Segments, Segments Everywhere

By: George M. Wilson, SEC Institute

It is almost impossible to attend an SEC workshop or conference and not hear the words “operating segments.” In the IPO process operating segment disclosures are almost always a time consuming and complex issue. The importance of this information to investors coupled with the subjective and complex nature of the related accounting guidance both contribute to this challenge. While this will likely always be a complex issue in our reporting, the FASB has started a project to review certain parts of the related GAAP.


As you can read in this Project Summary, the Board is planning to focus on aggregation criteria and the structure of disclosures by segment. From the Project Summary:


Segment Aggregation Criteria For segment aggregation criteria, the Board decided it could:

  1. Move the reportable segment thresholds to form part of the aggregation guidance, that is, develop a brightline threshold for aggregation.
  2. Remove the aggregation criteria, but retain the practical limit guidance.

Segment Disclosure Requirements  For segment disclosure requirements, three alternatives were considered. The Board could:

  1. Add individual pieces of segment information to the list of requirement disclosures.
  2. Require the disclosures in Topic 280, Segment Reporting, to be reported in a table.
  3. Require a table of regularly reviewed information based on how it relates to the lines in the financial statements.



This plan to address the frequently misunderstood and complex aggregation criteria is particularly good news, as the SEC staff frequently challenges aggregation. Companies frequently aggregate segment information to avoid disclosing granular information that could be used by their competitors. This concern frequently directly conflicts with GAAP disclosure requirements. Here is an example of such a comment that a company that operates hotels received:


  1. We note your disclosure that all of your operating segments meet the aggregation criteria to be grouped as a single reportable segment. Please tell us how you considered the need to aggregate your operating segments into reportable segments by brand or property type. In your response, please explain to us in sufficient detail how you determined all of your operating segments meet the aggregation criteria of ASC Topic 280-10-50-11.

This was the second of two comments in a letter dated April 19, 2017. As you might expect, this type of comment can take a lot of work to respond to and frequently is not resolved in the first round of comments.


The aggregation criteria the staff referred to are from ASC 280-10-50-11:


Aggregation Criteria


Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of this Subtopic, if the segments have similar economic characteristics, and if the segments are similar in all of the following areas (see paragraphs 280-10-55-7A through 55-7C and Example 2, Cases A and B [paragraphs 280-10-55-33 through 55-36]):


  • The nature of the products and services
  • The nature of the production processes
  • The type or class of customer for their products and services
  • The methods used to distribute their products or provide their services
  • If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

A very common misapplication of these criteria is to review the five areas, but not start with the issue of “do these operating segments have similar economic characteristics”.


For the comment above, the company’s response was:


We consider each one of our hotels to be an operating segment meeting the definition set forth in ASC Topic 280; however, no individual hotel is a reportable segment because none meets the quantitative threshold for reportable segments. For purposes of determining reportable segment(s), we aggregate all of the Company’s properties, regardless of brand or property type, because all of our hotels meet the criteria for aggregation set forth in ASC Topic 280-10-50-11.

Specifically, we believe that:

Aggregation is consistent with the objective and basic principles of this subtopic; and,

The properties have the following similar economic characteristics:



    The nature of the products and services,


    The nature of the production processes,


    The type or class of the customer for their products and services, and


    The methods used to distribute their products and services.

All but seven of the 96 hotels in the Company’s portfolio are classified by the lodging industry as upper-upscale and luxury properties and represent over 98% of revenues. Further, as disclosed in the 10-K, no single property represents more than 7% of total revenues. The remaining seven hotels are defined as upscale or midscale and represent less than 2% of revenues and as such do not either individually or in the aggregate approach the quantitative thresholds necessary to qualify as a reportable segment.

All of the properties in the portfolio, regardless of brand or property type, share very similar long-term financial performance and economic characteristics, including the nature of their products, services and production processes and the methods used to distribute their product. The hotels are designed and operated to appeal to similar individuals and group leisure and business customers that travel to upper-upscale and luxury properties. For example, while approximately 64% of total revenues are generated from room revenues, the individual hotels typically include meeting and banquet facilities, a variety of restaurants and lounges, swimming pools, exercise/spa facilities, gift shops, and parking facilities. Importantly, these amenities are either a brand(s) standard and/or customer expectation across all of the upper-upscale and luxury hotels in the portfolio. All of the properties in the portfolio react similarly to economic stimulus such as business investment, changes in GDP and changes in travel patterns. Capital allocation decisions to acquire, enhance, redevelop, or perform renewal and replacement expenditures are determined on a property-by-property basis to appropriately match each hotel within its specific market to seek to improve operating performance and include consideration of local market changes in supply and demand.


The staff asked for more information and you can find the company’s second response letter here. The depth of analysis in this second letter is significantly more than in the first response. And, both the comment and the response demonstrate the complexity of this issue in current GAAP.


As always, your thoughts and comments are welcome.

Leave a Reply

Your email address will not be published. Required fields are marked *