Reporting from the inside out.

• Author: Lott, Ronald W.
• Position: Corporate Reporting

The FASB's exposure draft on disaggregated information aims to align segment reporting with internal reporting and follow management lines of responsibility. Here's how it works, according to the FASB.

In January, the Financial Accounting Standards Board issued an exposure draft of a proposed standard, "Reporting Disaggregated Information About a Business Enterprise." As we go to press, the FASB is awaiting final comments on the exposure draft and is collecting information from the last few companies to participate in a field test of the exposure draft provisions. If your company is publicly held, this draft would change significantly the requirements under which it reports disaggregated, or segment, information. (Private business enterprises and not-for-profit organizations wouldn't be affected, because they aren't required to report segment information.)

The exposure draft would require companies to report information according to the management approach, based on recommendations of the Association for Investment Management Research and the Jenkins Committee. This approach entails aligning segment reporting with internal reporting and reporting financial information available internally.

Aligning segment reporting with internal management reporting means an enterprise's segments would be based on its internal financial reporting system and on lines of management responsibility. The draft defines the internal financial reporting system as the system that generates information for the financial statements in the company's annual report. In most companies, financial reports are available at a level or levels below the consolidated financial statements. The components represented by financial information below the consolidated level are potential operating segments.

Management responsibility also is an important factor in identifying operating segments. The exposure draft uses the term chief operating decisionmaker to describe the top level of the management responsibility tree, instead of a specific position like CEO, because responsibilities vary from enterprise to enterprise. The chief operating decisionmaker is defined by a function: evaluating the performance of an enterprise's components and deciding how to allocate resources to them.

A company's operating segments are easy to identify if the components reviewed by the chief operating decisionmaker match the columns in a hypothetical consolidation spreadsheet. However, not all enterprises are organized that way, and the exposure draft includes additional guidance for identifying...