Chief operating decision maker codm

What Is Chief Operating Decision Maker (CODM)?

The Chief Operating Decision Maker (CODM) is the individual or group within an entity that holds the primary responsibility for allocating resources to the entity's Operating Segments and assessing their performance. This function is central to Financial Reporting within the broader category of Accounting Standards. The CODM is not necessarily a single person with a specific title, but rather the function performed by those who make key operational decisions. For many entities, the CODM might be the chief executive officer (CEO), but it could also be a group of executive directors or another committee.⁴³,⁴² Identifying the CODM is a critical step in determining which operating segments an entity must disclose in its Financial Statements, as required by accounting standards like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

History and Origin

The concept of the Chief Operating Decision Maker (CODM) emerged with the evolution of Segment Reporting standards. In the United States, the Financial Accounting Standards Board (FASB) introduced Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," in 1997. This standard, now codified as FASB Accounting Standards Codification (ASC) Topic 280, fundamentally changed segment reporting from an industry-based approach to a "management approach."⁴¹,⁴⁰,³⁹

Under the management approach, companies are required to report information about their operating segments in a way that aligns with how management internally organizes and evaluates the business. This directly led to the formalization of the CODM concept, as the standard required disclosures based on the information reviewed by the entity's chief operating decision maker for purposes of Resource Allocation and Performance Measurement.³⁸,³⁷ Similarly, the International Accounting Standards Board (IASB) adopted a comparable approach with IFRS 8, "Operating Segments," issued in 2006, which largely converged with the US GAAP standard, also focusing on the CODM's role.³⁶

Key Takeaways

• The Chief Operating Decision Maker (CODM) is a function, not necessarily a specific job title, responsible for resource allocation and performance assessment of an entity's operating segments.³⁵,³⁴
• The CODM's internal reporting structure dictates how an entity's Reportable Segments are identified for external financial reporting purposes.³³
• Accounting standards like FASB ASC 280 (US GAAP) and IFRS 8 require entities to disclose segment information based on what the CODM regularly reviews.³²,³¹
• Recent updates to segment reporting standards emphasize disclosing more detailed expenses and clarifying the CODM's identity and their use of performance measures.³⁰,²⁹
• Correct identification of the CODM is crucial for transparent and decision-useful segment disclosures for investors and other stakeholders.²⁸

Interpreting the Chief Operating Decision Maker (CODM)

Interpreting the Chief Operating Decision Maker (CODM) involves understanding the entity's internal organizational structure and management processes. The CODM is the focal point for understanding how the company makes strategic decisions about its various business lines or geographical areas. For external financial reporting, particularly concerning Segment Reporting, the identification of the CODM directly influences how an entity's operations are presented to investors.²⁷

Companies must provide disclosures about their operating segments based on the information that the CODM uses to allocate resources and assess performance. This means that the segment profits, losses, and assets reported externally should directly reflect the internal measures used by the CODM. If the CODM reviews multiple measures of a segment's Profit and Loss (P&L), the entity may report more than one, though at least one must align with the measurement principles used in the Consolidated Financial Statements.²⁶,²⁵ The clarity and consistency of these disclosures are vital for financial analysts and investors to accurately evaluate the underlying performance of different parts of a diversified business.²⁴

Hypothetical Example

Consider "GlobalTech Inc.," a multinational technology company. GlobalTech's leadership team consists of a Chief Executive Officer (CEO), Chief Financial Officer (CFO), and heads of its three main divisions: Software Solutions, Hardware Manufacturing, and Cloud Services.

In this scenario, the CEO, John Doe, functions as the Chief Operating Decision Maker (CODM). He holds weekly meetings where he reviews detailed financial reports for each of the three divisions. These reports include revenue figures, direct costs, and allocated overhead, allowing him to see the Profit and Loss (P&L) for each segment. Based on these reviews, John makes decisions about how much capital to invest in each division (e.g., approving budgets for new product development in Software Solutions) and assesses the performance of each division head.

For its annual Financial Statements, GlobalTech Inc. would identify Software Solutions, Hardware Manufacturing, and Cloud Services as its Reportable Segments. The financial information disclosed for each of these segments would be the same information that John, as the CODM, regularly reviews for Resource Allocation and performance assessment. This "management approach" ensures that external users of the financial statements receive information that mirrors how the company itself is managed.

Practical Applications

The Chief Operating Decision Maker (CODM) concept has several crucial practical applications, primarily in the realm of corporate transparency and financial reporting:

• Segment Identification: The CODM's internal view of the business is the primary determinant for identifying an entity's Operating Segments. Only components whose operating results are regularly reviewed by the CODM for resource allocation and performance assessment, and for which discrete financial information is available, qualify as operating segments.²³,²²
• External Disclosures: Public companies are required to disclose information about their Reportable Segments in their Financial Statements (e.g., 10-K filings with the SEC). This includes segment revenues, profit or loss, and assets, as measured and reported to the CODM.²¹,²⁰
• Investor Analysis: The CODM-driven segment disclosures provide investors and analysts with a clearer, more granular view of a diversified company's operations. This disaggregated data allows for better assessment of the individual performance drivers, risks, and opportunities within different parts of the business, leading to more informed investment decisions.¹⁹
• Regulatory Compliance: Both US GAAP (through FASB ASC 280) and IFRS (through IFRS 8) mandate disclosures based on the CODM approach, ensuring that companies adhere to global accounting standards. The FASB recently issued updates (ASU 2023-07) requiring public entities to disclose significant segment expenses regularly provided to the CODM, further enhancing transparency.¹⁸

An example of such disclosures can be found in public company filings with the U.S. Securities and Exchange Commission, where companies explicitly name their CODM and outline their reportable segments.¹⁷

Limitations and Criticisms

While the Chief Operating Decision Maker (CODM) approach to segment reporting aims to provide more decision-useful information, it is not without its limitations and criticisms.

One common critique is that the "management approach" can introduce a degree of managerial discretion into what is reported externally. Since segment identification and the measures reported depend on the CODM's internal view, companies might present segments in a way that optimizes their public perception, potentially leading to less comparability across different entities or even across periods for the same entity if the internal structure or CODM's reporting preferences change.¹⁶ For instance, if a company's CODM changes their internal reporting structure, the Reportable Segments may also change, making historical comparisons difficult unless prior periods are recast.¹⁵

Another challenge lies in identifying the CODM itself, especially in complex, matrix-style organizations or where decision-making is highly decentralized. While often the CEO, the CODM can sometimes be a committee or group, which can make it less clear who truly holds the primary responsibility for Resource Allocation and Performance Measurement.¹⁴ Furthermore, critics have argued that despite the intent, segment disclosures based on the CODM might not always provide sufficient granular detail on segment expenses, which can limit the ability of investors to perform in-depth financial modeling.¹³ Recent FASB amendments aim to address this by requiring more detailed expense disclosures.¹²,¹¹

Chief Operating Decision Maker (CODM) vs. Segment Manager

The terms Chief Operating Decision Maker (CODM) and Segment Manager are closely related within the context of Segment Reporting, but they represent distinct functions.

The Chief Operating Decision Maker (CODM), as defined by accounting standards like IFRS 8 and ASC 280, is the function responsible for allocating resources to and assessing the performance of an entity's Operating Segments. This is a high-level, overarching role that oversees the strategic direction and overall performance of the various parts of the business. The CODM's view of the entity's segments drives the external financial reporting.¹⁰,⁹

A Segment Manager, on the other hand, is generally a person who is directly accountable to the CODM for the operations and financial results of a specific operating segment. Segment managers are responsible for the day-to-day management and performance of their respective segments. They report to the CODM, providing the detailed information that the CODM uses for higher-level decision-making. While the CODM may sometimes also act as a segment manager for certain segments, and a single manager might oversee multiple segments, the segment manager's role is typically operational within a specific segment, whereas the CODM's role is strategic and entity-wide regarding segment oversight.⁸

FAQs

Who typically serves as the Chief Operating Decision Maker (CODM)?

The Chief Operating Decision Maker (CODM) is often the entity's chief executive officer (CEO). However, it can also be the chief operating officer (COO), a group of executive directors, or another committee or individual with the primary function of allocating resources to and assessing the performance of the entity's Operating Segments.⁷,⁶

Why is the identification of the CODM important for financial reporting?

Identifying the CODM is crucial because it dictates how a public entity's Operating Segments are defined and how their financial information is presented in external Financial Statements. Accounting standards require that segment disclosures reflect the internal view used by the CODM, ensuring that investors receive information aligned with how management runs the business.⁵

Do all companies have a Chief Operating Decision Maker?

Yes, all public entities that are required to apply Segment Reporting standards (like FASB ASC 280 or IFRS 8) effectively have a Chief Operating Decision Maker, even if that function is performed by a group rather than a single individual. The concept is about the function of decision-making, not a specific title.⁴

Can the CODM change over time?

Yes, the identity of the Chief Operating Decision Maker (CODM) or the composition of the group performing that function can change over time due to changes in an entity's management structure or reporting lines. When such changes occur, the entity may need to reassess its Reportable Segments and recast prior period information for comparability.³

What kind of information does the CODM typically review?

The CODM typically reviews financial information such as segment revenues, expenses, Profit and Loss (P&L), and assets for each of the entity's operating segments. This information is used to make decisions about Resource Allocation and to assess each segment's contribution to the overall performance of the entity.²,¹