Join the waitlist
Guides/Accounting Standards

ASC 280 Segment Reporting After ASU 2023-07: Significant Expenses, CODM and Audit Tests

ASC 280 segment reporting explained: who must apply it, the 10% and 75% tests, the ASU 2023-07 segment expense disclosures, a worked table and audit tests.

CORAA TeamUpdated November 5, 20268 min read

Segment reporting is a public company topic, so many CPA firms never touch it. It reaches private-company files in two ways: a client that provides financial statements to issue securities in a public market, and a client whose reporting unit analysis for goodwill starts from its operating segments. ASU 2023-07 expanded the disclosures, and every audit team that sees an ASC 280 footnote should know what the new lines are supposed to contain.

Who has to apply ASC 280?

ASC 280 applies to public entities. In short, a public entity is a business or not-for-profit entity that:

  1. Has issued debt or equity securities, or is a conduit bond obligor for conduit debt securities, that are traded in a public market, including local or regional markets.
  2. Is required to file financial statements with the SEC.
  3. Provides financial statements for the purpose of issuing any class of securities in a public market.

The disclosure requirements do not apply to nonpublic entities, and a nonpublic entity that is not issuing securities in a public market does not have to provide them.

Even when the disclosures do not apply, operating segments are the starting point for identifying reporting units for goodwill impairment, including for private companies that have not elected the goodwill accounting alternative. See /us/blog/asc-350-goodwill-impairment-qualitative-assessment-and-quantitative-test.

How are segments identified?

ASC 280 uses the management approach: external segment reporting follows the way management organizes and reviews the business. The process has four steps. Identify operating segments, aggregate them into reportable segments where permitted, test whether reportable segments cover enough of the business, and decide whether entity-wide disclosures are needed.

An operating segment is a component of the entity that:

  • Engages in business activities that may generate revenues and expenses, including intercompany transactions.
  • Has operating results that the chief operating decision maker (CODM) regularly reviews to allocate resources and assess performance.
  • Has discrete financial information available.

The CODM is a function and not necessarily one person. It can be an individual or a group or committee, and ASU 2023-07 requires the public entity to disclose which.

Operating segments may be aggregated only if they have similar economic characteristics and are similar in five qualitative areas. The hurdle is high.

What are the 10% and 75% tests?

A segment is reportable if it meets any one of three tests. Its revenue, including intersegment revenue, is at least 10% of the combined revenue of all operating segments. Its reported profit or loss, in absolute amount, is at least 10% of the greater, in absolute amount, of the combined profit of the segments that did not report a loss and the combined loss of the segments that did. Its assets are at least 10% of the combined assets of all operating segments. After these tests, the external revenue of the reportable segments together must be at least 75% of consolidated revenue. If it is not, more segments are reported until the threshold is met.

An illustration. Segments A, B and C have revenue of $6,000, $3,000 and $1,000 (in thousands). Segment C is exactly 10% of the $10,000 total and is reportable on the revenue test. If all revenue is external, A and B together are 90% of consolidated revenue, so the 75% test is already met without C.

What did ASU 2023-07 add?

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments apply retrospectively to all prior periods presented unless impracticable. The update does not change how a public entity identifies, aggregates or applies the quantitative thresholds to its segments. It expanded the segment disclosures:

  • Significant segment expenses. For each reportable segment, disclose each significant expense category and amount that is regularly provided to the CODM and included in the segment profit or loss measure. Significance uses qualitative and quantitative factors. A public entity also evaluates an expense that is not reported to the CODM directly but is easily computable from what is, such as cost of sales derived from segment revenue and gross margin. Prior-period comparatives use the significant expense categories identified for the current period.
  • Other segment items. Disclose an amount for other segment items for each segment, calculated as segment revenue minus disclosed significant expenses minus segment profit or loss. Add a qualitative description of what is in it.
  • CODM title and position. Disclose the title and position of the individual, or the name of the group or committee.
  • How the CODM uses the profit measure. Explain how the CODM uses the reported measure to assess performance and allocate resources.
  • Interim periods. All annual segment profit or loss and asset disclosures are also required in interim periods, together with significant segment expenses and other segment items.
  • Single reportable segment entities. A public entity with one reportable segment provides all of the new disclosures and all existing Topic 280 segment disclosures. It identifies the profit or loss measure or measures its CODM uses, which may include a measure not shown on the consolidated income statement, such as EBITDA.

Worked table

An illustration of the new layout for one segment, in thousands:

Segment A Amount
Revenue 6,000
Cost of goods sold (significant expense, regularly provided to CODM) (3,000)
Personnel costs (significant expense, regularly provided to CODM) (1,500)
Other segment items (700)
Segment profit 800

Other segment items equal 6,000 - 3,000 - 1,500 - 800 = 700. The footnote describes what the 700 contains, such as marketing, facilities and gains or losses included in the profit measure.

Segment totals reconcile to the consolidated statements. Total segment revenue reconciles to consolidated revenue, total segment profit reconciles to consolidated income before income taxes and discontinued operations, and total segment assets reconcile to consolidated assets. The reconciling items usually include intersegment elimination. If Segment A sells $100,000 of product to Segment B, the consolidation elimination is:

Account Debit Credit
Intersegment revenue 100,000
Cost of sales 100,000

Audit angle

  1. Check that ASC 280 applies. Check the entity against the public entity definition, including any plan to issue securities in a public market.
  2. Identify the CODM. Read the board minutes and obtain the reports the CODM actually receives. The footnote must follow the management reports, not the other way round.
  3. Agree the segment data to the CODM package. Tie segment revenue, expense categories and profit to the management reports and to the general ledger.
  4. Test completeness of significant expenses. Compare the expense categories in the CODM reports to the footnote. An expense easily computed from the reports, such as cost of sales from revenue and gross margin, can also be significant under ASC 280-10-55-15B.
  5. Recompute other segment items. Revenue less disclosed expenses less profit must equal the line shown.
  6. Test the reconciliations. Agree each reconciling item to the consolidation workpapers, including intersegment eliminations.
  7. Check consistency. Prior-period comparatives must use the significant expense categories identified for the current period, and a change in how segments are measured must be disclosed.
  8. Read the single-segment case. If the client reports one segment, check that the full set of disclosures is still provided. See /us/standards/asc-280-segment-reporting-asu-2023-07.

Common misstatements: segment footnotes that follow GAAP statements rather than the CODM package, missing expense categories that the CODM reviews, an aggregation conclusion without support, and a reconciliation that omits intersegment items.

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

Sources

Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.

Share

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error

For US CPA firms

Join the CORAA waitlist

CORAA AI drafts audit working papers from your client’s QuickBooks books and does the first pass: lead schedules, tie-out, memos, draft notes and letters. CORAA Network reviewers clear every finding. Your firm reviews and signs.

  • First audit free, so you can judge the quality on a real file
  • Flat fee by entity size; messy books included
  • We work only with CPA firms, never their clients
See how it works →

* required

Keep reading
Schedule M-1 / M-2 / M-3
Book-Tax Differences: Schedules M-1, M-2 and M-3 and How They Tie to the Audit
2 CFR 200.303
2 CFR 200.303 Internal Controls Over Federal Awards: What Recipients Must Have and How Auditors Test It
2 CFR 200.332
2 CFR 200.331 and 200.332 Subrecipient Monitoring: Subrecipient vs Contractor and Pass-Through Duties