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 importance of the factors that have led to the matrix structure (it did not happen without a sound business reason!!).
For example, if an entity’s priority is to increase total sales, market share and geographic spread, the most relevant information for shareholders would be based on geographic markets. An entity that aims to improve the sales of individual products, with a Chief Operating Decision Maker (CODM) that believes that improving and maintaining product quality is the key to achieving this, might conclude that the most relevant information for shareholders would be based on products.
This approach would be acceptable under IFRS 8 if: Operating segments – Matrix structured entities
- the entity can sufficiently support the basis for how it determined its segments; and
- the entity’s basis for determining segments enables users of its financial statements to evaluate its activities and financial performance, and the business environment it operates in.
The Group’s chief executive officer reviews the internal management reports of each division at least quarterly. (IFRS 8 16) Operating segments – Matrix structured entities
Segment profit (loss) before tax is used to measure performance because management believes that this information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries. (IFRS 8 27)