Segment Reporting Under ASC 280 for the CPA FAR Exam

Overview of ASC 280: Segment Reporting

ASC 280 requires public entities to disclose information about their operating segments in their annual financial statements and in interim reports. The purpose of segment reporting is to help users of financial statements better understand the entity's performance, assess its prospects for future cash flows, and make more informed judgments about the entity as a whole. Segment reporting questions appear regularly on the CPA FAR exam.

Identifying Operating Segments

An operating segment is a component of a public entity that meets all three of the following criteria:

1. It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses from transactions with other components of the same entity).
2. Its operating results are regularly reviewed by the entity's chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and to assess its performance.
3. Discrete financial information is available for the component.

The CODM is a function, not necessarily a title. It refers to whoever in the organization reviews operating results to allocate resources and assess performance. This could be the CEO, a committee, or a group of individuals.

Aggregation Criteria

Two or more operating segments may be aggregated into a single reportable segment if they have similar economic characteristics and are similar in each of the following respects: the nature of products and services, the nature of the production processes, the type or class of customer, the methods used to distribute products or provide services, and the nature of the regulatory environment (if applicable).

Quantitative Thresholds

After identifying operating segments (and applying any aggregation), the entity determines which segments are reportable using three quantitative thresholds. A segment is reportable if it meets any one of these tests:

Revenue Test (10% Test)

The segment's reported revenue (including both sales to external customers and intersegment sales) is 10% or more of the combined revenue of all operating segments.

Profit or Loss Test (10% Test)

The absolute amount of the segment's reported profit or loss is 10% or more of the greater, in absolute amount, of the combined reported profit of all operating segments that reported a profit, or the combined reported loss of all operating segments that reported a loss.

Asset Test (10% Test)

The segment's assets are 10% or more of the combined assets of all operating segments.

The 75% External Revenue Test

After applying the 10% thresholds, the entity must verify that the total external revenue of all reportable segments constitutes at least 75% of total consolidated revenue. If not, additional operating segments must be identified as reportable (even if they do not meet the quantitative thresholds) until the 75% threshold is reached. Remaining nonreportable segments are combined and disclosed in an "all other" category.

Required Disclosures

For each reportable segment, the entity must disclose the following:

• A measure of segment profit or loss
• Total segment assets
• Revenues from external customers
• Intersegment revenues
• Interest revenue and interest expense
• Depreciation, depletion, and amortization expense
• Significant noncash items other than depreciation
• Income tax expense or benefit
• Significant expense categories (per ASU 2023-07, effective for fiscal years beginning after December 15, 2023)
• Expenditures for additions to long-lived assets

Entity-Wide Disclosures

Regardless of the number of reportable segments, entities must provide entity-wide disclosures about products and services, geographic areas (domestic and foreign revenues, and long-lived assets), and major customers (any single customer accounting for 10% or more of consolidated revenue).

Reconciliations

The entity must reconcile the total of the reportable segments' revenues, profit or loss, assets, and other significant items to the corresponding consolidated amounts. Reconciling items include corporate headquarters costs, intersegment eliminations, and amounts not allocated to segments.

Exam Preparation Tips

• Know the three criteria for an operating segment and the three quantitative thresholds (10% tests).
• Remember the 75% external revenue test as a check after applying the 10% thresholds.
• Understand that the CODM is a function, not a specific title.
• Be prepared to calculate whether a segment meets the revenue, profit/loss, and asset thresholds given specific financial data.
• Major customer disclosure is triggered at 10% of consolidated revenue, not segment revenue.