Operating segments Matrix structured entities – IFRS 8 10 addresses the issue of matrix structures. It uses the example of an entity where some managers are responsible for product and service lines worldwide, whereas other managers are responsible for specific geographical areas. Operating segments Matrix structured entities
The CODM reviews the operating results of both sets of components, and discrete financial information is available for both. In this situation, the entity should determine which set of components constitutes the operating segments, taking account of what users of the financial statements would need to know in order to evaluate the entity’s business activities and the environment it operates in. Operating segments Matrix structured entities
Matrix-structured entities use judgment to determine their operating segments. Such entities should consider the importance of the factors that have led to the matrix structure (it did not happen without a sound business reason!!). Operating segments Matrix structured entities
For example, if an entity’s priority is to increase total sales, market share and geographic spread, the most relevant information for shareholders would be based on geographic markets. An entity that aims to improve the sales of individual products, with a Chief Operating Decision Maker (CODM) that believes that improving and maintaining product quality is the key to achieving this, might conclude that the most relevant information for shareholders would be based on products. Operating segments Matrix structured entities
This approach would be acceptable under IFRS 8 if: Operating segments Matrix structured entities
- the entity can sufficiently support the basis for how it determined its segments; and Operating segments Matrix structured entities
- the entity’s basis for determining segments enables users of its financial statements to evaluate its activities and financial performance, and the business environment it operates in.
The Group’s chief executive officer reviews the internal management reports of each division at least quarterly. (IFRS 8 16) Operating segments – Matrix structured entities
Segment profit (loss) before tax is used to measure performance because management believes that this information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries. (IFRS 8 27)
What is an operating segment?
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 CODM to make decisions about resources to be allocated to the segment and assess its performance; and
- for which discrete financial information is available.
How are operating segments identified?
There are four key steps. Entities will need to:
- Identify the CODM.
- Identify their business activities (which may not necessarily earn revenue or incur expenses).
- Determine whether discrete financial information is available for the business activities.
- Determine whether that information is regularly reviewed by the CODM.
What or who is a chief operating decision maker?
The CODM is a function and not necessarily a person. That function is to allocate resources to, and assess the performance of, the operating segments. It is likely to vary from entity to entity – it may be the CEO, the chief operating officer, the senior management team or the board of directors. The title or titles of the person(s) identified as CODM is not relevant, as long as it is the person(s) responsible for making strategic decisions about the entity’s segments.
How do I determine an entity’s reportable segments?
Not all operating segments need to be separately reported. Operating segments are only required to be reportable if they exceed quantitative thresholds.
Quantitative thresholds (IFRS 8 13)
Information on an operating segment should be separately reported if:
- reported revenue (external and inter-segment) is 10% or more of the combined revenue of all operating segments;
- the absolute amount of the segment’s reported profit or loss is 10% or more of the greater of:
- the combined reported profit of all operating segments that did not report a loss, and
- the combined loss of all operating segments that reported a loss;
- the segment’s assets are 10% or more of the combined assets of all operating segments.
Two or more operating segments may be combined (aggregated) and reported as one if certain conditions are satisfied.
Operating segments Matrix structured entities
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