Companies considering a public offering in the next 12-24 months will need to carefully consider how to present their segment structure to external investors in a future registration statement. Given the segment structure’s importance to the overall story of the business and the change this represents for private companies, there may be some heavy lifting required.
Private companies typically present financial results as a single operating segment and aren’t subject to SEC reporting requirements. In a future public state, however, the Office of the CFO must be adept at external reporting for more intricate segment structures.
Here’s how to identify segments ahead of an IPO while maintaining momentum on the public-company journey:
Assess the Company’s Org Structure
Reviewing how the business is currently organized and operated is a good starting point for determining a company’s operating segments. This involves understanding the individuals or groups responsible for certain business units, who they directly report to, and how they are compensated.
This information enables a CFO or controller to build an analysis grounded in the actual reporting structure of the company.
An additional important step in this analysis is identifying the levels of authority each executive role has, which is valuable evidence in determining the operating segment managers and Chief Operating Decision Maker (“CODM”) under ASC 280 Segment Reporting.
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Evaluate Information Provided to the CODM
A key element in the determination of a company’s operating segments is the information available, provided to, and regularly reviewed by, the CODM (often the CEO or executive committee). This type of financial information can suggest management’s view of the organization.
Although not uncommon, a defined set of key performance indicators (KPIs) or financial package may not be formally provided to the CODM on a monthly or quarterly basis. As a result, CFOs and controllers often need to work with their executive teams to design a formal financial reporting package that provides decision-makers with the desired level of information to manage the business and allocate resources.
Additionally, a formal financial reporting package can ensure the information auditors review is consistent with how management operates the business. These packages can also provide a good basis for IPO roadshow materials and Investor Day presentations in the future.
Complete Technical Analysis
After completing a review of the company’s org structure and the information presented to the CODM, the Office of the CFO should prepare a technical analysis in accordance with ASC 280 Segment Reporting. This analysis will determine the financial information that helps users of the financial statements better understand the entity’s performance, assess prospects for future net cash flows, and make informed decisions about the entity.
Preliminary conclusions should be validated with executive leadership and the Board of Directors. Audit evidence such as Board materials, as well as information presented to the CODM like org charts and financial packages, will be reviewed by the external auditors to substantiate the technical conclusion.
It’s also not uncommon for external auditors to participate in internal reviews of monthly or quarterly results to validate that the company’s operating segment structure is consistent with how executives manage the business.
Prepare Segment Disclosures
Upgraded financial statements that meet Regulation S-X disclosure requirements, including additional operating segment disclosures, are needed for any prospective S-1 filing. Proactively preparing these disclosures in conjunction with a technical analysis can ensure the accounting team understands the new disclosures and the appropriate source of data.
Prospective near-term registrants should expect the topic of operating segments to be raised by multiple stakeholders. That means investing time to understand and address segment structures in advance of the IPO process to align business stakeholders and external auditors. This early alignment is critical to the development of the company’s story and how it’s presented to external investors.
For expert support identifying segment structures and making progress on your IPO journey, contact CrossCountry Consulting.