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Remarks before the 2015 AICPA Conference on Current SEC and PCAOB Developments

Courtney D. Sachtleben
Professional Accounting Fellow, Office of the Chief Accountant

AICPA National Conference on Current SEC and PCAOB Developments<br>Washington, DC

Dec. 9, 2015

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. It is a pleasure to be here. Over the past year, OCA[1] has been working closely with the Division of Corporation Finance and others, including the PCAOB, to emphasize the objectives and principles outlined in the guidance on segment reporting.[2] You will hear more from the Division of Corporation Finance tomorrow but today, I would like to highlight a couple of observations from these efforts, including around the identification of operating segments and aggregation into reportable segments.

Segment identification and disclosure

An investor gains an understanding of an entity’s operations, including how management makes decisions about those operations, through high-quality financial reporting. We have observed that as business operations evolve, how management organizes the entity for purposes of making operating decisions and assessing performance will also likely evolve. As such, registrants should periodically reassess their identification of operating segments, in particular after a change in organizational structure, key personnel changes, or significant acquisitions and dispositions.

The next observation is around what information should be considered when identifying operating segments. The relevant guidance notes that an operating segment is a component of the entity for which operating results are regularly reviewed by the chief operating decision maker (CODM) for the purpose of allocating resources and assessing performance.[3] A variety of information sources can enhance and corroborate this analysis. The periodic financial reporting package and the registrant’s organizational structure will often provide relevant insight into how management has organized the entity for purposes of making operating decisions and assessing performance.[4] However, neither is determinative to the analysis. Other sources of information may include the basis on which budgets and forecasts are prepared and executive compensation is determined. Registrants should consider whether their identified operating segments are consistent with these sources of information.

At times, application of the guidance will result in identification of a single operating segment. When such identification is consistent with the guidance, it can be a significant signal to investors about how management has allocated resources. Upon arriving at this conclusion, registrants should disclose that they allocate resources and assess financial performance on a consolidated basis and should explain the basis for that management approach.[5] It would seem counter to the objectives of segment reporting if the business description indicates the entity is diversified across businesses or products, yet is not managed in a disaggregated way.

OCA has also spent significant effort in evaluating registrants’ application of the guidance for aggregation of individual operating segments into one or more reportable segments. While the identification of operating segments is done under the management approach, the determination of reportable segments is a modified management approach. This approach incorporates both aggregation criteria and quantitative thresholds to determine which subset of operating segments should be reported in order to meet the objectives of segment reporting without reporting overly detailed information.[6] Two or more operating segments may be aggregated into a single reportable segment when all of the following are true: (1) aggregation is consistent with the objectives and principles of the standard, (2) the operating segments have similar economic characteristics, and (3) the operating segments are similar with respect to five qualitative criteria.[7] Reasonable judgment with a thorough understanding of an entity’s specific facts and circumstances is required in applying these criteria.[8] This judgment is informed by the starting point in the analysis, which is that management has first determined the information it finds useful (and uses) in managing the business is at a disaggregated operating segment level.

In determining whether two operating segments are “similar” with respect to the economic characteristics and each of the qualitative criteria, the guidance notes the evaluation should be made relative to the range of the entity’s business activities and the economic environments in which it operates.[9] For example, some entities operate within a single industry segment but may have multiple product lines by which it has defined its operating segments. Under the guidance, the entity would need to consider the range of those product lines and the characteristics of each that drive economic performance when evaluating aggregation. In doing so, it may be helpful to consider whether a reasonable investor would consider the two operating segments to be similar. Often, publically available industry reports and other analysis by users will indicate the key characteristics by which a reasonable investor may analyze the entity.

Once the registrant has identified those segments that meet the quantitative tests[10] or are otherwise qualitatively material and require separate reporting under the guidance, there is additional guidance for combining any remaining segments.[11] In performing this analysis, registrants should consider what additional level of detail would be useful to users of the financial statements for purposes of understanding the entity’s performance, assessing its prospects for future cash flows, and making more informed judgments about the entity as a whole.[12] As a good check, registrants may also want to consider whether their reportable segments facilitate a consistent description of the entity in its annual report and other published information,[13] such as its earnings release, investor presentations, and financial information on its website.

My final observation relates to management’s controls with respect to segment reporting. The guidance on segment reporting requires the application of reasonable judgment. Effective internal control over financial reporting (ICFR) supports those judgments, including the judgments needed in the determination of operating segments, aggregation, and entity-wide disclosures. Input from, and interaction with, the CODM may be an important element in the design of effective ICFR in regard to how the CODM allocates resources and assesses performance. In addition, documenting the design and effective operation of management’s controls over these judgments is an integral part of management’s support for the effectiveness of its ICFR,[14] and will be essential to the auditor’s ability to evaluate these controls.


That concludes my prepared remarks. Thank you for your kind attention and please enjoy the remainder of the conference. 

[1] Office of the Chief Accountant.

[2] Accounting Standards Codification Topic 280, Segment Reporting.

[3] ASC 280-10-50-1 defines an operating segment as a component of a public entity that has all of the following characteristics: (1) it engages in business activities from which it may earn revenues and incur expenses, (2) its operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segment and assess its performance, and (3) its discrete information is available.

[4] ASC 280-10-05-3 states, in relevant part: “The management approach is based on the way that management organizes the segments within the public entity for making operating decisions and assessing performance. Consequently, the segments are evident from the structure of the public entity’s internal organization.” ASC 280-10-05-4 states, in relevant part, that the management approach “focuses on financial information that a public entity’s decision makers use to make decisions about the public entity’s operating matters.”

[5] See ASC 280-10-50-21(a).

[6] See paragraph 72 of the Basis for Conclusions of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.

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

[8] See previous remarks on the aggregation analysis by Scott A. Taub Remarks at the University of Southern California Leventhal School of Accounting SEC and Financial Reporting Conference (May 2004) at:, and Dan Murdock Remarks before the 2014 AICPA Conference on Current SEC and PCAOB Developments (December 2014) at:

[9] See paragraph 68 of the Basis for Conclusions of Statement 131.

[10] See ASC 280-10-50-12.

[11] See ASC 280-10-50-13.

[12] ASC 280-10-50-18 acknowledges a practical limit of 10 reportable segments after which the segment information may become too overly detailed.

[13] See ASC 280-10-05-4 and non-authoritative discussion in paragraph 61 of the Basis for Conclusions of Statement 131.

[14] Release Nos. 33-8810, 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June 27, 2007) available at:

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