IFRS 8 Operating Segments |

Operating segments – Matrix structured entities

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IFRS 8 10 addresses the issue of matrix structures. It uses the example of an entity where some managers are responsible for product and service lines worldwide, whereas other managers are responsible for specific geographical areas.

The CODM reviews the operating results of both sets of components, and discrete financial information is available for both. In this situation, the entity should determine which set of components constitutes the operating segments, taking account of what users of the financial statements would need to know in order to evaluate the entity’s business activities and the environment it operates in. Operating segments – Matrix structured entities

Matrix-structured entities use judgment to determine their operating segments. Such entities should consider the … Read more

How are operating segments determined?

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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
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Can a discontinued operation be an operating segment?

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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

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Can a R&D function be an operating segment?

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As long as discrete information is reviewed by the Chief Operating Decision Maker (CODM) a R&D function can be an operating segment. Typically, an entity’s research and development (R&D) function is a vertically integrated operation (see Operating segments – Vertically integrated operation), in which the R&D activities serve as an integral component of the entity’s business. The definition of operating segment envisages that part of an entity that earns revenue and incurs expenses relating to transactions with other components of the same entity may still qualify as an operating segment even if all of its revenue and expenses derive from intra-group transactions. Can a R&D function be an operating segment?

Where entities allocate entity-wide R&D costs … Read more

Operating segments – Vertically integrated operation

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IFRS 8 defines an operating segment as a ‘component of an entity that engages in business activities from which it may earn revenues and incur expenses’. This recognises that not all business activities earn revenues.

Where transfer prices are charged between an entity’s stages of production (for example, with oil and gas companies), the fact that the transfer prices are not assessed by the Chief operating decision maker (CODM) would not exempt such activities from being considered operating segments. The operating segments of an oil and gas company may include exploration, development, production, refining and marketing – if the CODM manages the entity in this way.

Vertical integrated businessA vertically integrated business model means that you consolidate multiple steps … Read more

Operating segments – Cost centers

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IFRS 8 defines an operating segment as a ‘component of an entity that engages in business activities from which it may earn revenues and incur expenses’. This recognises that not all business activities earn revenues.

Cost centers as a separate segment

Manufacturing entities that are managed by reference to operating cost centres, may not record cost center revenues because the entity’s total customer revenues are not allocated to each cost center. Operating segments – Cost centers

Care should be exercised when determining whether an internally reported activity constitutes an operating segment (for example – A head office function that undertakes business activities (for example, a treasury operation that earns interest income and incurs expenses)) may be an … Read more

Disclosure of operating segments

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The disclosures regarding operating segments focus on the information that management believes is important when running the business. The disclosure requirements are summarised below.

Information required


General information

  • Factors used to identify the reportable segments.
  • Types of product/service from which each reportable segment derives its revenue.

Information about the reportable segment; profit or loss, revenue, expenses, assets, liabilities and the basis of measurement

  • A measure of profit or loss and total assets.
  • A number of specific disclosures, such as revenues from external customers if they are included in segment profit or loss and presented regularly to the CODM.
  • Explanation of the measurement of the segment disclosures.
  • The basis of accounting for transactions between reportable segments.
  • The
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What are operating segments?

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Most entities will be able to identify their operating segments easily by reference to the definition. However, when this is not the case, for example if the chief operating decision maker (CODM) uses more than one set of segment information, other factors may enable the operating segments to be identified.

Factors to consider in determining operating segments for a reporting entity are:

  • the nature of the business activities of each component of the entity, the existence of managers responsible for them, and information presented to the board of directors.
  • an operating segment will usually have a segment manager who is directly accountable to, and has regular contact with, the CODM to discuss the performance of the segment.
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