How should operating segments be identified under IFRS 8?

IFRS 8 Operating Segments — Core Rule

IFRS 8 Operating Segments requires entities to identify operating segments based on the management approach—segments are business components whose operating results are regularly reviewed by the chief operating decision maker (CODM) for performance assessment and resource allocation, regardless of how products, services, or geography are organised internally (IFRS 8.5, IFRS 8.10).

How IFRS 8 Operating Segments Works

• Management approach principle: The CODM (typically the chief executive officer or executive management committee) identifies segments based on their internal reporting structure and management model, not external customer or geographic classifications. This is fundamentally different from the predecessor IAS 14, which used a dual-segment approach. The segment identification must reflect how management organizes the business to run and evaluate performance (IFRS 8.5).

• Definition of an operating segment: An operating segment is a component of an entity that (a) engages in business activities from which it may earn revenues and incur expenses; (b) whose operating results are regularly reviewed by the CODM to make decisions about resources allocation and assess performance; and (c) for which discrete financial information is available (IFRS 8.5). The "regularly reviewed" test is critical—if the CODM does not review a business unit's results regularly, it is not an operating segment.

• Segment aggregation: Two or more operating segments may be aggregated into a single reportable segment if aggregation criteria are met: (i) economic characteristics are similar; (ii) they are similar in respect of nature of products/services, types of customers, distribution methods, and regulatory environment; and (iii) they meet all other operating segment definition criteria (IFRS 8.12). Aggregation is permitted but not required.

• Identification of the CODM: The entity must first identify who the CODM is—this is often the board of directors, chief executive, or an executive committee. The CODM may be an individual or a group. Once identified, the entity examines what financial and operational information the CODM regularly reviews to assess performance and decide on resource allocation. This internal reporting package, not external reporting, drives segment identification (IFRS 8.6, IFRS 8.7).

• Distinguishing segments from other organizational units: Not all internal organizational structures create separate operating segments. For example, a shared service center (HR, IT, finance) or a head office function does not constitute an operating segment unless the CODM regularly reviews its discrete operating results and makes resource decisions based on them (IFRS 8.5). Similarly, a cost center or profit center that exists purely for internal accounting purposes—not reviewed discretely by the CODM—is not a segment.

• Changes in segment identification: Segment identification is not static. If the entity reorganizes and the CODM's reporting package changes, segment identification must be updated in the next reporting period to reflect the new management structure. Comparative segment information must be presented on a consistent basis unless impracticable (IFRS 8.27).

IFRS 8 Operating Segments — Practical Example

A multinational beverage company has the following organizational structure reviewed monthly by the board (CODM):

• Europe Division: €450m revenue, €65m EBIT
• North America Division: €380m revenue, €48m EBIT
• Emerging Markets Division: €120m revenue, €8m EBIT
• Corporate Functions (Head Office): Not reviewed separately; costs allocated to divisions

The company also operates internal cost centers for IT (€15m) and procurement (€8m), but these are not reviewed discretely.

Segment identification: The Europe, North America, and Emerging Markets divisions are operating segments. Each is reviewed regularly by the CODM; each has discrete financial information; each earns revenues and incurs expenses. The corporate functions and cost centers are not segments because the CODM does not review them as discrete units for performance assessment.

Journal entry for segment revenue allocation (quarterly consolidation):

IFRS 8 Operating Segments — Common Pitfalls

• Confusing CODM with operational management: Finance teams often assume that operational line managers (e.g., a regional sales director) constitute the CODM. In reality, the CODM is the person or committee that reviews discrete segment results for company-wide resource and performance decisions. Misidentifying the CODM leads to incorrect segment boundaries.

• Over-segmenting based on products or customers: Entities sometimes create "segments" for each major customer or product line, even if the CODM does not review them separately. IFRS 8 requires segments to be based on management's actual decision-making structure, not theoretical business components. If the CODM reviews only three geographic regions, there are three operating segments, regardless of how many product lines exist within each region.

• Failing to update segment reporting after reorganization: When an entity restructures and the CODM's reporting changes (e.g., shifting from geographic to divisional reporting), practitioners sometimes retain the old segment structure for comparability. IFRS 8.27 requires restatement of comparative segments to reflect the new management approach. This is not optional; it is a restatement requirement.

IFRS 8 Operating Segments — Key Paragraphs

• IFRS 8.5: Definition of an operating segment and the management approach principle
• IFRS 8.6, IFRS 8.7: Identification of the CODM and regular review criteria
• IFRS 8.10: Reportable segments threshold (10% quantitative test)
• IFRS 8.12: Operating segment aggregation criteria
• IFRS 8.27: Restatement of comparative segment information following changes in management reporting structure
• IFRS 8.28–IFRS 8.34: Disclosure requirements for reportable segments