Significant Segment Expenses: The New Detail Inside Segment Profitability

What are Significant Segment Expenses?

Significant segment expenses are expense categories and amounts that are regularly provided to the Chief Operating Decision Maker and included in a reported Segment Profit or Loss measure.

FASB introduced the significant-expense principle through ASU 2023-07 to give investors more detail about the costs behind Reportable Segment profitability.

Why the disclosure changed

Before the update, investors often received segment revenue and a profit measure without enough expense detail to understand how the segment generated that result. FASB's project responded directly to investor requests for more decision-useful information about segment expenses.

The new principle is tied to internal management reporting. If an expense category is regularly provided to the CODM and included in the segment profit-or-loss measure, it can fall within the disclosure requirement when significant.

This management link matters. The rule is not simply a requirement to copy every consolidated income-statement expense into every segment.

Significance is contextual

The standard directs companies to consider quantitative and qualitative factors when assessing significance. There is no single universal percentage that makes a segment expense significant for every issuer.

An expense can matter because of its size, its nature, its importance to how the business operates, or the way management uses it. Investors therefore should avoid treating absence from the significant-expense table as proof that a cost does not exist or is economically unimportant.

What investors can learn

Expense detail can make segment margins more interpretable. For example, an analyst may be able to separate cost of sales, personnel costs, advertising, distribution, research spending, or other categories that previously sat behind one segment profit number.

That can help with operating-leverage analysis, margin bridges, peer comparisons, and forecasting. It may also show that two segments with similar current margins have very different cost structures and therefore different sensitivity to revenue changes.

However, company-to-company comparability remains imperfect because the disclosed categories depend partly on what management regularly provides to the CODM.

Relationship to other segment items

Not every amount between segment revenue and segment profit will necessarily appear as a separately named significant expense. ASU 2023-07 also requires disclosure of Other Segment Items, which captures the difference between reported segment revenue less disclosed significant expenses and the reported segment profit-or-loss measure.

The two disclosures should be read together rather than interpreting the significant-expense list as a complete standalone income statement for the segment.

Sources and further reading

• FASB: Segment Reporting completed project summary
• FASB: ASU 2023-07, Segment Reporting
• CFA Institute: Segment Disclosures, Investor Perspectives

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