Key Points
- The CODM's actual reporting package determines which segments exist, not the entity's legal or geographic structure.
- IFRS 8 requires separate disclosure for any segment exceeding 10% of combined revenue or reported profit or loss. Assets trigger the same 10% test independently.
- Misidentifying the CODM is the single most common reason regulators reject an entity's segment note.
- Aggregation of two segments into one is permitted only when they share all five economic characteristics listed in IFRS 8.12 .
What is Operating Segment?
Every group audit, the same question comes up during planning: does the segment note actually match what the board sees each month? We request the CODM's internal reporting pack, lay it next to the published segment note, and look for divisions that appear in one but not the other. That mismatch is where IFRS 8 findings start, and it is the single fastest way to identify whether the client has defined its segments correctly.
IFRS 8.5 defines an operating segment as a component that engages in revenue-earning and expense-incurring business activities (including intra-group transactions) and whose operating results the chief operating decision maker (CODM) reviews regularly to allocate resources and assess performance. Discrete financial information must also be available for the component. Both conditions are cumulative, and the standard uses a management approach, so the segments reported externally mirror the segments used internally.
IFRS 8.11 sets quantitative thresholds. A segment requires separate reporting when its reported revenue (external plus intersegment) or its reported profit or loss equals or exceeds 10% of the combined total for all operating segments. Assets trigger the same 10% test independently. Segments that fall below all thresholds can be combined with others or reported in an "all other segments" category, but IFRS 8.15 requires that at least 75% of the entity's external revenue is attributable to reportable segments. If the 75% test fails, the entity must designate additional segments until it passes.
ISA 720 .A2 directs the auditor to test consistency between the internal reporting package and the published segment reporting note. Inconsistencies between what the CODM receives each month and what appears in the annual report indicate either a misidentification of the CODM or an aggregation that IFRS 8.12 does not support.
Worked example: Schäfer Elektrotechnik AG
Client: German electronics group, FY2025, consolidated revenue €310M, IFRS reporter. Schäfer has four divisions tracked in the monthly board pack: industrial sensors (revenue €155M), automotive connectors (€82M), consumer electronics (€48M), and a small R&D licensing unit (€25M).
Step 1 — Identify the CODM
The management board (Vorstand) receives a monthly divisional profit-and-loss report and allocates capital budgets at the divisional level. The Vorstand is the CODM.
Step 2 — Confirm that each division meets the definition
All four divisions earn revenue and incur expenses, and each has discrete financial information in the board pack. Each qualifies as an operating segment under IFRS 8.5 .
Step 3 — Apply the quantitative thresholds
Combined segment revenue is €310M. The 10% threshold is €31M. Industrial sensors (€155M), automotive connectors (€82M), consumer electronics (€48M), and R&D licensing (€25M) all exceed €31M on revenue alone except R&D licensing. For R&D licensing, check profit: the unit reports segment profit of €18M against combined segment profit of €47M (38%). That exceeds 10%, so R&D licensing is separately reportable on the profit test.
Step 4 — Verify the 75% external revenue test
Total external revenue is €310M. The four reportable segments account for 100% of external revenue, well above the 75% floor in IFRS 8.15 .
Conclusion: Schäfer reports four operating segments, each crossing at least one quantitative threshold, and the 75% external revenue test is satisfied without designating additional segments.
Why it matters in practice
ESMA's 2023 European Common Enforcement Priorities report found that entities define their CODM at a level that does not match the actual resource allocation decisions. In our experience, the most common version of this is a client that names the CEO as CODM while the management board receives divisional reporting and makes allocation decisions collectively. When that happens, the segment structure should reflect the board's view, not the CEO's. IFRS 8.7 defines the CODM as a function, not necessarily a single individual.
Aggregation is the other pain point. We have seen teams aggregate segments under IFRS 8.12 without documenting all five criteria (similar nature of products and services, similar production processes, similar customer types, similar distribution methods, and similar regulatory environments). Meeting one or two is not enough. All five must be satisfied, and the working paper (WP) must address each one explicitly. Nobody enjoys ticking and bashing five qualitative conditions against two business lines that management insists are "basically the same," but skipping it is how files get flagged by the regulator.
Operating segment vs. reportable segment
| Dimension | Operating segment ( IFRS 8.5 ) | Reportable segment ( IFRS 8.11 –18) |
|---|---|---|
| Definition | Any component meeting the CODM test in IFRS 8.5 | An operating segment that crosses a quantitative threshold or is designated to meet the 75% test |
| Threshold | None. The test is qualitative. | 10% of combined revenue, profit or loss, or assets |
| Disclosure depth | May be combined or included in "all other segments" if thresholds are not met | Full disclosure required: revenue, profit or loss, assets, liabilities (if reported to the CODM), and specified reconciling items |
| Aggregation | Two operating segments may be aggregated into one reportable segment if all five IFRS 8.12 criteria are met | Once reportable, full disaggregated disclosure applies to the reportable unit |
Clients sometimes conflate "operating segment" with "reportable segment" and skip the threshold analysis entirely. An entity with eight operating segments may end up with only four reportable segments after applying IFRS 8.12 aggregation and the quantitative thresholds. At firms like ours, we see this confusion most often when a new group is listed for the first time and the finance team has never prepared an IFRS 8 note before.
Related terms
Frequently asked questions
How do I identify the chief operating decision maker for segment reporting?
IFRS 8.7 defines the CODM as the function (not necessarily one person) that allocates resources and assesses performance at the segment level. Look at who receives the internal divisional reporting and who signs off on capital allocation decisions. In many European groups, this is the management board collectively, not a single CEO.
Does IFRS 8 require segment reporting for private companies?
IFRS 8.2 applies to entities whose equity or debt instruments are traded in a public market, or that are in the process of filing with a securities commission. Private companies reporting under full IFRS but without listed instruments are not required to apply IFRS 8, though they may do so voluntarily.
Can the number of operating segments change between years?
Yes. If the CODM reorganises internal reporting (for example, splitting a division or merging two business units), the segment structure changes. IFRS 8.29 requires restatement of prior-period segment information to match the new structure unless it is impracticable. The auditor verifies that the restatement is complete and that the reason for the change is disclosed.