Segment Reporting and Broker-Dealers
On November 27, 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures, which is effective for fiscal years beginning after December 15, 2023, and applies to public entities, which includes Broker-Dealers.
The goal of segment reporting is to provide information about a company’s business activities and economic environment. This update specifically addresses segment reporting and aims to improve disclosures related to a public entity’s reportable segments, which are those business units or components for which financial information is regularly evaluated by management and is required to be disclosed. Requirements covered in segment reporting include disclosures of expenses, general information, and major customer information. These disclosures are required to be applied retroactively to prior comparative financial statements in the period of adoption, however, Broker-Dealers that file their financials with only one period or year, need only apply the standard for the periods presented. The amendments in the ASU do not change how a public entity identifies or aggregates its operating segments, or how it applies the quantitative thresholds to determine its reportable segments.
Key Points
Improved Disclosures
- To address requests by investors and other capital allocators for more detailed data on segment expenses, ASU 2023-07 now enhances the information required to be reported about reportable segments by Broker-Dealers. This additional transparency will assist stakeholders in better understanding the cost structure of each segment. While segment reporting has always been applicable to Broker-Dealers, previously there were limited required disclosures since many Broker-Dealers only operate in one segment. The new standard requires the disclosure of all existing segment reporting disclosures as well as those included in ASU 2023-07, even if the entity operates in a single segment.
- To properly improve disclosures, an analysis must include the identity of the chief operating decision maker and the identification of significant segment expenses when concluding on the number of reportable segments.
Segment Expenses
- Under the significant expense principle, Broker Dealers will need to disclose significant segment expenses regularly provided to their chief operating decision maker (CODM). For a Broker Dealer, that might be the CEO, CFO or other member of management, and not necessarily the FinOp, especially if they are outsourced. Disclosure is required with respect to the title and position of the individual or name of the group or committee identified as the CODM. The significant expense principle also applies to segment expenses that are easily computable expenses based on information regularly provided to the CODM such as operating income.
Significance
- Once the entity identifies the segment expenses, it should evaluate the significance to determine which expenses to disclose by considering both quantitative and qualitative factors, such as if the expense important to future profitability based on trends. We expect disclosures could vary, even if in the same industry, depending on what factors the CODM uses to allocate resources. One example is a Broker Dealer with allocated overhead, the expenses under an expense sharing agreement may meet the criteria required to be disclosed, if it is determined that these are items the CODM uses to allocate resources.
Single Reportable Segment
- Even if an entity concludes it has only one reportable segment, the new guidance introduces specific disclosure requirements for such cases, to ensure consistency and clarity across all situations. It is expected when there is a single reportable segment, that the entity would conclude that the segment measure of profit or loss required to be disclosed is net income. For a single reportable segment, other measures used to allocate resources and assess performance should also be disclosed.
Impact
The recent ASU 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures, is effective for 2024 audits of Broker Dealers. We expect regulators will closely monitor segment reporting compliance, including adherence to the new guidance, during 2024 review of financial statement disclosures.
Broker-Dealers will need to ensure a process is in place to ensure segment reporting is regularly evaluated by management, which includes evaluating reportable segments and including various required disclosures in the financial statements. While the segment reporting process outlined above is not a new process for Broker-Dealers, there should be increased focus to document the existing process. Broker-Dealers should refer to the FASB itself for illustrative examples and further details on applying the new guidance. Broker-Dealers should review their documentation on segment reporting prior to the fiscal year end and discuss with their auditor as needed.
Author: Nick Palazzi | [email protected]