Navigating the New Segment Reporting Rules: Key Changes for 2025

Items Companies Should Be Considering

The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) introduced new segment reporting rules in 2024 through the release of Accounting Standards Update (ASU) 2023-07. This update enhances transparency in financial disclosures, especially around segment expenses. These changes focus on ensuring that public companies provide detailed information about significant segment expenses and their composition in both annual and interim reports.

Overview:

The new guidance introduces additional disclosure requirements for public entities regarding their reportable segments but does not change how they are defined, determined or aggregated. This guidance takes effect for fiscal years beginning after Dec. 15, 2023, meaning calendar year companies will need to incorporate these disclosures in their 2024 10-K filings. Interim reporting requirements for these companies will also begin in the first quarter of 2025.

New Rules: The new rules provide these additional disclosure requirements:

Significant Segment Expenses

• An expense is considered a significant segment expense if it meets the following criteria:
  • It is significant for the segment
  • It is regularly reported to, or easily derived from information provided to, the chief operating decision maker (CODM)
  • It is included in the reported measure of segment profit or loss
• A significant segment expense can include direct expenses, shared expenses, allocated corporate overhead or interest expense as long as they are regularly reported to the CODM and factored into the segment’s profit or loss measure
• If an entity does not disclose the specific categories and amounts of significant expenses for one or more reportable segments, it must provide a narrative of the expense information the CODM uses to manage operations (e.g., budgeted, forecasted or consolidated expense information

Other Segment Expenses

• Once significant segment items are identified, any remaining items that are not individually significant will be grouped into an “other” category.
• For each reportable segment, companies must disclose both the aggregate amount and description of other segment items included in each reported measure of segment profit or loss beyond the significant segment expenses
• Other segment items are calculated as the total segment revenue minus significant segment expenses (per above) and the reported segment profit or loss

Other Measures of Segment Profit or Loss

• If a public entity chooses to disclose additional measures of segment profit or loss, it will need to provide additional segment disclosures as a result
• For each reported measure of segment profit or loss, the company must disclose significant segment expenses, other segment items, and the existing disclosures in ASC 280-10-50-22 to 24 and ASC 280-10-50-29
• The total of each reported measure of segment profit or loss must also be reconciled with the consolidated amount of income before taxes and discontinued operations

Single Segment Reporting Entities

• The new ASU confirms that all public entities, including those with a single operating or reportable segment, must adhere to the segment guidance. This includes disclosing a measure of segment profit or loss (or multiple measures if used to assess performance and allocate resources), as well as reporting significant segment expenses and other segment items.
• The ASU expands the current interim disclosure requirements to require that nearly all of the annual numerical segment disclosures be made on an interim basis
• These include reported measures of segment profit or loss, total assets, revenues, interest revenue and expense, depreciation, depletion and amortization, unusual items, equity in income of investees, income tax expense or benefit, significant non-cash items (excluding depreciation depletion and amortization), equity method investments and total additions to long-lived assets
• Disclosures for significant segment expenses and other segment items are also required for interim periods. However, only the reconciliation of the total of reportable segments’ measures of profit or loss to consolidated income before income taxes and discontinued operations is required for interim periods
• Reconciliations of the total reportable segments’ revenues and assets are not required for interim periods

Interim reporting requirements begin in 2025, and companies must provide the following additional information:

• The ASU expands the current interim disclosure requirements to require that nearly all of the annual numerical segment disclosures be made on an interim basis
• These include reported measures of segment profit or loss, total assets, revenues, interest revenue and expense, depreciation, depletion and amortization, unusual items, equity in income of investees, income tax expense or benefit, significant non-cash items (excluding depreciation depletion and amortization), equity method investments, and total additions to long-lived assets
• Disclosures for significant segment expenses and other segment items are also required for interim periods. However, only the reconciliation of the total of reportable segments’ measures of profit or loss to consolidated income before income taxes and discontinued operations is required for interim periods
• Reconciliations of the total reportable segments’ revenues and assets are not required for interim periods”

Closing: Companies should start now and review their internal reporting processes to ensure that they capture and disclose all relevant new segment expense information required by the new rules. Additionally, because this new rule focuses heavily on the information provided to the CODM, it is essential for companies to align their internal reporting to management with the external reporting required under the new guidance.

If you have any questions about the new segment reporting rules, please connect with us.