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4.3 Operating Segments

Operating segments are components of a business that engage in activities from which it may earn revenues and incur expenses. Operating segments are generally distinguished based on the nature of the products or services they provide, the geographical areas in which they operate, or the customer groups they serve. Segment reporting provides information about the performance and risks of an entity’s various operating segments, allowing users of financial statements to assess the company’s profitability and growth prospects.

The International Financial Reporting Standards (IFRS) require entities to disclose information about their operating segments in accordance with IFRS 8 – Operating Segments. Here are the key aspects of operating segments:

  1. Identification of Operating Segments: The entity needs to identify its operating segments based on the internal reports reviewed by the Chief Operating Decision Maker (CODM). The CODM is responsible for allocating resources and assessing the performance of the operating segments. Operating segments should be determined based on the management approach, which reflects how the entity’s operations are managed internally.
  2. Reportable Segments: Reportable segments are operating segments that meet certain quantitative thresholds specified by IFRS 8. If an operating segment exceeds the quantitative thresholds, it is considered a reportable segment, and detailed segment information needs to be disclosed in the financial statements. The thresholds include revenue thresholds, profitability thresholds, and the percentage of total segment revenue or profit.
  3. Segment Information: The entity is required to disclose certain information for each reportable segment. This includes revenue from external customers, intersegment revenue, segment profit or loss, segment assets, segment liabilities, and other significant items that are regularly reviewed by the CODM. This information provides insights into the financial performance and position of each operating segment.
  4. Aggregation of Segments: In some cases, operating segments may be aggregated into a single reportable segment if certain criteria are met. This allows for a reduction in the level of segment disclosure if the segments have similar economic characteristics and meet specific aggregation criteria outlined in IFRS 8.
  5. Additional Disclosures: In addition to segment information, entities are required to provide certain additional disclosures. These include information about products and services, geographical areas, major customers, and any unusual items or events affecting the segments.