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This article was first published in the October 2019 International edition of Accounting and Business magazine.

IFRS Standards and US GAAP still have plenty of differences, but the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) continue to work towards greater convergence of accounting principles and treatments. This is of particular relevance to this author, who has just married an American, although there was (slightly) less talk of accounting standards during the ceremony.

One of the current major topics for discussion between the boards relates to how a company reports on its operating segments. IFRS 8, Operating Segments, and Topic 280, Segment Reporting, are currently substantially converged. The FASB is considering some changes to the standard in the US, which could mean changes to IFRS 8.

The main principles of segment reporting are that particular entities (mainly large, listed entities) are required to disclose information about their operating segments, products and services, their geographical areas of operation and their major customers.

This information is regarded as highly useful and relevant to users, providing them with key data for decision-making purposes. The other side of the coin is that entities have to disclose details on information they may not want others, such as competitors, to see. It is this balance that really holds the tension within segment reporting.

Over the years, the FASB has received feedback that investors are unhappy with the level of segment detail provided by public companies and believe that generally there should be more segments and more disclosures about those segments.

The problems have largely arisen in three main areas of the standard: segment identification, aggregation of operating segments into reportable segments, and segment disclosure requirements. Of these three, the FASB decided not to address segment identification because doing so would involve a fundamental change to the accounting standard. The current focus is therefore to look at the other two elements and examine what proposed changes could be made.

Segment aggregation

Segments may be combined if they meet all the aggregation criteria. This means they must have similar economic characteristics and be similar in terms of:

  • the nature of the products/services
  • the nature of production processes
  • the type or class of customer
  • the methods used to distribute the products/services.

The combined segments are then reportable if they meet any of the size tests. They are reportable if they make up more than 10% of the entity’s total revenue, profit or loss, or assets; in addition, smaller segments may need to be reported so that at least 75% of total corporate revenue is reported.

One alternative being considered by the FASB is to switch the requirements and move the size tests to earlier in the process so that any individual segment exceeding the 10% limit is reportable and cannot be aggregated with others, regardless of whether they meet the criteria or not.

The aim of this change would be to ensure that a public entity discloses its largest operating segments as management views them, with aggregation permitted only for the smaller segments.

A second alternative is also being considered: removing the aggregation criteria altogether. Under this method, an entity would report all its operating segments unless they exceed the practical limit (around 10 segments).

Under the first alternative, preparer feedback is that while the number of reportable segments would increase, it wouldn’t necessarily improve the quality of segment information. Preparers think it might impair the natural groupings of certain items and result in an ‘all other’ category that would be difficult for users to understand.

For example, a consumer goods company that currently aggregates haircare, skincare and personal care businesses into a reportable segment of ‘beauty’ could be forced to separately disclose haircare as a reportable segment while moving the other two into the ‘all other’ category. Users, though, do not quite see things the same way, and would prefer further disaggregation of items currently in the ‘all other’ category.

The area of competitive harm is also under discussion. Many preparers are concerned that further disaggregation could result in competitive harm to an entity, although they acknowledge that competitors would be similarly affected. Again there is a split between users and preparers, with most users believing that competitive harm is overstated by entities as a reason not to improve segmental disclosures.

A lot of the user feedback on the second alternative was very similar to that received for the first alternative. The main concerns are that the 75% test would be removed, meaning that entities may report less than 75% of their external revenue. Another concern about completely removing the size and aggregation limits is that it could result in extremely small segments being reported, resulting in the reporting of immaterial information.


Currently, a large number of items have to be disclosed by reportable segment, looking at income and expense items, in addition to information on segment assets. In its proposals, the FASB refers to this as ‘the List’.

The FASB is looking at a number of proposals in relation to the disclosures required, as follows:

  • Develop a disclose-or-explain list. Currently, items in the List are disclosed only if the item is allocated segmentally and the chief operating decision-maker (CODM) is regularly provided with these items. But users feel the CODM must be looking at detailed segment information that is not being reported. One of the proposed changes to the standard is to develop a disclose-or-explain requirement. This would not add new items to the List but would provide an explanation for why an item on the List is not disclosed.
  • Add pieces of information. Analysts say that while items on the List are helpful currently, there are other items that would be useful too. The FASB will conduct research on the potential benefits of adding cost of revenue, research and development expense, cashflow information and information relating to inventory to the disclosure list.
  • Develop principles-based disclosures. The List is arguably less flexible in capturing the specific, meaningful segment information for an entity. Applying a principles-based approach may be a purer form of the management approach. The items being looked at are whether to disclose significant segment expense categories, significant segment asset categories and significant segment liability categories.
  • Clarify the meaning of regularly provided segment information. Some preparers of reports are uncertain what the IFRS 8 standard means when it refers to information being regularly provided to the CODM. This could be in the form of monthly or quarterly meetings, but there may be other information that the CODM accesses or is able to access. The FASB will seek to clarify this term.
  • Separate corporate amounts from unallocated amounts. The FASB is considering whether it would be helpful to clarify corporate amounts and unallocated amounts. Corporate amounts could be shared entity assets such as corporate headquarters or shared service items, whereas unallocated amounts could be costs that are not specific to a segment but not related to the corporate headquarters either.
  • Explain how consolidated amounts relate to financial statement lines. Currently consolidated amounts may be disclosed in the statements but not shown as a line item, such as depreciation. The proposal is that an entity could be required to describe both the amount and the lines on the income statement, showing the total depreciation and what line it is included on the financial statements.
  • Explore the composition of reportable segments. This would provide clearer information as to what elements have been aggregated into reportable segments. Separate information would not be required for each, but this would provide users with the information as to what each reportable segment consists of.
  • Disclose management judgments in applying the aggregation criteria. The IASB issued this in 2013, and it is a current area of difference between IFRS Standards and US GAAP. The FASB is examining whether a similar disclosure should be included in US GAAP to further converge the standards.

Segment reporting may not change any of the numbers that are produced within a set of financial statements, but the proposals on the table could have a significant impact on the amount of information disclosed. It is likely that the IASB will examine the FASB’s work with a keen eye, as it is in the interest of all parties for the standards to remain as converged as possible. Ultimately, a long and happy marriage is likely to exist within segmental reporting, especially with the IASB’s current focus on better communication within financial reporting.

Adam Deller is a financial reporting specialist and lecturer.