An example of Identifying operating segments under IFRS 8 —
Company A has a chief executive officer (CEO), a chief operating officer (COO) and an executive committee comprising the CEO, COO and the heads (general managers) of three business units — Xenon, Yellow and Zebra. Every month, financial information is presented to the executive committee for each of business units Xenon, Yellow and Zebra and for Company A as a whole in order to assess the performance of each business unit and of the company as a whole.
Units Xenon, Yellow and Zebra each generate revenue and incur expenses from their business activities. Unit Yellow derives the majority of its revenue from Unit Zebra. Corporate headquarter costs that are not allocated to units Xenon, Yellow and Zebra are also reported separately each month to the executive committee in order to determine the results for Company A as a whole.
Step 1: Who is the CODM?
In this case, the CODM is likely to be the executive committee, since it is this group that regularly reviews the operating results of all business units and the company as a whole. However, if the business unit heads only join the committee meetings to report on their specific business unit and then leave the meeting, and the CEO and COO are the only people who review all the business units and the company as a whole, and the ones who make resource allocation decisions, for example, about changing the structure of the business units, then the CODM would be the CEO and COO. In practice, this would not make any difference to the identification of the operating segments (see step 2).
Step 2: Can the component generate revenue and incur expenses from its business activities?
For units Xenon and Zebra, the answer is clearly yes. For Unit Yellow, the answer is also yes — even though its revenue is derived internally this does not prevent it from being identified as an operating segment (IFRS 8 paragraph 5(a)). For the corporate headquarters, the answer is no as it does not derive revenues; it only incurs costs.
Step 3: Are the component’s operating results regularly reviewed by the CODM as a basis for resource allocation and performance assessment?
For units Xenon, Yellow and Zebra and the corporate headquarters, the answer is yes. However, the corporate headquarters has already failed step 2 and thus would not be identified as an operating segment.
Step 4: Is discrete financial information available for the component?
For units Xenon, Yellow and Zebra and the corporate headquarters, the answer is yes. However, the corporate headquarters has already failed step 2 and thus would not be identified as an operating segment.
Conclusion
Therefore, units Xenon, Yellow and Zebra are identified as Company A’s operating segments.
