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Remarks before the 2014 AICPA Conference on Current SEC and PCAOB Developments

Dan Murdock

Deputy Chief Accountant, Office of the Chief Accountant

Washington, D.C.

Dec. 8, 2014

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.


Good morning.  Thank you for the introduction and thank you to the AICPA for inviting me to be here again this year.

I would like to start by repeating that for all of the SEC staff speaking at this conference, the views expressed are each speaker's own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.

SEC Staff Speeches

That caveat provides a nice segue into my first topic – SEC staff speeches.  You will notice that, once again, staff from my office will be sharing their views on issues that we have recently addressed in both formal and informal consultations.  Each of these areas represents some of the more judgmental aspects of accounting that constituents are dealing with in practice.  Our objective in sharing these views is not to provide absolute answers– many of these scenarios are complex and will almost always depend on the individual facts and circumstances.  Rather, we hope to provide a level of transparency into some of the issues the staff has addressed.  Just as we remain focused on enhancing financial reporting transparency, we acknowledge that speeches are one avenue for providing transparency into our current thinking around some of the more complex and judgmental areas of accounting.  In addition, as issues are brought to our attention through consultations, it is possible that our views will evolve as we consider them.  Some of the speeches you hear today will highlight that evolution.

With that being said, some of you may nevertheless be tempted to apply our speeches to your fact pattern without a thoughtful consideration for the context for our remarks and how your specific facts and circumstances may be different.  I caution you, however, in placing too much reliance on staff speeches at a conference in arriving at your accounting conclusions.  At the risk of stating the obvious, you are responsible for your accounting and your judgments.  Just as accounting firm manuals are updated as authoritative literature changes and new fact patterns are evaluated, the staff’s thoughts also evolve over time as issues are brought to our attention or circumstances change.  And when they do, we have a responsibility to provide transparent communication of these views.  Providing this transparency is the goal of the speeches you will hear today.  This does not mean, however, that as our thoughts evolve, we will necessarily seek to retrospectively challenge registrants’ prior conclusions.  All of the relevant facts and circumstances cannot fully be described within the context of a speech, and registrants should not change their accounting unless they conclude, on their own, that it is appropriate to do so. 

I ask that you consider the nature of these remarks and be responsible in your application of the views to your individual fact patterns.  I like to consider a useful metaphor that staff speeches have a “shelf life,” so to speak.  As a rule of thumb, speeches older than five years generally may not be as relevant, as staff thinking, business models, and the accounting literature all continue to evolve.  And this does not mean that, because a speech is not at its “shelf life,” you should “exclusively” rely on it as the justification for your conclusion.  Likewise, citing an example in a non-authoritative guide is similarly not compelling.  This point deserves to be restated.  Non-authoritative guidance is just that – non-authoritative; we will continue to challenge non-authoritative guidance that we feel is inconsistent with GAAP as we become aware of it.  Remember, there is no substitute for a thoughtful, researched analysis that, when available, includes an understanding of what the standard setters sought to achieve.  I personally find the Basis for Conclusions quite helpful in this analysis.  Above all else, that is the expectation from us when we review a submission, and more importantly when you prepare your filings.  In those most difficult of areas, as always, you are encouraged to submit a pre-filing request, which should always include your auditor’s views on the accounting, even in situations in which your auditor may not agree with you.

Segment Reporting

Segment reporting provides one example of an area where our thinking has evolved, particularly as we have seen situations where our comments have become a substitute for more fulsome, principles-based analysis.  Segment reporting is by no means a new topic of conversation, particularly at this conference, but the importance to investors is undeniable.  Segment disclosures are often described as the unit of valuation by an analyst and arguably one of the most important disclosures in the financial statements.

The Financial Accounting Foundation completed its post implementation review of Statement 131, now ASC 280, in December 2012.  While the FASB ultimately decided not to pursue a project on operating segments, the report did highlight a number of observations, particularly around the high degree of regulatory effort directed towards compliance with the standard.[i]  I’m not going to re-hash those frequent areas of comment but instead will highlight certain requirements in the standard and share with you some of our current thinking, particularly as it relates to identifying operating segments and when aggregation of those operating segments may be appropriate.

Identify the Chief Operating Decision Maker

The determination of segments begins with identifying the chief operating decision maker, or CODM.  The term chief operating decision maker identifies a function, not necessarily a manager with a specific title.  That function is to allocate resources to and assess the performance of the segments of an entity.[ii]

We have seen entities default to the CEO as the CODM, but I encourage you to take a fresh look at this determination.  When identifying the CODM, remember to think about what the key operating decisions are and who is making those decisions for the entity as a whole.  Those key operating decisions might not be made at the strategic or ultimate decision level – such as the CEO – but rather by someone who is closer to the day-to-day operations.  The guidance does not require the CODM to have ultimate decision making authority, but it is important that the identified individual – or individuals – are evaluating the entity’s operating results to assess performance and to allocate resources.  Failing to appropriately identify the CODM would make it highly unlikely you will get to the right answer.

Identification of Operating Segments

That brings me to the next step, which is to identify your operating segments.  ASC 280 employs a management approach to the identification of operating segments, which means it is based on the way that management organizes the segments within the entity for the purpose of making operating decisions and assessing performance.  Consequently, segments will often be evident from the structure of an entity’s internal organization.[iii]  Some of you may interpret this to mean that simply looking at the entity’s organizational chart will be sufficient.  While this may be a good data point, let me caution you that the organizational chart is simply a data point – the underlying principle requires consideration of the nature and extent of information that is reported to the CODM by each of the positions you identify on that chart.

Another presumption we have heard from constituents is that the CODM report is somehow the ultimate determinant of operating segments.  While we may have placed emphasis on this report in the past, let me be clear there is no presumption to this effect in GAAP; rather, the CODM report, like the organizational chart, is simply one data point in the analysis.  Over the years, we have heard registrants propose to “take something out” of the report in order to justify their determination of operating segments.  This is particularly unsatisfying and inconsistent with the objectives of segment reporting, which is to provide information about the entity’s different types of business activities and different types of economic environments in which it operates in order to help users understand the entity’s performance, assess its prospects for future cash flows, and ultimately make more informed judgments about the entity as whole.[iv]

So you may be asking what else should be considered besides the CODM report?  While certainly not an exhaustive list, a few things you might want to think about are the overall management structure, the basis on which budgets and forecasts are prepared, and the basis on which executive compensation is determined.

Aggregation of Operating Segments

The last area I’ll highlight today is the aggregation of operating segments.  This continues to be one of the more judgmental areas of the operating segment literature so I wanted to share with you some recent thinking as well as some areas that we continue to explore.

Two or more operating segments may be aggregated into a single operating segment if a) aggregation is consistent with the objective and basic principles of the standard; b) segments have similar economic characteristics; and c) the segments are similar in each of five areas specified in the standard.[v]

The underlying principle is that separate reporting of segment information will not add significantly to an investor’s understanding of an entity if its operating segments have characteristics that are so similar they can be expected to have essentially the same future prospects.[vi]  That said, the aggregation criteria are intended to be a high hurdle, and you need to meet all of the criteria in order to aggregate operating segments.  The FASB specifically rejected recommendations that the criteria be indicators rather than tests and that an expectation of similar long-term performance alone would be sufficient to justify aggregation, noting that such relaxed criteria might result in a level of aggregation that would cause a loss of potentially valuable information.[vii]  There are also no bright lines when assessing whether two or more operating segments have similar economic characteristics.  Rather, entities should use reasoned judgment that is consistent with the objectives of the standard in determining whether the aggregation criteria have been met.

Despite the fact that Statement 131 was issued more than 15 years ago, there are still some under-explored areas as it relates to aggregation.  For example, the staff recently considered the similarity of “type or class of customers” criterion in the standard.  In the fact pattern we considered, two segments had similar products, production processes, and methods of distribution, and shared one similar customer base.  However, one of the segments had a second, incremental customer base which resulted in a material revenue stream.  In that instance, we ultimately concluded that the similarity of “type or class of customers” criterion had not been met, and, as a result, the two operating segments should not be aggregated.

As I come to the end, I ask that you remember these takeaways relative to segments.  First, consider this your notice – the staff will be taking a refreshed approach when reviewing operating segment disclosures; I encourage you to adopt a similarly refreshed mindset now.  Second, let go of any over-reliance on the CODM report and, instead, apply the principles within ASC 280 to ensure your identification of operating segments is consistent with the objectives of segment reporting.  Third, remember, most entities will have more than one reportable segment and less than ten.


Let me close by thanking you for your commitment to reliable and transparent financial reporting.  I look forward to answering questions as part of the end of day Q&A panel.

[i] Post-Implementation Review Report on FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, available at

[ii] See ASC 280-10-50-5.

[iii] See ASC 280-10-05-3.

[iv] See ASC 280-10-10-1.

[v] See ASC 280-10-50-11.

[vi] See paragraph 73 in the Basis for Conclusions of Statement 131 Disclosures about Segments of an Enterprise and Related Information

[vii] See paragraph 74 in the Basis for Conclusions of Statement 131.

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