Can a discontinued operation be an operating segment?

A discontinued operation can meet the definition of an operating segment if:

  • it continues to engage in business activities; Can a discontinued operation be an operating segment?
  • the operating results are regularly reviewed by the CODM; and Can a discontinued operation be an operating segment?
  • discrete financial information is available to facilitate the review.

Example – Insurance company disposing of its workers’ compensation business

An insurance company discontinues its ‘workers’ compensation’ line of business. The discontinuation meets the criteria for ‘discontinued operations’ under IFRS 5, ‘Non-current assets held for sale and discontinued operations’. For internal purposes, separate financial results are maintained for this business, and they are reviewed by the CODM until the discontinuance is complete. The operation is still being managed by the CODM and would continue to meet the definition of an operating segment. Conversely, if the CODM no longer reviews discrete financial information on the discontinuing operation, it would no longer fall within the definition of an operating segment. For example, a furniture manufacturing plant shuts down its operations in Asia. The plant is no longer producing inventory and it has been reclassified under IFRS 5 as ‘assets held for sale’. Discrete financial information is no longer reported. As a result, it would not be considered an operating segment. Note. Disclosures would still be presented in accordance with IFRS 5.

How are operating segments determined?

IFRS 8 8 states that the following factors should be considered when an entity is determining the set of components that constitutes its operating segments:

  • The nature of business activities of each component. To the extent that the higher- level segment information is represented by components that contain dissimilar business activities, while the lower level components contain similar business activities, the lower level components may be more representative of the company’s operating segments.
  • The existence of managers responsible for each component. It is likely that those components that have individuals responsible for the components’ results (such as a segment manager, business-unit CFO, or vice president) and who are directly accountable to, and maintain regular contact with, the Chief Operating Decision Maker (CODM) to discuss operating activities, financial results, forecasts, or plans for the segment, are an entity’s operating segments. Segment managers may be responsible for more than one operating segment. IFRS 8 9 states that generally, if there is only one set of components for which segment managers are held responsible, that set of components constitutes the operating segments.
  • The information provided to the board of directors. The information provided to the company’s board of directors, when not considered to be the CODM, may indicate the level at which
    1. overall performance is assessed and Can a discontinued operation be an operating segment?
    2. decisions are made about resource allocation to different areas of an entity’s business.

Entities should consider qualitative factors in addition to those outlined above in determining the appropriate operating segments. These should include an assessment of whether the resultant operating segments are consistent with the core principle of IFRS 8 and whether the identified operating segments could realistically represent the level at which the CODM is assessing performance and allocating resources. Can a discontinued operation be an operating segment?

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