Identifying Operating Segments – A Football Analogy

By Carl Dietz, CPA

Manager of Financial Reporting

During this time of year, I wake up each Sunday morning, prepare a cup of coffee, turn on ESPN, and listen to the sports news as I make the final lineup changes to my fantasy football team. The announcers go through the each team’s lineup, suggesting players who might play well and players who might not play during the day. It’s easy for us to sit back in our couches and play general manager for a day. For the owners, general managers and the players of our favorite football team, their game-day preparation started months ago.

A winning football team is built on a good game plan and either home-grown or acquired talent to help them execute that game plan. This is also true in the business world with a good strategic plan being executed through home-grown ideas or acquired businesses. For those businesses that have gone through the “free agent pool” of acquiring a business over the past few years, now is the time to think about how this acquisition will affect your year-end audit. In this article, we’ll discuss how to evaluate your acquisition the same way our favorite football team prepares for the upcoming season.

As with any football team, the team and its players are always being evaluated. During the course of each practice and game the general manager, head coach and assistant coaches observe each player and analyze each play. Which players on defense are good against the pass or good against the run? Which players have a knack for creating separation from the defense and what play was called which led to that touchdown? After the season, which players will leave our team via free agency? Which players should we take in the draft? All of these questions ultimately have to be answered by someone, or a group of people, in order to maintain our team’s high level of play. In the accounting world, we would call this person the Chief Operating Decision Maker (“CODM”). For most football teams, their CODM could be the general manager, head coach or coaching staff. In our situation, our general manager is also our head coach and he’s the one making all of the final decisions.

How does the general manager come to make his decisions? Does he have an analytics department who keeps track of each player? Does he have multiple personnel coaches reporting to him after each game? And what about the scouting department – is the general manager reviewing their reports after each college football game? These questions are similar to what a corporation’s CODM would ask of the business unit leaders. Which business units are performing according to forecasts? Where should we allocate resources to maximize profits? What business units are under performing?

The general manager is ultimately in charge of answering all of these questions and making decisions to better the team, not only for the current season but for seasons to come. In many ways, this is the same goal of a business’s CODM – how does he guide his team to success? The CODM would begin this process by reviewing activities from which the business may earn revenues and incur expenses.

In the football world, general managers need to dig down to the lowest possible component of a football team – the individual player. Each player is responsible for a specific task, whether it be to pass the ball, catch the ball, or ensure that the opponent is not allowed to pass or catch the football. Individual metrics have been established which track the individual players progress – passing yards, receiving yards, interceptions – and those metrics are used in deciding whether to start, bench, or cut the player from the team. In the business world, our CODM would perform a similar analysis by finding the lowest possible level of discrete data and analyzing that data to determine how well the component is operating. As noted in footnote 2 below, if a component earns revenues and incurs expenses, has its operating results regularly reviewed by the CODM and has discrete financial data, then we can consider this component to be an operating segment. If our football player was part of a business, he could be considered an operating segment since they exhibit the same characteristics – the player engages in activities that aid the team in winning (i.e. activities that may earn revenues and incur expenses), the general manager reviews his game-day performance (i.e. operating results are regularly reviewed by the CODM), and discrete data is available to analyze his performance (i.e. discrete financial information is available).

Each player on a football team plays an integral part to ensure the team wins the game. However, each player is usually grouped into a unit – wide receivers, offensive or defensive lines, the secondary – and are evaluated on that unit’s level of play. A CODM of a business would also look at each of its components, similar to how a team aggregates its players, and perform the same task of grouping the components with similar characteristics . Thus, our offensive line or defensive line, in accounting terms, could be considered to be a reporting unit.

On any given game day, a football roster has 53 active players spread among the offensive, defensive and special teams’ positions. Each of these individuals can be considered to be their own “reporting unit” as mentioned above. But as you know, most teams might consider their group to be aggregated into more discrete units (operating segments). When listening to the analysts on television, not only do they call out individual players (Byron Maxwell will have to do a good job of covering Julio Jones and limiting his touches) but also as a unit (the defensive line will have to win the battle in the trenches and provide a good pass rush to limit Matt Ryan’s ability to find his open receivers). Our football team is an excellent analogy to determining operating segments, as we could break down our team into separate units – quarterback, running backs, receivers and tight ends, offensive line, etc. – each of which has their own role in helping the team win a game.

One of this year’s auditor hot-button topics is clearly identifying operating segments and reporting units and how goodwill has been allocated to those operating segments or reporting units. Hopefully these analogies will help you better understand this difficult topic and help you in determining your Company’s operating segments and reporting units.


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