Segments, Taxes, SAB 74 and More

Segments, Taxes, SAB 74 and More

Blog Keeping Current: Disclosure and Governance Developments

The Financial Accounting Standards Board (FASB) was quite active at the end of 2023 and published two notable Accounting Standards Updates (ASUs) that are expected to meaningfully affect public company disclosures regarding segments and taxes. While compliance with these two new ASUs is not required for upcoming 10-Ks, some disclosure about their expected effect may be required. In addition, companies should begin planning now for how they will implement and be affected by these standards, including whether there are any changes to consider making before the amended standards take effect. Note that companies that report only a single segment are also impacted by the upcoming segment rule changes. 

In addition to these FASB updates, we discuss below a recent SEC staff speech reminding companies to pay due attention to the preparation and presentation of the statement of cash flows.

Segments

ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, seeks to improve the disclosures about reportable segments, primarily by requiring additional disclosures about significant segment expenses. Among others, the amended segment reporting standard will require that companies:

  • Disclose, on an annual and interim basis, significant segment expenses that are both regularly provided to the chief operating decision maker (CODM) and taken into account in calculating a reported measure of segment profit or loss for such reportable segment.
  • Disclose, on an annual and interim basis, an amount for “other segment items” by reportable segment and a qualitative description of its composition. “Other segment items” are those adjustments between segment revenue and a reported measure of segment profit or loss for that segment that are not otherwise disclosed as a significant segment expense under the preceding bullet.
  • Disclose the title and position of the individual, or the name of the group or committee, identified as the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
  • Provide all annual disclosures about a reportable segment’s profit or loss and assets in interim periods.
  • Provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280 even if there is only one reportable segment.

In addition, the new ASU permits companies to disclose more than one measure of segment profit or loss for a segment in instances where the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. If a company elects to provide more than one such measure for a given segment, at least one measure of segment profit or loss must be a measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the company’s consolidated financial statements. The SEC staff cautioned companies to engage with the SEC staff if choosing to early adopt this new segment reporting standard, particularly as it relates to the interplay between the new segment reporting standard and SEC guidance around non-GAAP measures, especially the guidance under Section 104 of the SEC’s Non-GAAP Compliance and Disclosure Interpretations.

The amendments to the segment reporting standard are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.

In the interim, companies would be well-advised to take a look at their CODM reporting packages to assess the potential segment disclosures that might be required under the amended standard and ensure that their CODM, other members of management and audit committees are aware of this new ASU and its effects on the company’s disclosures.

Taxes

ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, responds to investor requests for additional transparency concerning income tax information. The amendments primarily involve the following disclosure changes:
  • Rate Reconciliation. Companies will be required to provide a tax rate reconciliation that includes specific categories of items, plus any other reconciling items where the effect of such item is greater than 5% of the tax amount that would be due on pretax income (or loss) based on the applicable statutory income tax rate. The specific disclosure categories include:

o State and local income tax, net of federal (national) income tax effect (reflecting income taxes imposed at the state or local level within the jurisdiction (country) of domicile);

o Foreign tax effects (reflecting income taxes imposed by foreign jurisdictions);

o Effect of changes in tax laws or rates enacted in the current period;

o Effect of cross-border tax laws;

o Tax credits;

o Changes in valuation allowances;

o Nontaxable or nondeductible items; and

o Changes in unrecognized tax benefits.

Subject to limited exceptions, reconciling items generally are required to be presented on a gross basis.

Public companies must also provide qualitative disclosures about their reconciling items, including:

o Qualitative description of the states and local jurisdictions that make up over 50% of the effect of the state and local income tax category; and

o If not otherwise evident, an explanation of the individual reconciling items disclosed, such as the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. 

  • Income Taxes Paid Disclosure. Annual disclosure will be required as to the amount of income taxes paid (net of refunds received) disaggregated by:

o Federal (national), state, and foreign taxes; and

o Individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received).

    • Other Required Disclosures and Disclosure Updates. Under the amendments, companies will also be required to disclose:

    o Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign; and

    o Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign.

    The amendments eliminate some required disclosures, including the requirements to: 

    o Disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or make a statement that such an estimate cannot be made; and

    o Disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

    For public companies, the amendments to the income taxes reporting standard are effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and amendments should be applied on a prospective basis, though retrospective application is permitted. 

    SAB 74

    As a reminder when dealing with changes in accounting standards, SEC Staff Accounting Bulletin 74, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period (codified as SAB Topic 11.M / ASC 250-10-S99-5), requires that companies discuss the potential effects of adopting recently issued (but not yet implemented) accounting standards in registration statements and reports filed with the SEC, unless the impact on the company’s financial position and results of operations is not expected to be material.  

    Disclosures should be included in MD&A and the financial statement footnotes. The level of information will differ across various standards and from one company to another. In regards to the recent ASUs concerning segments and income taxes, among other recent ASUs, companies should consider the following disclosures per SAB 74:

    • A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier;
    • A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined;
    • A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable, in which case, a statement to that effect may be made; and
    • Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.).

    In instances where a recently issued ASU will impact the preparation of, but not materially affect, the financial statements, SAB 74 encourages disclosing that a standard has been issued and that its adoption will not have a material effect on the company’s financial position or results of operations.

    Cash Flow Statement Presentation

    Aside from FASB-specific updates, for this upcoming Form 10-K season, companies are reminded to pay due attention to the preparation and presentation of the statement of cash flows.  In December, SEC Chief Accountant Paul Munter issued a statement in which he noted that the SEC Office of the Chief Accountant has “observed that preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements, which may impede high quality financial reporting for the benefit of investors.” He underscored that “[a]ccurately classifying cash flows as operating, investing, or financing activities is paramount to investors understanding the nature of the issuer’s activities that generated and used cash during the reporting period,” while acknowledging that these classifications can at times “require significant judgment.” He also emphasized the importance of direct controls as to cash flow statements, including with respect to the classification of cash flows and disclosure of noncash items. 

    He further encouraged companies to “carefully consider how to best present cash and noncash information, and whether additional information should be disclosed to facilitate an investor’s understanding of the statement of cash flows and the financial statements as a whole.” Offering up examples, he suggested that companies could consider further disaggregating items presented in the statement of cash flows, disclosing additional information as to the relationships between amounts reported in the statement of cash flows and those in the statement of financial position, and reporting operating cash flows under the direct method. Companies considering any such additional disclosures should closely coordinate with their auditors and audit committees.

     

     

     

     

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