Segment reporting formally began in 1997 under US GAAP with the issuance by the Financial Accounting Standards Board (FASB) of Statement of Financial Accounting Standard No. 131 (SFAS No. 131), “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 became FASB Accounting Standards Codification (ASC) Topic 280.

Public companies are required to disclose certain specified components of segment profitability, as well as specific information regarding a reportable segment. Currently, segment disclosures are not required to be presented in any particular format by either US GAAP or IFRS.

We are pleased that the FASB has recently added a project to its agenda to undertake improvements to segment reporting with the objective of providing users with more decision-useful information about the reportable segments of public companies. The FASB indicated that the elements of Topic 280 under consideration by the FASB are the aggregation criteria and the disclosure package. We agree that targeted improvements in a number of areas are warranted. A review of International Financial Reporting Standard 8 (IFRS 8), “Operating Segments,” should also be a project for the International Accounting Standards Board (IASB), given the similarity of the segment reporting requirements between the two reporting regimes.

We recently surveyed CFA Institute members, including portfolio managers and analysts. See the “About the Survey” section at the end of this document. We surveyed their level of satisfaction with existing segment disclosure requirements and solicited their views on areas for improvement. We surveyed general perceptions about segment disclosures as well as specific questions that correlate to the segment disclosure standards in Topic 280 so that we could provide the most useful information to accounting standard setters.

What typically concerns professional investors is over aggregation, which clouds and reduces transparency around the mix and quality of the business and its related performance. Whether such aggregation is an intentional cloaking of results or required by Topic 280, investors see greater opportunity for reducing the “gaming” of the segment disclosures and increasing the clarity and transparency of these disclosures.

Survey results included:

• Importance versus satisfaction—For investors, 75% rate segment disclosures as very important to their analysis. The respondents rate segment disclosures as equally, 58.7%, if not more important, 31.4%, for a total of 90.1%, than entity-wide disclosures. That said, their satisfaction, 13.4%, with the segment disclosures is substantially less than their rating of the importance of segment disclosures. The implication for standard-setters is that there is substantial work to be done to meet segment disclosure investor needs.
• Critical audit matter—Respondents strongly agreed (49.3%) or agreed (34.1%; for a total of 83.4%) that segments should be disclosed as a critical audit matter in the new auditor’s report.
• Competitive harm—Respondents agreed or strongly agreed (67.8%) that competitive harm is overstated as a reason not to improve segment disclosures.
• Technology—Respondents agreed or strongly agreed (86.6%) that technological improvements should, but have not, substantially improved segment disclosures.
• Enforcement—Respondents (72.7%) agreed that regulators do not seem to enforce segment disclosure requirements effectively, but they did not feel as strongly (only 51.0%) that changing segments was a red flag. The question likely needed to be rephrased to ask if “frequent changing of segments were a red flag.” That said, respondents had insightful comments on this issue.
• Consistency of discussion results with segment disclosures—A majority (61.8%) of respondents indicated that the public discussion of results was not necessarily consistent with segment results. Similarly, 74.8% of respondents agreed that non-GAAP measures are not, but should be, reconciled to segment results.
• Presentation—We touched on the concept of presentation—specifically income statement presentation—in several questions. First, we queried satisfaction with presentation and then asked what improvements respondents perceived as most important. Respondents, 77.8%, noted that segment disclosures are not always presented clearly and reconciled to the basic financial statements and that presentation by product/service or by region—as currently allowed—made comparative analysis more difficult, 82.4% .

Although all segment information is a disclosure, we queried investors’ satisfaction with, as well as the desired improvements needed in, the specific elements of disclosure. Please see the survey for the results of those findings.