U.S. public companies would have to start breaking out big-ticket expenses incurred by their business divisions under a new proposal from the U.S. accounting standards-setter aimed at helping investors get a clearer view of financial performance.
Companies usually split their operations into segments by business line or geography. They are required to disclose a measure of their profits or losses by operating segment in financial statements, but don’t have to go into much more detail.
Under a proposal from the Financial Accounting Standards Board, companies would have to disclose significant expenses in those divisions, which could cover things like labor, technology fees, rent or cost of goods sold. This information is currently included in the footnotes of companies’ financial statements.
Senior executives often get to see that breakdown of expenses, but don’t have to share it with investors. The FASB, which on Wednesday voted to propose the new requirements, has yet to define what makes an expense significant.
The proposed update, however, would be limited to companies that already provide segment information to a so-called chief operating decision maker; companies that don’t currently share this information with their chief executive, chief operating officer or executive committee wouldn’t have to disclose it to investors. These businesses would have to state in their disclosure that their senior executives don’t receive this data.
Businesses would also have to disclose the title and position of the individual or group they have deemed chief operating decision maker, something not required at the moment. The FASB also proposed allowing companies to report more than one way of measuring a business division’s profit or loss, as long as at least one of those measures meets the criteria laid out in existing rules on segment reporting.
The FASB has been considering tweaks to the rules on business-segment reporting since 2017. It expects to issue a formal proposal in September or October and ask the public for feedback, a spokeswoman said.
If finalized, the proposed update could be a win for investors. For years, many have pushed for more detailed breakdowns of companies’ expenses and other information to help forecast revenue and margins when valuing a business. Companies often oppose disclosing details on their business segments for fear of revealing too much to competitors.
“Investors generally crave as much information as possible about companies in their portfolios, so they will likely welcome required disclosures of significant expenses by business segment,” said
executive director of the Council of Institutional Investors, which represents pension funds and other large money managers.
In private conversations with the FASB, companies have said they might be forced to design new internal controls, make additional hires and pay more for their audits if the proposal passes. And while some board members expect the costs to be modest,
have said the benefits of the proposal wouldn’t justify the outlay.
In a letter to the FASB, software firm
said the standard-setter should focus on clarifying and refining its rules on segment reporting, which it called complex and subject to judgment.
“It often leads to confusion within a company which can lead to complexities in maintaining compliance with the guidance,”
Autodesk’s chief accounting officer, said in the September missive. The company declined to comment.
If the proposal does pass, U.S. accounting rules will become less aligned with International Financial Reporting Standards on segment reporting. The International Accounting Standards Board, the FASB’s counterpart for many jurisdictions outside the U.S., said on Wednesday that it will be monitoring the FASB’s efforts. The IASB has no active project on segment reporting on its agenda.
Write to Mark Maurer at [email protected]
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