High quality management accounts are essential to enable management to monitor how they are performing and how they need to allocate their resources. This is particularly key for entities that operate in a variety of classes of business, geographical locations, regulatory or economic environments or markets. IFRS 8 ‘Operating Segments’ aligns external reporting through the identification and reporting of operating segments with what is reported internally by management.
In many cases, identifying operating segments will be straightforward. However, in some situations the guidance may not give a clear answer. For example, the Chief Operating Decision Maker (CODM) may use more than one set of segment information or the segment characteristics may apply to two or more overlapping sets of components. In these and other situations judgement is required to determine how best to meet IFRS 8’s core principle.
Operating segments are components of an entity with the following three characteristics:
In addition, an operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues.
This approach focuses on how management has organised the entity to make key operating decisions and to assess performance. Using the above criteria to identify operating segments may be straightforward for many entities. However, in less obvious situations each aspect of the definition needs careful consideration. A number of the practical issues are discussed below.
We hope you find the information in this article helpful in giving you some insight into IFRS 8. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.
