Skip to content

Corporate Financial Reporting · Operating Segments (Ind AS 108)

Definition and Identification of Operating Segments under Ind AS 108

Updated 11 October 2026 · Fact-checked

An operating segment under Ind AS 108 is a component of an entity that earns revenues and incurs expenses, whose results the chief operating decision maker (CODM) regularly reviews to allocate resources and assess performance, and for which discrete financial information exists. To solve questions, test each component against these three conditions and identify the CODM.

Understand Definition and Identification of Operating Segments

Ind AS 108 asks you to report segments the way management sees the business. This is called the management approach. The standard does not tell you to split the business by product or by geography. It tells you to follow the reports that the top decision maker actually uses.

Paragraph 5 gives the definition. A component is an operating segment if all three conditions hold:

  • (a) it engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses from transactions with other components of the same entity;
  • (b) its operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segment and to assess its performance; and
  • (c) discrete financial information is available for it.

A segment need not have earned revenue yet. Paragraph 5 says start-up operations may be operating segments before earning revenues.

The chief operating decision maker is a function, not a job title (paragraph 7). Its function is to allocate resources to the operating segments and assess their performance. Often it is the CEO or COO, but it may be a group of executive directors or others. Do not assume it is the board unless the facts say so.

A segment manager is also a function (paragraph 9). Generally, a segment manager is directly accountable to the CODM and keeps regular contact with the CODM to discuss operating activities, results, forecasts or plans for the segment. The CODM may also be the segment manager for some segments. One manager may be the segment manager for more than one segment.

Sometimes the CODM sees more than one set of reports, or the entity has a matrix structure, for example product lines worldwide and also geographic managers. Paragraphs 8 and 10 then say you decide which set forms the operating segments by reference to the core principle. Paragraph 8 lists helpful factors: the nature of each component's business activities, the existence of managers responsible for them, and information presented to the board of directors. Paragraph 9 adds that if there is only one set of components for which segment managers are held responsible, that set forms the operating segments.

Key rules to remember

Definition of operating segment (para 5)
Operating segment = business activities (revenue and expenses) + results regularly reviewed by CODM for resource allocation and performance + discrete financial information available
All three conditions must be met. Failing any one means the component is not an operating segment.
CODM (para 7)
CODM = the function that allocates resources to, and assesses performance of, the operating segments
It is a function, not a title. It may be the CEO, COO or a group of executive directors.
Segment manager (para 9)
Segment manager = function directly accountable to the CODM, in regular contact on operations, results, forecasts or plans
Not necessarily a specific title. One manager can cover more than one segment.
Internal transactions (para 5(a))
Revenues and expenses of a segment include transactions with other components of the same entity
A component selling only internally can still qualify as an operating segment.
Matrix or multiple report sets (paras 8, 9, 10)
Choose the set of components identified by the core principle, using nature of activities, existence of responsible managers and information given to the board
If only one set has responsible segment managers, that set forms the segments.

How to solve Definition and Identification of Operating Segments questions

Use the same sequence for any question asking whether something is an operating segment or who the CODM is.

  1. 1Identify the CODM from the facts. Look for who allocates resources and reviews performance. Treat it as a function, not a title.
  2. 2List the components of the entity that the facts mention, such as divisions, product lines, regions or subsidiaries.
  3. 3Test each component against condition (a): does it engage in business activities that may earn revenues and incur expenses, including with other components? Start-ups with no revenue yet can pass.
  4. 4Test condition (b): does the CODM regularly review its operating results to decide on resources and assess performance? Occasional or ad hoc review is not enough.
  5. 5Test condition (c): is discrete financial information available for it?
  6. 6If there are overlapping sets of components (matrix), decide the set by the core principle, using the nature of activities, responsible managers and board information.
  7. 7State your conclusion for each component, quoting the failed or satisfied condition, and name the CODM and segment managers.

Quickest way: Three-test checklist with CODM anchor

When to use it: Use in MCQs and short case scenarios where you must decide quickly whether a component is an operating segment.

  1. Underline who reviews results and allocates resources. That is the CODM.
  2. Tick three boxes for each component: activities with revenue and expenses, regular CODM review for resources and performance, discrete financial information.
  3. One missing tick means not a segment. Matrix structure means pick the set that managers are held responsible for and that the CODM reviews.
  4. Remember that a start-up with no revenue yet can still be a segment.

Common mistakes in Definition and Identification of Operating Segments

  • Treating CODM as a named post such as the Managing Director only.

    Students link the term to a job title.

    Fix: Paragraph 7 says it is a function. Identify whoever allocates resources and assesses segment performance. It may be a group of executive directors.

  • Saying a component with no external revenue cannot be a segment.

    Students think only external sales count.

    Fix: Paragraph 5(a) includes revenues and expenses from transactions with other components of the same entity. Also, start-ups may qualify before earning revenue.

  • Treating every department as an operating segment.

    Students ignore the CODM review condition.

    Fix: A department such as corporate head office or accounts does not earn revenues in its own right in most cases, and is not reviewed as a segment. Always apply all three conditions.

  • Splitting segments by geography or product on your own preference.

    Students apply textbook categories instead of the management approach.

    Fix: Use the structure reported to the CODM. In a matrix, follow the core principle and the factors in paragraph 8.

  • Skipping the condition of discrete financial information.

    Students focus only on the revenue and CODM tests.

    Fix: Write all three tests of paragraph 5 in your answer and tick each one.

Worked examples

Example 1

Sundaram Industries Ltd has three divisions: Auto Parts, Pumps and a Central Treasury Team. The Managing Director and CFO jointly allocate resources and review monthly results of Auto Parts and Pumps, for which separate profit statements are prepared. Central Treasury only manages group funds and its costs are not reviewed as a separate unit for resource decisions. Identify the CODM and the operating segments.

Show the solution
  1. CODM is the function that allocates resources and assesses performance. Here the Managing Director and CFO together do this, so they form the CODM.
  2. Auto Parts: it earns revenues and incurs expenses; the CODM reviews its results monthly for resource decisions; separate profit statements exist. All three paragraph 5 conditions are met.
  3. Pumps: same facts, so all three conditions are met.
  4. Central Treasury Team: it manages group funds and its results are not reviewed as a unit to allocate resources or assess performance. Condition (b) is not met, so it is not an operating segment.

Answer: The CODM is the Managing Director and CFO acting together. Auto Parts and Pumps are operating segments. The Central Treasury Team is not, because the CODM does not review its results for resource allocation and performance assessment.

Example 2

Himalaya Foods Ltd is organised with product-line managers (Snacks, Beverages) and regional managers (North, South). The CEO regularly reviews results of both product lines and regions, and financial information is available for both. Only the product-line managers are held responsible for results and negotiate budgets and forecasts with the CEO. Regional managers handle sales support only. Which set forms the operating segments?

Show the solution
  1. This is a matrix form of organisation: two overlapping sets of components, both reviewed by the CODM (the CEO) with financial information available for both (paragraph 10).
  2. Under paragraph 10, the entity determines the set by reference to the core principle. Paragraph 8 lists factors: nature of business activities, existence of managers responsible for them, and information given to the board.
  3. Product-line managers are held responsible and discuss budgets and forecasts with the CEO. This matches the description of segment managers in paragraph 9. Regional managers only support sales.
  4. Therefore the product-line set is the one that fits the segment concept better.

Answer: Snacks and Beverages are the operating segments, because their managers are held responsible to the CEO as segment managers and this fits the core principle. The regions are not operating segments.

Exam tips

  • In MCQs, watch for options that call CODM a 'title' or always the board. The correct view is that it is a function.
  • Quote paragraph 5 conditions (a), (b) and (c) in descriptive answers. Marks are given for testing each one.
  • In case scenarios, find who actually allocates resources and reviews results. Use that, not the designation in the facts.
  • Remember two traps: start-ups without revenue can be segments, and intra-entity revenue counts under paragraph 5(a).
  • For matrix questions, name the factors in paragraph 8 and say which set the segment managers are responsible for.

Practice questions from Operating Segments (Ind AS 108)

Definition and Identification of 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.

Definition and Identification of Operating Segments: frequently asked questions

What is the definition of an operating segment in Ind AS 108?

It 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 CODM for resource allocation and performance assessment, and for which discrete financial information is available. All three conditions of paragraph 5 must be met.

Who is the chief operating decision maker under Ind AS 108?

The CODM is a function that allocates resources to and assesses the performance of the operating segments. Often it is the CEO or COO, but it may be a group of executive directors or others. It need not have a specific title.

Can a start-up unit with no revenue be an operating segment?

Yes. Paragraph 5 states that an operating segment may engage in business activities for which it has yet to earn revenues. It still must meet the CODM review and discrete financial information conditions.

What if the entity has a matrix structure?

Where overlapping sets of components exist, the entity determines which set forms the operating segments by reference to the core principle. Factors include the nature of the business activities, the existence of responsible managers and information presented to the board.