FAF Review Team concludes that FASB Statement 131 on segment reporting generally achieves its purpose

14 January 2013

The FAF Review Team affirmed that the standard-setting process worked well overall and contributed to a successful standard, and had no significant standard-setting process recommendations.

FASB Chairman Leslie F Seidman said: “The post-implementation review report on Statement 131 affirms the overall effectiveness of the standard. However, the report identified aspects of Statement 131 that stakeholders think could be improved; for example, the effect of changes in technology on the determination of what information is reviewed by the chief operating decision-maker. We are considering the reported findings and will provide our initial response in the coming weeks. We also will consider the IASB’s review of IFRS 8 before making a determination on how to proceed.”

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 organisations.

The Statement 131 review team received input from investors and other financial statement users, as well as preparers, auditors, academics, and financial regulators. Based on its research, the review team concluded that:

• Statement 131 provides more information about companies’ different business activities than the prior segment reporting standard did. In addition, companies’ reported segment information is better aligned with their internal structures and more consistent with financial information reported outside the financial statements. However, there are indications that some companies (particularly those reporting only one segment) are not reporting a sufficient number of segments.
• Overall, Statement 131 enhanced the relevance of segment disclosures. Additional disaggregated information and improved alignment allows investors to understand the different types of activities in which a company engages and its prospect for future growth. Investors also use the improved segment information to make judgments about the company as a whole. However, reported segment information is not always sufficient for their investment decisions. Users would like more segment information (e.g. gross margin and cash flow), and some might like more consistency across companies in the amount, type, and measurement of information disclosed.
• In general, Statement 131’s requirements can be understood, can be applied as intended, and result in reliable information. However, the guidance for determining and aggregating operating segments might be difficult for some companies to apply—in part because of advances in technology and the principles-based nature of the standard—and generates continuing discussions between preparers, practitioners, and regulators.
• Statement 131 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant economic consequences. However, some companies might be aggregating segments to reduce transparency because of competitive harm concerns or for other reasons.
• Both the costs and the benefits associated with Statement 131’s required segment disclosures are consistent with the Board’s and stakeholders’ expectations.

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