Operating Segment Identification
One of the first things an entity must do under IFRS 8 is to identify an operating segment.
Under IFRS 8 an operating segment is a component of an entity:
- that engages in business activities from which it earns revenues and incurs expenses
- whose operating results are regularly reviewed by the entity’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance, and
- for which discrete financial information is available.
The standard requires the identification of operating segments based on internal reports, which are reviewed by the chief operating decision-maker in order to allocate resources and assess performance.
The reason for this is to ensure that an entity reports segments that are used by management to monitor and control the business.
If an operating segment is used to sell goods or services to other operating segments in a group, it may be included as an operating segment if it is managed that way.
Keep in mind though, not every part of an entity will be an operating segment.
The company’s headquarters, for example, will not earn revenue, or earn revenue that is only minor, or incidental to the activities of the entity so they’re not included as an operating segment.
Chief Operating Decision Maker
What do we mean when we refer to a chief operating decision maker?
This isn’t referring to a specific person in the organisation who gets to decide how segments are split out, rather, it’s a function, which allocates resources and assesses the performance of the group.
It could be the CEO or COO, but it could also be the board of directors or others.
Aggregation of Segments
Two or more operating segments may be combined into a single operating segment if:
Aggregation is consistent with the core principle of this standard, to allow users of the financial statements make informed decisions based on the financial statements.
The segments have similar economic characteristics and are similar in each of the following areas:
- nature of the products and services
- nature of the production process
- type or class of customer for their products and services
- methods used to distribute their products or provide their services, and
- if applicable, the nature of the regulatory environment, for example, banking insurance or public utilities.
Make sure the segments are similar in each of the areas, not just one or two.
An example of this is where a group may have retail shops in Ireland and the UK, each an individual reporting segment.
If the shops sell the same types of products, to similar customers, the entity may decide to aggregate these two reporting segments for its financial statements.