Changes in the C-suite can affect segment reporting In the loop

In the loop
April 2015
Changes in the C-suite can
affect segment reporting
What you need to know
-
Public company financial statements
are required to include segment
disclosures, which are intended to
provide investors with the ability to
see the company through the eyes of
management.
-
Identifying the chief operating
decision maker (CODM) is a critical
aspect of identifying operating
segments, and may evolve when the
C-suite structure changes, for
example, when a new person joins its
ranks.
-
The information reviewed by the
CODM is a key data point in
determining operating segments.
-
It’s important to reassess segment
conclusions, especially upon changes
in the business, technology, or
management.
Who’s making decisions and assessing performance (and what data
they’re using to do it) directly affects segment disclosures
Correctly identifying operating segments is important because it is the starting
point for certain disaggregated financial information included in the footnotes,
and for goodwill impairment testing. The determination of operating segments
can change based on what information the Chief Operating Decision Maker
(CODM) uses to allocate resources and assess performance. And who the CODM
is may change when new executives come on board or when executives change
how they manage the business.
What factors are considered when determining operating segments?
“Failing to
appropriately identify
the CODM would make
it highly unlikely you
will get to the right
answer.”
– Dan Murdock,
SEC Deputy Chief
Accountant
December 8, 2014
Who is the CODM?
The term CODM refers to a function (not necessarily an individual) that is
accountable for allocating resources and assessing the performance of an entity.
The CEO or COO is often the CODM, which makes sense at face value—after all,
the CEO and COO generally makes most key decisions. However, whether the
CODM is one of these executives or both acting together as a group may require
analysis. Further, if these executives are delegating their decision-making, or
involving others, companies may need to consider whether someone other than
the CEO or COO or some other group is the CODM.
Operating segments should align with management’s approach
Segment reporting is intended to give investors a view of management’s approach
to running the business. So determining segments relies not only on what
information the CODM uses to make decisions, but also on how the company is
structured to run its day-to-day business activities.
The information regularly reviewed by the CODM is an important data point
when determining operating segments. However, when the segment reporting
standard first came out two decades ago, it was a lot easier to identify what
information the CODM was using, since most CODMs were primarily receiving
printed packages of monthly financial information.
Fast forward to today’s real-time management reporting environment, CODMs
likely have access to “check the numbers” whenever they want and at whatever
level of detail they see fit. In that context, it’s important that CODMs are able to
pinpoint specifically which information they regularly review when making
decisions about resource allocation and performance assessment so that the
company reaches an accurate conclusion on operating segments.
Facilitating accurate segment reporting
Corporate reporting functions — tasked with identifying both the CODM and the
operating segments — need sufficient insight into how key operating decisions
are made, and what information is used to make them. Advancements in
technology, evolving businesses, and changing executive roles can make these
conclusions fluid and difficult to determine. It’s also important for the CODM to
proactively communicate significant changes in information used or in
management structure, as these may have a direct impact on segment reporting.
In the loop
How PwC can help
Additional information
Executive-level insight into
today’s top financial reporting
and regulatory issues
To have a deeper discussion of how
segment reporting guidance
might affect your company,
please contact:
Financial statement presentation
guide
Our guide includes a chapter on
segments to help companies navigate
the application of segment reporting
rules.
Beth Paul
973 236 7270
[email protected]
Lawrence Dodyk
973 236 7213
[email protected]
For more accounting and financial
reporting developments, visit
www.cfodirect.com
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