Generally, public companies are obligated to report financial information separately for each operating segment identified in accordance with the criteria set forth in FASB ASC 280-10-50-1. ASC 280-10-50-1 provides that an operating segment is a component of a public company that has all of the following characteristics:
- It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity).
- Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions regarding resource allocation to the segment and assessing its performance.
- Its discrete financial information is available.
The SEC issues a number of comment letters inquiring into whether public companies should be reporting financial information by segment. These comment letters include a very detailed request for information, such as:
- Identify your Chief Operating Decision Maker (CODM) and submit a copy of the information package provided to the CODM covering all business activities.
- Submit a copy of all information provided to your board of directors covering business activities and operating results for the last fiscal year which was not provided to your CODM.
- Describe the frequency and types of communications between the CODM and his or her direct reports.
- Provide a copy of the minutes of your board of directors’ meeting for each of the most recent four meetings.
- Describe the significant resource allocation decisions made during the last and current fiscal years by your CODM.
While the SEC and financial reporting obligations tail should not wag the operations dog, reporting companies may wish to review their internal financial reports, especially those that are reviewed by senior management or the board of directors, to determine whether they needlessly provide information by product line, geography or any other criteria that could be the basis of segment reporting. For example, if a company does not report financial information by segment, but internal reports provide financial information by product line, unless management utilizes the product line information, it may be best to eliminate such reports to avoid any appearance that the information is, in fact, considered by management, which could form the basis of an argument that segment reporting is appropriate.