For the Investor:
By Gary Buesser, FASB Member

Segment Reporting


When the FASB periodically surveys investors about what areas within U.S. GAAP should be improved, Segment Reporting is frequently near the top of the list.
 
When the FASB periodically surveys investors about what areas within U.S. GAAP should be improved, Segment Reporting is frequently near the top of the list.

We have found that investors have two primary concerns: companies with too few segments, and those that provide limited segment disclosures such as only revenue and margin. 
 
To address these issues, the FASB added a project on its agenda to improve segment reporting
 
But why are robust segment reporting disclosures so important?  Investors normally model a company at the segment level rather than at the consolidated level.  More segments and greater information about an operating segment improve an analyst’s ability to forecast a company’s revenue, margins and assets—which serves as the basis for valuing a company.
 
There is a natural tension between investors who want more disclosure and companies who prefer less disclosure.  While I understand the competitive harm issue raised by companies related to too much disclosure, I discount that in part because I rarely see any correlation between a company’s success and limited disclosure.  
 
In fact, I see just the opposite: successful companies typically provide robust disclosures and the market rewards them with higher valuations/multiples.
 

But what about current U.S. GAAP segment reporting?

 
An operating segment has the following characteristics:
  1. It engages in business activities from which it may earn revenues and incur expenses
  2. Operating results are reviewed by the organization’s chief operating decision maker (CODM), and
  3. Financial information is available. 
Meanwhile, operating segment disclosures include:
  1. Revenue
  2. A measure of profit or loss
  3. Depreciation and amortization expense, and
  4. Long-lived assets expenditures.
If no asset information is provided, that fact should be disclosed.  Cash flow information by segment is not required.  Companies are required to provide a reconciliation of the significant segment disclosures to the consolidated statement totals.
 

Why do some companies report only one or two operating segments?

 
First, some companies have only one operating segment.  For example, one railroad company breaks out four product categories (agricultural, energy, industrial, and premium), but each category does not meet the definition of an operating segment. 
 
Second, the aggregation criteria in the standard allows companies to combine business units with similar economic characteristics into one operating segment.  Therefore, if all of a company’s business units have similar economic characteristics, they can report only one segment. 
 

Why do companies report limited operating segment information when the standard requires more disclosure?

 
First, if a company’s chief operating decision maker (normally, the CEO or COO) does not review certain information for an operating segment, for example assets, disclosure of that information is not required. 
 
Second, some companies do not track assets or capital spending by operating segment in their financial reporting systems, i.e., the financial information is not available to management. 
 

So what are my goals as an individual Board member for the Segment Reporting project?

My first goal is to disclose more segments. Secondly, I would like a standard to disclose greater information by segment.

My first goal is to disclose more segments. Secondly, I would like a standard to disclose greater information by segment.
 
One of the difficult issues the FASB faces when considering operating segment disclosures is every industry has different financial metrics that management and analysts consider to be useful.
 
Therefore, a new standard must provide some flexibility to accommodate all the disparate business models that report under U.S. GAAP.
 

What would I like to see in a new standard?

 
First, I would like to require companies with only one-to-two operating segments to report more segments if they have multiple operating segments.  With one caveat, I believe three-to-five segments are sufficient for most diversified companies. However, I don’t support guidance that would require the average company to report too many segments, for example, eight to ten.
 
Second, I would want a minimum requirement that nonfinancial companies report the following segment information:
  1. Revenue
  2. Margin
  3. Depreciation and amortization
  4. Capital spending, and
  5. Assets or property, plant, and equipment. 
These five key metrics would enable an investor to evaluate an operating segment’s revenue and margin trends, a rough cash flow metric (EBITDA), its capital intensity, and a pre-tax return on asset number.   
 
Investors can participate in the FASB’s Segment Reporting investor outreach by contacting Jeff Brickman and Chandy Smith, our investor liaisons. We would like to hear from you as to how we can improve Segment Reporting.