The Impact of New Segment Reporting on Your Internal Controls

Effective Date

In November 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU 2023-07) with the goal of enhancing segment disclosures under Topic 280 – Segment Reporting. This Update is applicable for all public entities.

Impact on Internal Controls

People, process, and technology are words used almost daily by auditors and accountants when discussing processes and controls.  When changes occur in these areas, such as a new control owner or a new IT system being introduced, the impact on internal controls must be evaluated.  While there is a tendency to adopt a “SALY” (same as last year) approach, any significant changes in the accounting environment must be considered not just from a change in the accounting policies, but also from an internal controls perspective. 

Anecdotally, while not expected to have the same entity-wide impact that the adoption of ASC 606 and 842 had, ASU 280 is likely to have a material impact, depending on many factors, including potential system changes, report writing, education of employees, and expected number of segments. Regardless of material changes or not, it is critical that companies address the required disclosure requirements to avoid misstatements and internal control deficiencies.  Below is a list of questions that management should consider as part of segment reporting.

People

• Is current management qualified to make the required changes from a technical accounting perspective?
• Have we identified all the departments outside of general accounting that might be impacted by the change (i.e., IT, Tax, FP&A, investor relations, etc.)?
• Has management considered the controls over the identification of the Chief Operating Decision Maker (CODM) and disclosed how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources?
• Will management implement new internal controls over the identification and reporting of the significant segment expenses to be reported in the footnote, as well as developing control activities over how the CODM is using these reported expenses to measure segments’ profit/loss?
• Are there controls ensuring the correct format of significant segment expenses reviewed by the CODM, and that the company has accurately determined and reported segment profit or loss, reflecting them correctly in the financial statement footnotes?
• Are there controls to identify if the CODM uses multiple measures of a segment’s profit or loss for assessing performance and resource allocation, and how is this reflected in the footnotes?

Process

• Has management documented controls over the actual adoption itself such that they can demonstrate how the new ASU was implemented?
• Does the new format present the need for changes in the workbooks, the footnote packages, and disclosure committee review? To the extent that is the case, has process documentation been updated to reflect the new process, and what are the controls over managing those changes?
• Is the design of management review controls adequate and performed with the right level of precision?
• Has management considered whether the change in the disclosure and presentation will further impact the control environment?
• Has management prepared or enhanced existing segment documentation in a memorandum to align with ASC 280, including the adoption of this update?
• Has management ensured that the new disclosure is complete and accurate in accordance with the requirements?

Technology

• Does the current GL system and tech stack allow for the aggregating, storing, and managing of segment reporting-specific data?
• Do systems allow for scalability to handle an increase in volume and complexity of future Segments?
• Are there unremediated control deficiencies in the ITGC environment that would prevent reliance on controls around Segment Reporting?
• Does the new need for information to be presented differently result in changes in key report configurations?  If so, have controls over change management been considered to the extent they are designed to help ensure that data reported is complete and accurate.

How Centri Can Help

At Centri, our team of risk advisory and technical accounting experts has the knowledge and expertise to help your business navigate the new requirements, including:

• Serving as the central point of contact for the working group, ensuring that responsibilities are clearly defined, and critical deadlines are met.
• Reviewing your current system and its capabilities to identify the significant segment expenses to be reported within the appropriate timeframe.
• Developing/enhancing internal controls over the identification and reporting of the significant segment expenses to be reported in the footnote, as well as developing control activities over how the CODM is using these reported expenses to measure segments’ profit/loss. 
• Enhancing existing Segment documentation in a memorandum to align with the new ASU, or if one has not been previously prepared, preparing a memorandum of how the Company complies with ASC 280 including the adoption of this Update.
• Assisting with the preparation of the Segment Footnote and its related required disclosures in the financial statements.