IFRS 8 Operating Segments: CODM Test, Aggregation and Reconciliation
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Sai Manikanta Pedamallu
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IFRS 8 Operating Segments: CODM Test, Aggregation and Reconciliation
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
IFRS 8 does something unusual. Rather than prescribing how an entity should divide itself for reporting purposes, it requires the entity to report the way it already looks at itself internally.
This is the management approach, and its logic is that the segmentation management actually uses to run the business, allocate capital, and assess performance is more informative than any externally imposed framework. If the board reviews five business units, investors should see five business units.
The approach has a consequence that is easy to overstate and easy to miss. It does not mean an entity may segment however it wishes. It means the entity must segment the way it genuinely does internally, and the standard contains a series of tests designed to prevent the internal view from being reshaped for external convenience.
Post 83 compares IFRS 8 with IAS 14, the standard it replaced, and covers why the shift to the CODM concept mattered.
The Operating Segment Definition
An operating segment is a component of an entity that satisfies all three of the following:
It engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the same entity.
Its operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance.
Discrete financial information is available for it.
Three points follow from the wording.
A segment may sell exclusively to other segments. The definition includes intersegment transactions, so a manufacturing division that supplies only other divisions within the group is an operating segment.
A segment may have earned no revenue at all. The phrase is "may earn revenues", so a start-up operation not yet generating revenue can be an operating segment where the other conditions are satisfied.
Not every part of an entity is an operating segment or forms part of one. Corporate headquarters functions that earn no revenue and incur only expenses incidental to the entity as a whole are the standard example. Some expenses are simply not attributable to any segment.
The Chief Operating Decision Maker
The chief operating decision maker is a function, not necessarily a person. This is the point most frequently misunderstood.
The function is that of allocating resources to and assessing the performance of the operating segments of an entity. It may be discharged by a chief executive officer, a chief operating officer, a group of executive directors, an executive committee, or the board itself.
Identifying the CODM requires asking who actually performs that function, which means examining who receives which reports, who makes capital allocation decisions, and against what measures performance is assessed and rewarded.
Two practical situations arise repeatedly.
Where a board reviews consolidated results while an executive committee reviews divisional results and allocates capital between them, the executive committee is more likely to be the CODM, notwithstanding the board's formal seniority.
Where a chief executive makes allocation decisions after receiving divisional packs prepared by a management committee, the chief executive is the CODM and the committee is a supporting function.
The identification is a matter of fact to be determined from evidence, and it drives everything downstream. An entity that identifies the wrong CODM identifies the wrong segments.
Aggregation: Where Most of the Judgment Sits
Two or more operating segments may be aggregated into a single operating segment where aggregation is consistent with the core principle of the standard, the segments have similar economic characteristics, and the segments are similar in each of the following respects:
The nature of the products and services.
The nature of the production processes.
The type or class of customer for their products and services.
The methods used to distribute their products or provide their services.
If applicable, the nature of the regulatory environment, for example banking, insurance, or public utilities.
The structure of the test matters. Similar economic characteristics is a threshold condition, and the five listed respects must each be satisfied, not a majority of them.
There is a separate and narrower permission for combining segments that individually fail the quantitative thresholds: such segments may be combined to produce a reportable segment only where they have similar economic characteristics and share a majority of the five criteria. That relaxation applies only to sub-threshold segments being combined, not to the aggregation of segments generally.
Aggregation is the most challenged judgment in IFRS 8, because aggregating a weak segment into a strong one conceals the weak one. Regulators and auditors examine whether segments claimed to have similar economic characteristics genuinely do, typically by comparing long-term average gross margins, growth rates, and returns. Two divisions with persistently divergent margins do not have similar economic characteristics however similar their products may appear.
The Quantitative Thresholds
An operating segment is a reportable segment where it meets any one of three quantitative thresholds.
The revenue test. Its reported revenue, including both external sales and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.
The profit or loss test. The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of the combined reported profit of all operating segments that did not report a loss, and the combined reported loss of all operating segments that did report a loss.
The assets test. Its assets are 10 per cent or more of the combined assets of all operating segments.
The profit test is the one candidates most often compute incorrectly. The denominator is not total segment profit. It is the greater in absolute terms of the aggregate profit of profitable segments and the aggregate loss of loss-making segments, taken separately. Where an entity has segments earning 100 and 60 and segments losing 40 and 30, the denominator is 160, not 90.
Absolute amounts are used throughout, so a loss-making segment qualifies on the same basis as a profitable one.
The 75 Per Cent Test
Where the total external revenue reported by reportable segments constitutes less than 75 per cent of the entity's revenue, additional operating segments must be identified as reportable segments, even where they do not meet any of the quantitative thresholds, until at least 75 per cent of the entity's revenue is included in reportable segments.
This is a completeness backstop. It prevents an entity with a highly fragmented business from reporting two large segments and burying the majority of its revenue in an unanalysed residual.
Note that the 75 per cent test uses external revenue in the numerator and the entity's revenue in the denominator, while the 10 per cent revenue threshold uses combined internal and external revenue. The two tests use different bases and must be computed separately.
The All Other Segments Category
Information about other business activities and operating segments that are not reportable is combined and disclosed in an all other segments category, presented separately from other reconciling items in the required reconciliations.
The sources of revenue included in that category must be described.
The requirement to present it separately from other reconciling items matters. An entity cannot merge unreported operating segments with corporate costs, eliminations, and unallocated items into a single residual line. The residual operating activity is disclosed as its own category, and the genuine reconciling items sit separately.
Measurement: The CODM's Numbers, Not IFRS Numbers
The amount reported for each segment item is the measure reported to the chief operating decision maker for the purposes of allocating resources and assessing performance.
This is a genuine departure from the rest of IFRS. Segment profit may be measured on a basis that does not comply with IFRS at all, provided that is the basis the CODM actually uses. A segment result reported before certain allocations, or on a management accounting basis, or excluding items management regards as non-operating, is reported as such.
What the standard requires instead is explanation and reconciliation. The entity must explain the measurements of segment profit or loss, assets, and liabilities, including the basis of accounting for intersegment transactions, the nature of any differences between segment measurements and the entity's IFRS measurements, and the nature of any asymmetrical allocations, such as an expense allocated to a segment without the related asset.
Only those amounts that are included in the measure reviewed by the CODM, or otherwise regularly provided to the CODM, are required to be disclosed by segment. An entity that does not report segment assets to its CODM does not disclose segment assets.
The 2024 IFRIC Agenda Decision
In 2024 the IFRS Interpretations Committee issued an agenda decision clarifying the disclosure requirements for reportable segments, and it has had a visible effect on filed financial statements.
The decision emphasises the need to disclose certain specified items where these are included in the measure of segment profit or loss reviewed by the CODM, or are otherwise regularly provided to the CODM, even where they are not included in that measure of segment profit or loss.
The second limb is the substantive point. Previously, some entities read the disclosure requirement as attaching only to items forming part of the CODM's segment profit measure. The agenda decision confirms that items regularly provided to the CODM require disclosure whether or not they are components of that particular measure.
The effect is observable. Following its evaluation of the agenda decision, one large listed IT services group expanded its segment disclosures to include salaries, other employee costs, and contracted labour costs, and updated its comparative financial information accordingly.
For entities where the CODM receives detailed cost breakdowns alongside a summary profit measure, this decision broadens the disclosure requirement meaningfully, and it requires a fresh assessment of what is actually provided to the CODM rather than what appears in the segment profit line.
Reconciliation Requirements
An entity provides reconciliations of:
The total of the reportable segments' revenues to the entity's revenue.
The total of the reportable segments' measures of profit or loss to the entity's profit or loss before tax and discontinued operations, or after those items where they are allocated to segments.
The total of the reportable segments' assets to the entity's assets, where segment assets are reported.
The total of the reportable segments' liabilities to the entity's liabilities, where segment liabilities are reported.
The total of the reportable segments' amounts for every other material item disclosed to the corresponding entity amount.
All material reconciling items must be separately identified and described.
One useful clarification: the reconciliation does not need to be performed at individual segment level. It is a reconciliation of segment totals to entity totals, not a line-by-line bridge for each segment.
Entity-Wide Disclosures
These apply to all entities within IFRS 8's scope, including entities with a single reportable segment, and they are frequently overlooked for exactly that reason.
Information about products and services. External revenue for each product and service, or each group of similar products and services, unless the necessary information is not available and the cost to develop it would be excessive.
Information about geographical areas. External revenue attributed to the entity's country of domicile and to all foreign countries in total, with separate disclosure where revenue from an individual foreign country is material. Non-current assets are disclosed on the same basis. The basis of attribution must be disclosed.
Information about major customers. Where revenue from a single external customer amounts to 10 per cent or more of the entity's revenue, the entity discloses that fact, the total revenue from each such customer, and the segment or segments reporting the revenue. The identity of the customer need not be disclosed, nor the amount reported by each segment.
A group of entities under common control is regarded as a single customer for this purpose, as is a government and entities known to the reporting entity to be under the control of that government.
The major customer disclosure is a recurring omission at Indian IT services and auto component companies with concentrated client bases.
The Indian Application
Diversified conglomerates. Indian groups such as Reliance Industries, the Tata companies, Larsen and Toubro, Adani group entities, and ITC operate across genuinely distinct businesses, and their segment disclosure is among the most informative parts of their annual reports. The aggregation question is live for these groups: whether two businesses within the same broad category genuinely share similar economic characteristics is exactly the judgment IFRS 8 requires and regulators examine.
Banks and the regulatory overlay. This is the most interesting Indian tension. The Reserve Bank of India prescribes a segment structure for banks, requiring reporting across treasury, corporate and wholesale banking, retail banking, and other banking operations, with digital banking subsequently added as a sub-segment of retail banking.
IFRS 8 requires reporting on the basis the CODM actually uses. Where a bank's internal management structure differs from the RBI-prescribed categories, the two frameworks point in different directions. In practice Indian banks report on the regulatory basis, and where that basis genuinely reflects how the business is managed the two align. Where it does not, the entity needs to be clear about which basis it is presenting and why, since Ind AS 108 requires the management view.
Quarterly reporting. SEBI's listing regulations require segment information in quarterly results, meaning Indian listed entities apply Ind AS 108 four times a year rather than annually, as noted for other standards in Post 67.
Ind AS 108 vs IFRS 8
| Area | IFRS 8 | Ind AS 108 |
|---|---|---|
| Management approach | Same | Same |
| Operating segment definition | Same | Same |
| CODM as a function | Same | Same |
| Aggregation criteria | Same | Same |
| 10 per cent quantitative thresholds | Same | Same |
| 75 per cent external revenue test | Same | Same |
| Measurement on the CODM basis | Same | Same |
| Reconciliation requirements | Same | Same |
| Entity-wide disclosures | Same | Same |
| Regulatory segment prescription | Not applicable | RBI prescribes segment categories for banks; SEBI LODR requires quarterly segment reporting |
What Big 4 Auditors Focus On
CODM identification. Auditors examine board and committee papers, management reporting packs, and the terms of reference of executive bodies to test who actually allocates resources and assesses performance, rather than accepting management's assertion.
Aggregation of segments with divergent economics. This is the highest-risk judgment. Auditors test similar economic characteristics using long-run margin, growth, and return data, and challenge aggregation where the underlying financial profiles diverge persistently. Aggregation that conceals a deteriorating business is a specific focus.
Consistency between segment reporting and other communications. Auditors compare the segments reported in the financial statements with those discussed in the management commentary, the investor presentation, and the earnings call. Where management discusses five businesses publicly but reports three segments, the inconsistency requires explanation.
Threshold computation. Auditors recalculate the 10 per cent tests, with particular attention to the profit test denominator, and the 75 per cent external revenue test.
Application of the 2024 IFRIC agenda decision. Auditors test whether the entity has reassessed what is regularly provided to the CODM, rather than continuing to disclose only the components of the segment profit measure.
Major customer disclosure. Auditors test revenue concentration against the 10 per cent threshold, since this disclosure is commonly omitted where the concentration is commercially sensitive.
Dip IFRS Exam Angle
IFRS 8 is examined through segment identification and threshold computation, frequently combined in a single question.
Most tested areas:
Applying the three-limb operating segment definition, including recognising that a component selling only internally, or not yet generating revenue, can be an operating segment.
Identifying the CODM from a described governance structure.
Applying the aggregation criteria, and recognising that all five respects must be satisfied alongside similar economic characteristics.
Computing the three quantitative thresholds, particularly the profit test denominator.
Applying the 75 per cent external revenue test and identifying additional reportable segments.
Common traps:
Computing the profit test denominator as total segment profit. It is the greater in absolute terms of aggregate profits of profitable segments and aggregate losses of loss-making segments.
Using external revenue for the 10 per cent revenue test. That test uses combined internal and external revenue; the 75 per cent test uses external revenue.
Treating the CODM as necessarily an individual. It is a function that may be discharged by a committee or board.
Requiring a segment to meet all three quantitative thresholds. Meeting any one is sufficient.
Aggregating segments on the basis of a majority of the criteria. The general aggregation test requires all five, plus similar economic characteristics; the majority test applies only to combining segments that individually fail the thresholds.
Omitting entity-wide disclosures on the basis that the entity has a single reportable segment. They apply regardless.
Assuming segment measures must comply with IFRS. They are the measures reported to the CODM, with reconciliation and explanation required.
FAQ
Can segment profit be measured on a non-IFRS basis?
Yes. The amount reported is the measure reported to the CODM, even where that measure does not comply with IFRS. The standard requires explanation of the basis and reconciliation of segment totals to the corresponding entity amounts.
Is the CODM always the chief executive?
No. The CODM is a function, not a title. It may be discharged by a chief executive, a chief operating officer, a group of executive directors, an executive committee, or the board. Identification depends on who actually allocates resources and assesses performance.
Must a segment meet all three quantitative thresholds to be reportable?
No. Meeting any one of the revenue, profit or loss, or assets thresholds is sufficient.
Does an entity with only one reportable segment still make entity-wide disclosures?
Yes. The disclosures about products and services, geographical areas, and major customers apply to all entities within the standard's scope, including single-segment entities.
Does the major customer disclosure require naming the customer?
No. The entity discloses that revenue from a single external customer exceeds 10 per cent of entity revenue, the total revenue from each such customer, and the segment reporting it. The customer's identity need not be disclosed.
What changed as a result of the 2024 IFRIC agenda decision?
It confirmed that specified items require disclosure where they are regularly provided to the CODM, even where they are not included in the CODM's measure of segment profit or loss. Entities whose CODMs receive detailed cost information alongside a summary profit measure have had to expand their disclosures accordingly.
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This is Post 81 of the Global Fin X IFRS Series. Previous: IAS 24 Related Party Disclosures: Definition, Exemptions and Common Omissions. Next: Post 82: IAS 24 Related Party Transactions: What NFRA and Big 4 Look For in India.