FASB Rethinks Business Segment Reporting

The Financial Accounting Standards Board may be changing its rules on business segment reporting or issuing additional guidance in response to questions raised during a post-implementation review of a 16-year-old standard.

The changes are being contemplated after FASB’s parent organization, the Financial Accounting Foundation, conducted a post-implementation review of the business segment reporting standard (see Accounting Standard for Business Segment Reporting Mostly Works). The report, which was issued in January, was one of a series of reviews of older accounting standards that the FAF has been spearheading to determine how well the accounting rules have been working in practice. The review found that the standard generally achieved its intended purpose of improving the way public companies report financial information about their business segments, although some companies are not reporting on all of their business segments or providing enough information on them.

FASB now plans to review the issues raised by the post-implementation review with its stakeholders and the staff of the Securities and Exchange Commission to determine whether further review of the standard is warranted.

FASB issued Statement 131 in 1997 to improve the way public companies report financial information about their business segments. Statement 131 establishes standards for the way that public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The statement does not apply to private companies or to not-for-profit organizations.

FASB’s response Wednesday to the FAF report on FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (codified in Accounting Standards Codification Topic 280, Segment Reporting), noted that the PIR report findings affirm that segment information is now better aligned with an organization’s internal structure and is more consistent with financial information reported outside the financial statements, enabling investors and users to better understand an organization’s activities and prospects for future growth.  However, the report noted that some preparers and practitioners would find additional guidance on certain operational aspects of Statement 131 to be helpful, and some users indicated they would like additional and comparable information to be presented by segment.

“The FASB welcomes the overall conclusion in the PIR report that Statement 131 is working effectively and is providing more information about an organization’s business activities than the prior segment reporting standard and enhancing the relevance of segment disclosures,” said FASB chairman Leslie F. Seidman in a statement. “The report’s findings indicate that some stakeholders believe certain operational aspects could be improved with additional guidance. Therefore, the FASB will consult with stakeholders to understand the significance of the issues raised and their priority in relation to other potential agenda items. We will also meet with representatives of the U.S. Securities and Exchange Commission and the International Accounting Standards Board in response to the report’s findings and will report back to the FAF Trustees and the FAF’s Oversight Committee as progress is made."

The IASB is also conducting a post-implementation review of a comparable standard, IFRS 8, Operating Segments, which is substantially converged with Statement 131. The IASB staff has presented and discussed the preliminary results from their PIR outreach at the January 2013 IASB meeting.

FASB said that any plan to undertake a separate project to review or amend Statement 131 as a result of the post-implementation reviews should be coordinated with the IASB to maintain a converged approach to segment reporting.

The review of the business segments reporting standard is the second post-implementation review of a FASB standard. The team completed its first review of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) (codified in Accounting Standards Codification Topic 740, Incomes Taxes), in January 2012. More information on the FAF’s PIR process can be found on the FAF website.

The PIR process, which is independent of the standard-setting process of the FASB and the Governmental Accounting Standards Board, aims to help the FAF’s board of trustees with its ongoing efforts to evaluate the effectiveness of the standard-setting process for both organizations. However, the FAF trustees’ oversight responsibility does not extend to recommending standard-setting action, which is the sole, independent responsibility of the FASB and the GASB.