Identifying Operating Segments under IFRS 8

IFRS 8 *Operating Segments* requires entities whose debt or equity instruments are publicly traded (or in the process of being issued in public markets) to disclose information about their operating segments. The identification process follows a structured approach grounded in the "management approach."

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The Management Approach (IFRS 8.5)

IFRS 8 adopts a management approach, meaning operating segments are identified based on how the entity's chief operating decision maker (CODM) reviews information for resource allocation and performance assessment. This is a key departure from IAS 14, which used a risks-and-rewards approach. The CODM may be a single individual (e.g., CEO) or a group (e.g., Board of Directors).

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Definition of an Operating Segment (IFRS 8.5)

A component of an entity qualifies as an operating segment if it meets all three criteria:

• It engages in business activities from which it may earn revenues and incur expenses (including transactions with other segments)
• Its operating results are regularly reviewed by the CODM to make decisions about resource allocation and assess performance
• Discrete financial information is available for the component

Business start-up activities can qualify even if they have not yet earned revenue (IFRS 8.5(a)).

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Aggregation Criteria (IFRS 8.12)

Two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the core principle of IFRS 8, if the segments have similar economic characteristics, and if they are similar in all of the following:

• The nature of the products and services
• The nature of the production processes
• The type or class of customer
• The distribution methods
• The regulatory environment (if applicable)

Aggregation is a judgement-based assessment and should not be applied mechanically.

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Quantitative Thresholds for Reportable Segments (IFRS 8.13)

An operating segment is reportable if it meets any one of the following thresholds:

• Its reported revenue (internal and external) is 10% or more of the combined revenue of all segments
• The absolute value of its reported profit or loss is 10% or more of the greater of: (i) combined profit of profitable segments, or (ii) combined loss of loss-making segments
• Its assets are 10% or more of the combined assets of all segments

Additional requirements (IFRS 8.15): If total external revenue of reportable segments is less than 75% of total entity revenue, additional segments must be identified as reportable (even if they fall below the 10% thresholds) until the 75% threshold is reached.

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Practical Considerations

• Segments that do not meet the quantitative thresholds may still be reported voluntarily (IFRS 8.13)
• Operating segments that were reportable in a prior period should generally continue to be reported even if they fall below the threshold, unless management determines the decline is permanent (IFRS 8.17)
• All remaining activities not allocated to a reportable segment are combined in an "all other segments" category with sources of revenue disclosed (IFRS 8.16)

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Disclosure of Judgment

Entities must disclose factors used to identify segments and the types of products/services from which each segment derives its revenues (IFRS 8.22), ensuring transparency in how the management approach has been applied.