ACCT 635 Week 6 Discussion Board Forum 6 Example

Discussion Board Forum 6: Segment Disclosure After ASU 2023-07

ACCT 635 Advanced Research for Financial Reporting, Discussion Board Forum 6

Thread by [Student Name]

The classmates are composites; Target's segment counts come from its filed 10-K, and the standard, studies and Bible passage cited are real.

Segment information tells investors where a company's revenue and profit come from, and investors have long argued it is among the most useful disclosures in a 10-K. Before the latest update, companies reported a measure of segment profit or loss but often little about the expenses behind it, so an analyst could see that a segment's margin fell without seeing why. Under ASU 2023-07, a public company now itemizes the big segment costs that routinely reach its top decision maker and sit inside the segment profit measure, adds one figure for all remaining items, and names who that decision maker is. It also requires companies with a single reportable segment to provide all of the segment disclosures. Companies began applying it in fiscal years that started after the middle of December 2023 (Financial Accounting Standards Board [FASB], 2023). My aim here is to ask whether the added detail repays its cost.

Theory helps explain why the FASB had to require this. Research on SFAS 131, the earlier segment standard, found that before it took effect, managers tended to withhold segment data for businesses that were profitable and operated in less competitive industries, which is consistent with protecting them from rivals, and that the new standard changed analysts' information environment (Botosan & Stanford, 2005). Berger and Hann (2003) found that SFAS 131 revealed segment information that had been hidden and that the market had not fully anticipated. When managers can choose what to disclose, they tend to keep the most valuable information for themselves.

Target is an interesting case because its 10-K reports one operating segment and one reportable segment (Target Corporation, 2026). Under the old rules, a single-segment company could say little beyond that. Under ASU 2023-07, it must explain how its chief operating decision maker uses the measure of profit and disclose the significant expenses that decision maker reviews. For a retailer, that discussion can show which costs management watches, which is itself information about strategy. Wolk et al. (2017) treat usefulness to readers' decisions as the test any disclosure must pass, and segment notes that mirror management's own reports pass it more easily than figures an analyst has to reconstruct from the income statement and guesswork.

Jesus warned that what is concealed now will come to light (English Standard Version Bible, 2001/2016, Luke 12:2). Disclosure standards work on a humbler version of that principle: information that matters to owners eventually needs to be in front of them.

Reply to Jasmine

Jasmine, your thread praised ASU 2023-07 for giving analysts more detail, and I agree the analyst perspective is the strongest argument for it. Botosan and Stanford (2005) found that the earlier segment standard changed the information analysts relied on, which suggests segment detail feeds directly into forecasts. Significant expense detail should help further, because an analyst can now model which costs drive margin changes rather than inferring them.

But I would add the counterweight your thread left out: proprietary costs. The same research found that managers had withheld segment data where it was most valuable to competitors. Requiring expense detail by segment may reveal cost structures that rivals can use, and the update tries to limit that by tying the disclosures to what the chief operating decision maker actually receives rather than to a fixed list of expenses (FASB, 2023). That design choice means two companies in the same industry may disclose different expense categories, which reduces comparability but respects how each company is managed.

I think the trade-off is reasonable, but it means analysts will still need to read the notes carefully rather than compare line items mechanically. A retailer that reports shrink and freight separately and a rival that folds them into one line are both complying, yet their numbers cannot simply be lined up side by side, and an analyst who forgets that will draw the wrong conclusion about which company controls costs better. Do you think the management approach to segment reporting, which lets each company decide what its decision maker sees, is the right foundation, or would a standardized list serve investors better?

Reply to Owen

Owen, you argued that requiring segment disclosures from single-segment companies is pointless, since the segment is simply the whole company. I see why it looks that way, but I think the requirement adds something. A single-segment company like Target now has to show the major costs its top decision maker looks at routinely and describe how that person uses profit to decide where resources go (FASB, 2023; Target Corporation, 2026). Even if the totals match the income statement, the choice of which expenses management watches tells investors how the business is run.

Berger and Hann (2003) found that segment information revealed by the earlier standard contained news the market had not fully anticipated, which suggests that even disclosure that seems redundant can carry information. For a single-segment company, the news may be in the categories rather than the totals.

There is also a forward-looking reason. If a single-segment company later adds a segment, investors will already have a baseline for how management measures performance. And the update's requirement to name the decision maker clarifies accountability, since investors can see whether a chief executive, a committee or a chief financial officer is the person whose reports define the segment and its profit measure.

I agree the cost-benefit balance is weaker for single-segment companies than for diversified ones, so your concern is not unreasonable. The question is whether the incremental information justifies a modest added disclosure. Would your view change if the expense categories a single-segment company discloses turn out to differ from those on its income statement?

References

Berger, P. G., & Hann, R. (2003). The impact of SFAS No. 131 on information and monitoring. Journal of Accounting Research, 41(2), 163-223. https://doi.org/10.1111/1475-679X.00100

Botosan, C. A., & Stanford, M. (2005). Managers' motives to withhold segment disclosures and the effect of SFAS No. 131 on analysts' information environment. The Accounting Review, 80(3), 751-772. https://doi.org/10.2308/accr.2005.80.3.751

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Financial Accounting Standards Board. (2023). Accounting standards update No. 2023-07: Segment reporting (Topic 280): Improvements to reportable segment disclosures.

Target Corporation. (2026). Form 10-K: 2025 annual report. U.S. Securities and Exchange Commission.

Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2017). Accounting theory: Conceptual issues in a political and economic environment (9th ed.). SAGE.