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CA Final · Financial Reporting

Ind AS 108 Operating Segments: CA Final Financial Reporting

Ind AS 108 requires certain entities to report financial information by operating segment, using the same view management uses internally. To solve questions, identify operating segments through the CODM's reports, aggregate if criteria allow, apply the 10% tests, check the 75% revenue test, then disclose measures, reconciliations and entity-wide information.

What this chapter covers

Ind AS 108 uses the management approach. You report segments the way the chief operating decision maker (CODM) reviews the business, not the way an accountant would carve it up. The aim is to let users see the entity through management's eyes.

The chapter has a clear flow. First, decide whether the standard applies to the entity. Next, identify operating segments. Then aggregate where allowed and test which segments are reportable using quantitative thresholds. Finally, measure and disclose segment information, give entity-wide disclosures and handle restatement when segments change.

The chapter connects to the rest of Financial Reporting in several places. Revenue, expenses and assets come from the accounting of Ind AS 115, Ind AS 16, Ind AS 2 and others. Ind AS 33 is a related standard with a similar public-market scope: it applies to entities whose ordinary shares or potential ordinary shares are traded in a public market (or that are filing to issue them), and to other entities that choose to disclose earnings per share. Disclosing EPS does not by itself bring an entity within Ind AS 108. But an entity outside the scope of Ind AS 108 that chooses to disclose information described as segment information must comply fully with Ind AS 108. Ind AS 105 discontinued operations and Ind AS 103 business combinations can change the segment picture. It also feeds Paper 6 case studies on consolidated reporting.

Ind AS 108 is compact and rule-based, so you can approach it systematically. The 10% thresholds and the 75% test lend themselves to numerical questions, and CODM, aggregation and disclosures lend themselves to short theory. It also suits case-scenario MCQs, where one fact such as who the CODM is or whether segments are similar can decide the answer. Once you learn the sequence of tests, you can work through any scenario in an orderly way.

Ind AS 108 Operating Segments: topics in the order to study them

  1. 1Ind AS 108 Scope and Core PrincipleStart here to learn who must apply the standard and what the management approach means, since every later test builds on it.
  2. 2Identifying Operating SegmentsYou need the definition of an operating segment and the role of the CODM before you can test anything quantitatively.
  3. 3Aggregation Criteria and Quantitative ThresholdsThis comes after identification because you can only aggregate or test segments that you have already identified; it is also the main numerical area.
  4. 4Segment Measurement and Disclosure RequirementsOnce you know which segments are reportable, you learn what to measure and disclose for each, including reconciliations.
  5. 5Entity-wide Disclosures and RestatementStudy this last, as it adds disclosures that apply even to single-segment entities and covers changes to segments over time.

How to prepare Ind AS 108 Operating Segments

Treat the chapter as a decision sequence. If you can recall the order of the tests, you can handle any case scenario.

  1. Read the scope paragraph and note that the standard applies to entities whose debt or equity instruments are traded in a public market, or that are filing to issue them. Link this to the idea of the management approach.
  2. Learn the definition of an operating segment in three parts: it earns revenue and incurs expenses, its results are reviewed regularly by the CODM, and discrete financial information is available. Practise spotting the CODM in short scenarios.
  3. Memorise the aggregation conditions. Two or more operating segments may be aggregated only if aggregation is consistent with the core principle of the standard, the segments have similar economic characteristics, and they are similar in all five areas: nature of products and services, production processes, type or class of customers, distribution methods, and regulatory environment (if applicable). If any one condition fails, do not aggregate.
  4. Learn the three 10% tests (revenue, profit or loss, assets) and the 75% external revenue test. Solve at least five numerical questions, writing the test table the same way each time.
  5. Prepare a one-page list of disclosures: general information, profit or loss and assets and liabilities if reported to the CODM, measurement basis, and reconciliations to entity totals.
  6. Add entity-wide disclosures (products and services, geographical areas, major customers) and the restatement rule for changed segment structure.
  7. Finish with mixed past-paper style questions and write answers in provision, facts, conclusion form.

Common mistakes in Ind AS 108 Operating Segments

  • Treating the CODM as a named individual such as the CEO in every case.

    Fix: Ask which person or group allocates resources and assesses performance, and use the facts given in the case.

  • Applying the 10% profit test using only the total of profitable segments, or ignoring the loss-making ones.

    Fix: Compute combined profit of profitable segments and combined loss of loss-making segments, take the greater absolute amount, then compare each segment's absolute result.

  • Stopping after the 10% tests without checking the 75% test.

    Fix: Always finish with the 75% external revenue check and add segments if the total is below it.

  • Aggregating segments only because they are in the same industry or look similar.

    Fix: State the core principle consistency and then test each of the qualitative criteria and similar economic characteristics before aggregating.

  • Reporting segment measures on Ind AS accounting policies by default.

    Fix: Report the measure used by the CODM, explain the basis of measurement, and provide reconciliations to entity totals. Include segment liabilities only if they are regularly provided to the CODM.

  • Forgetting that entity-wide disclosures apply even to entities with one reportable segment.

    Fix: Treat entity-wide disclosures as a separate checklist and apply it whenever the information is not already given in segment disclosures.

Last-day revision: Ind AS 108 Operating Segments

  • Ind AS 108 applies to entities with publicly traded debt or equity, or those in the process of issuing them.
  • Management approach: segments follow internal reporting to the CODM.
  • CODM is a function, not necessarily a person; it allocates resources and assesses performance.
  • An operating segment earns revenue, has results reviewed by the CODM and has discrete financial information.
  • Start-up operations can be operating segments even before they earn revenue.
  • Corporate headquarters and post-employment benefit plans are generally not operating segments.
  • Aggregation is allowed only if it is consistent with the core principle, the segments have similar economic characteristics, and they are similar in all five areas: products and services, production processes, customers, distribution methods and regulatory environment (if applicable).
  • A segment is reportable if revenue, profit or loss, or assets is at least 10% of the combined total; for profit or loss, compare absolute amounts of the larger of combined profit and combined loss.
  • Reportable segments must cover at least 75% of total external revenue; if not, add more segments.
  • Reconcile total segment revenues, profit or loss, assets and other material items to entity amounts. Segment liabilities are disclosed and reconciled only if they are regularly provided to the CODM.
  • Entity-wide disclosures cover products and services, geographical areas and major customers (10% or more of entity revenue).
  • If segment structure changes, restate prior period information unless the information is not available AND the cost to develop it would be excessive. Both conditions must be met. If you do not restate, disclose segment data for the current period on both the old and the new bases, unless that is impracticable.

Ind AS 108 Operating Segments practice questions

Ind AS 108 Operating Segments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ind AS 108 Operating Segments: frequently asked questions

Which entities must apply Ind AS 108?

The standard applies to entities whose debt or equity instruments are traded in a public market, or that file financial statements to issue instruments in a public market. Other entities may choose to apply it, but then must comply fully.

How do I solve a 10% threshold question quickly?

Draw a table with revenue, profit or loss and assets for each segment, and compute the 10% benchmark for each column. Mark any segment that meets at least one test, then check that reportable segments cover 75% of external revenue.

Is a segment that fails the 10% tests always ignored?

No. Management may still report it separately if it believes the information is useful, and it may be aggregated with another segment if all the aggregation criteria are met. Segments below every threshold may also be combined with each other, but only if they have similar economic characteristics and share a majority of the aggregation criteria. This 'majority' relaxation applies only to below-threshold segments; normal aggregation needs similarity in all the criteria. Otherwise they go into an all other segments category.

What happens when the segment structure changes?

You restate the corresponding earlier period information to reflect the new structure, unless the information is unavailable and the cost to develop it would be excessive. If you do not restate, you must disclose segment data for the current period on both the old and the new bases of segmentation, unless that is impracticable.