Operating segment

IFRS 8 Definition: An operating segment is a component of an entity:

  • that engages in business activities from which it may earn revenues and incur expenses,
  • whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance,
  • for which discrete financial information is available.

An entity shall report separately information about an operating-segment that meets any of the following quantitative thresholds:

  1. Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.
  2. The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of
    1. the combined reported profit of all operating segments that did not report a loss and
    2. the combined reported loss of all operating segments that reported a loss. [IFRS 8 13]

Defining an Operating Segment

Different companies have different management reporting frameworks and identification of operating-segments depends on the perspective with which the company’s top management reviews its performance and makes resource-allocation decisions.

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Oil Horse, Inc. is a company engaged in upstream and downstream oil and gas operations. It has been defining its operating-segments as upstream, downstream, chemicals and financing. Due to the sheer size of each segment, they all met the quantitative threshold for definition of reportable operating segment. Subsequent to a recent management shakeup, the company modified its management reporting framework and it now looks at its operations from a geographical point of view. Using the following information, identify which of the operating-segments are required to be reported separately. All amounts are in billion CUs.

Operating segment


Identification of reportable-segments requires calculation of each segment’s percentage revenue, profit and assets with reference to the sum of revenue, profit and assets respectively. Calculation of percentage revenue and percentage assets is quite straightforward: divide each segment’s revenue/assets by total revenue/assets. Percentage profit/(loss) however, is tricky. It is calculated by dividing each profit/(loss) figure by 14.2 billion, which is the greater of (a) all profits i.e. (3.2+4+7=14.2 billion) and (b) all losses (i.e. 0.5+1.3+0.3=2.1 billion).

The results are summarized below:

Operating segment Operating segment

Balaia and Valinor are not reportable operating segments because none of there percentages are 10% or greater. Novindus is an operating segment because the standards require any one of the three criteria to be 10% or greater (and not all). Since reportable operating segments cover 86% (=(22+24+32+10)/102) of the company’s total revenue, the company meets the 75% revenue-coverage threshold and no additional operating-segments are to be disclosed.

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General model of measurement of insurance contracts

Operating segment

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