Can a R&D function be an operating segment?

As long as discrete information is reviewed by the CODM. Typically, an entity’s research and development (R&D) function is a vertically integrated operation (see Operating segments – Vertically integrated operation), in which the R&D activities serve as an integral component of the entity’s business. The definition of operating segment envisages that part of an entity that earns revenue and incurs expenses relating to transactions with other components of the same entity may still qualify as an operating segment even if all of its revenue and expenses derive from intra-group transactions.

Where entities allocate entity-wide R&D costs into the business activities for which the R&D is specifically being performed, the R&D function will be a separate operating segment as long as the CODM separately reviews discrete R&D activity and data. It will not be separate segment if the CODM does not review discrete financial data for the criteria.

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