Accounting & Tax

Son of Reg FD

Never heard of FAS 131? The SEC is beginning to watch for violators.
Lisa YoonMarch 29, 2001

For the past year, senior financial execs have been focusing on such hot topics like FAS 133, the derivatives-reporting rule, Regulation FD and the imminent new rules governing merger accounting.

As a result, SFEs might be excused for overlooking FAS 131, which will be closely scrutinized by the Securities and Exchange Commission starting this spring when the 2000 10-Ks start rolling off the presses.

FAS 131 requires public companies to use a “management approach” in reporting business-segment data on financial statements—that is, to report the segment data the same way management organizes the segments internally.

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The SEC will be looking at the footnotes in the 10-K and making sure they are consistent with the description of the business in the “management discussion and analysis” section. The SEC will also be checking press releases and analyst reports to make sure the company describes the business the same way to everyone.

Kind of Reg FD-esque.

For example, “you have (large) companies claiming [on external financial statements] that they’re in one business segment,” says Roy Van Brunt, a director at Washington, D.C.-based investigative accounting firm Ten Eyck Associates Inc. “FAS 131 would kind of knock the stuffing in that by saying, ‘don’t be ridiculous, you have (all of these other businesses).’ It’s an attempt to let people understand how much of the company’s assets are tied up in each business, and how much revenue and how much profitability comes from each of those types of businesses.”

The rule dates to 1997, when it replaced FAS 14, a looser version of FAS 131. Penalties for inadequate compliance include restatement requirements.

Compliance with the statement has no impact on the bottom line. Yet the new attention to FAS 131 could elicit some grumbling from CFOs and their finance departments.

For one, proper compliance—and restatement of unsatisfactory statements— will require significant administrative resources. Another common, and more-serious, gripe that companies have concerns competitive intelligence. Says Van Brunt, companies fear that “as soon as I do that, I show how much profit I’m making in this part of my business. Then other people who don’t disclose it will know information about my company that I don’t know about theirs.”

Yet that argument becomes moot if all companies comply with the requirements, according to James Harrington, a partner at PricewaterhouseCoopers LLP. Plus, he says, “competitors know this information already. When you’re in a competitive environment, your competitors know what you’re doing because you have similar customers, they know what’s going on in the marketplace. They know the industry, and they know where they compete with you.”

Harrington says that a bigger problem arises if a company is in registration. “If a company is looking to raise capital, this will hold up the registration process. This can have some very onerous implications. For example, if there’s a merger that going on, the SEC can hold up the whole process by requiring a company to restate its financial statements.”

So what are the key issues to keep in mind in order to comply with FAS 131?

For one, keep in mind that a “reportable segment” means operating segments that report any of the following:

  • Revenues (including intersegment revenues) of at least 10 percent of total revenues of all reported operating segments.
  • Profit of at least 10 percent of the combined profit, or loss, of all operating segments reporting a profit.
  • Assets of at least 10 percent of the combined revenues, profit or loss, or assets of all operating segments.

In addition, FAS 131 requires specific types of information, including general information about factors used to identify reportable segments. This includes all information that the chief operating decision maker (CODM) receives.

Says PwC’s Harrington: “One of the arguments that we get is that some information is included in the package that goes to the CODM but he or she doesn’t review it. Therefore, companies argue that they shouldn’t have to disclose it. The SEC has stated that they can’t fathom a situation where information is in the package that goes to the CODM, but the CODM doesn’t use it.”

Other types of required information include detailed profit-and-loss data for each reported segment, reconciliation of that data, and interim period financial statements for each reportable segment.

If this sounds like a daunting amount of administrative work, the best advice, according to both Van Brunt and Harrington, is not to put it off.

“Last year, the market was so active and the SEC’s staff didn’t have time to look at [segment disclosure],” says Van Brunt. “With the decline in the market, and the decline in {the number of] initial public offerings, they have a lot more time to look at these annual reports that they didn’t have last year.”

He adds, “If companies have ignored 131 for three or four years now, this is the year not to ignore it anymore.”

Related Links:

Read FAS 131 in full at the SEC’s site.

Go to Deloitte & Touche’s site to read a comprehensive report on FAS 131, including frequently asked questions.