be common.

Single reportable segment entities will now have to provide the following qualitative and quantitative disclosures:

Qualitative Disclosures:

• Factors used to identify the company’s reportable segments, including the basis of organization
• Types of products and services from which its reportable segment derives its income
• The title and position of the individual or the name of the group or committee identified as the chief operating decision maker (CODM)

Quantitative Disclosures:

• A measure of profit or loss and total assets for each reportable segment
• Significant expense categories and amounts that are regularly provided to the CODM and included in reported segment profit or loss.

The key qualitative change from the Update is the requirement to provide the factors used to identify the company’s reportable segment and the types of products and services from which the reportable segment derives its income. Please review the examples provided by the FASB for the qualitative disclosures in Appendix B of this article.

Quantitative Disclosures Required by the Update

A Measure of Profit or Loss and Total Assets for Each Reportable Segment

When a single operating segment constitutes all of the consolidated entity, the CODM may regularly review the entity-wide operating results and performance. Whether or not the single operating segment constitutes all of the consolidated entity will impact the disclosures required. As such, companies must consider the guidance in paragraph 280-10-50-4 to determine whether the single reportable segment is managed on a consolidated basis (i.e., single operating segment constitutes all of the consolidated entity).

If the single operating segment constitutes all of the consolidated entity, the single reportable segment entity must identify the measure or measures of a segment’s profit or loss that the CODM uses in assessing segment performance and deciding how to allocate resources.

At the very least, one measure of a segment’s profit or loss should align with the measurement principles used in the entity’s consolidated financial statements and be reconciled to the consolidated income or loss before taxes and discontinued operations. As it relates to companies with single reportable segments, the SEC staff interprets this to mean net income or net loss.

Comment letter of respondents to the Update noted that when a CODM of a single operating segment entity uses a consolidated profit or loss measure that is presented on the income statement, the disclosures required by the significant expense principle and the existing segment requirements (from 280-10-50-22 and 280-10-50-25) could result in duplicating all or certain parts of the primary financial statements in the segment footnote.

In response, BC 32 to the Update states that while duplication is permitted, the Board believes duplication is unnecessary, and, as a result, a public entity may choose to reference the primary financial statements in the segment footnote. Further, a single reportable segment entity may voluntarily choose to disclose additional performance measures in accordance with ASC 280-10-50-28A through 50-28B.

Significant Expense Categories and Amounts That Are Regularly Provided to the CODM and Included in Reported Segment Profit or Loss

Public companies shall disclose the significant expense categories and amounts that are regularly provided to the CODM and included in reported segment profit or loss (i.e., consolidated net income or loss) by performing the following:

1. An entity must first identify the segment level expense information that is regularly provided to the CODM.
2. An entity should then evaluate that information to identify those segment expenses that are included in each reported measure of a segment’s profit or loss (i.e., net income or loss for single-segment entities).
3. Afterwards, the entity should disclose those segment expense categories and amounts that are significant, including other segment items.¹

Easily Computable Segment Expense

In addition, a public entity shall evaluate for disclosure a segment expense that is regularly provided to the CODM as well as a segment expense that is easily computable from information that is regularly provided to the CODM. An example the FASB provides is if the information that is regularly provided to the CODM includes a segment revenue amount and a segment gross margin amount, segment cost of sales can be easily computed from this information. Therefore, if cost of sales is significant, an entity should disclose the category and amount.

CODM Is Not Provided Segment Level Expenses

The CODM may not be regularly provided with expense information for any of a public entity’s segments. When no significant expense categories and amounts are disclosed for a reportable segment, a public entity should:

1. Report an amount and a description of the composition of other segment items
2. Describe the expense information that the CODM uses to manage the operations of that segment.

For example, when no significant expenses are disclosed for a reportable segment, the public entity may disclose that the CODM is regularly provided with only budgeted or forecasted expense information for that segment or uses consolidated expense information. Such explanation is not required when significant expense categories and amounts are disclosed for a reportable segment.

See below for potential impacts of the newly released ASU 2024-03 focused on the disaggregation of income statement expenses.

Although the Update provides an exception for providing detailed segment level expenses, companies must consider the upcoming impacts of ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The purpose of ASU 2024-03 is to provide investors more detailed information about the types of expenses included within commonly presented expense captions, such as cost of sales, selling general, and administrative expenses (SG&A), and research and development expenses (R&D).

The main provisions of ASU 2024-03 include:

1. Disclose the amounts of (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil-and gas-producing activities (DD&A) (or other amounts of depletion expense) included in each relevant expense caption. A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed in (a)–(e).
2. Include certain amounts that are already required to be disclosed under current GAAP in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

Said differently, if SG&A and R&D include any of the amounts listed in item 1 above, then SG&A and R&D both need to be broken out in a detailed table. While most public companies already disclose such detail in their management discussion and analysis (MD&A) section of 10Ks / 10Qs, this Update will require the detailed tables to be applied and audited in the financial statements. Refer to Appendix B for example disclosures provided by the FASB.

While early adoption is permitted, ASU 2024-03 will be effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027.

The Value of Third-Party Advisory Firms

Third-party firms like Stout can help companies navigate updates such as ASU 2023-07 through guidance on implementing new accounting standards, ensuring that organizations comply with complex disclosure requirements. These advisory services can streamline the transition process, mitigate compliance risks, and provide valuable insights into optimizing financial reporting.

Appendix A: Footnote Disclosure Example for a Life Science Company With One Reportable Segment

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision making group, in deciding how to allocate resources in assessing performance. [XYZ Pharmaceutical] has one reportable segment: life science. The life science segment consists of the development of clinical and preclinical product candidates for the development of the Company’s proprietary new therapies to enhance the function of [specified by company]. The Company’s chief operating decision maker (“CODM”) is the chief executive officer.

The accounting policies of the life science segment are the same as those described in the summary of significant accounting policies. The CODM assesses performance for the life science segment based on net loss, which is reported on the income statement as consolidated net loss. The measure of segment assets is reported on the balance sheet as total consolidated assets.

To date, the Company has not generated any product revenue. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future as it advances product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval.

As such, the CODM uses cash forecast models in deciding how to invest into the life science segment. Such cash forecast models are reviewed to assess the entity-wide operating results and performance. Net loss is used to monitor budget versus actual results. Monitoring budgeted versus actual results is used in assessing performance of the segment and in establishing management’s compensation, along with cash forecast models.

The table below summarizes the significant expense categories regularly reviewed by the CODM for the years ended December 31, 2024, and 2023:

^(a) Other segment items included in Segment loss includes changes in warrant liability and interest income.

Appendix B: Excerpt From ASU 2023-07

The following are examples of the required disclosures for single-segment entities under the Update. Prior to each example is a breakdown of the associated requirement discussed previously in this article.

[Factors used to identify reportable segments]

ABC Company has one reportable segment: software. The software segment provides cloud computing services to customers under software-as-a-service arrangements. ABC Company derives revenue primarily in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single software platform that is deployed to and implemented by customers in a similar manner.

[Types of products and services from which reportable segment derives revenue]

The software segment derives revenues from customers by providing access to cloud computing applications under software-as-a-service arrangements. The most popular cloud computing application is an enterprise resource planning application used primarily by customers to manage functions such as accounting, financial management, project management, and procurement. The service term for the software arrangements is variable, with the median term being approximately five years.

[Title and position of the CODM]

ABC Company’s chief operating decision maker is the senior executive committee that includes the chief operating officer, chief financial officer, and the chief executive officer.

[Measure of profit or loss and total assets]

The accounting policies of the software segment are the same as those described in the summary of significant accounting policies. The chief operating decision maker assesses performance for the software segment and decides how to allocate resources based on net income that also is reported on the income statement as consolidated net income. The measure of segment assets is reported on the balance sheet as total consolidated assets.

The chief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the software segment or into other parts of the entity, such as for acquisitions or to pay dividends. Net income is used to monitor budget versus actual results. The chief operating decision maker also uses net income in competitive analysis by benchmarking to ABC Company’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.

[Significant expense categories]

^(a) Other segment items included in Segment net income includes marketing expense, restructuring expense, foreign currency exchange gains and losses, and other overhead expense. 

Excerpt From ASU 2024-03

¹ In accordance with ASC 280-10-50-26B, other segment items are the difference between reported segment revenues less segments expenses and reported segment profit or loss. A qualitative description of other segment items shall also be disclosed.