Identifying operating segments under ifrs 8 — matrix structure :
Company Atlanta Inc. has a chief executive officer (CEO), a chief operating officer (COO) and an executive committee comprising the CEO, COO and the heads (general managers) of three business units organized according to the company’s main products — units Xenon, Yolk and Zebra. The company also operates in two distinct geographic regions — Oceania and North America. The heads of these geographic regions attend executive committee meetings, have input into decisions about the distribution of the company’s products into their geographic regions and give their views on the performance of the company’s products in their regions.
Every month, financial information is presented to the executive committee for each of business units Xenon, Yolk and Zebra, geographic regions Oceania and North America and for Company Atlanta Inc. as a whole in order to assess the performance of each business unit, each geographic region and of the company as a whole. Corporate headquarter costs that are not allocated to units Xenon, Yolk and Zebra or to the geographic regions are also reported separately each month to the executive committee in order to determine the results for Company Atlanta Inc. as a whole. There is necessarily an overlap between the financial information presented for each of units Xenon, Yolk and Zebra and the Oceania and North American geographic regions because the product performance reported for each unit is reported again, with that of the other two product units, by geographic region.
Step 1: Who is the CODM?
In this case, the CODM is likely to be the executive committee, since it is the group that regularly reviews the operating results of all business units, geographic regions and the company as a whole. However, the heads of the geographic regions don’t appear to be able to make decisions about all business units and the company as a whole; rather, they only have input into the impact of product decisions on their geographic regions. This fact may influence the determination of operating segments (see the conclusion after step 4).
Step 2: Can the component generate revenue and incur expenses from its business activities?
For units Xenon, Yolk and Zebra., the answer is clearly yes. For the geographic regions, the answer is also yes, even though the revenues are generated from deployment of the products from units Xenon, Yolk and Zebra in the regions. For the corporate headquarters, the answer is no as it does not derive revenues; it only incurs costs.
Step 3: Are the component’s operating results regularly reviewed by the CODM as a basis for resource allocation and performance assessment?
For units Xenon, Yolk and Zebra, the geographic regions and the corporate headquarters, the answer is yes. However, the corporate headquarters has already failed step 2 and thus would not be identified as an operating segment.
Step 4: Is discrete financial information available for the component?
For units Xenon, Yolk and Zebra, the geographic regions and the corporate headquarters, the answer is yes. However, the corporate headquarters has already failed step 2 and thus would not be identified as an operating segment.
Conclusion
This leaves the entity potentially having two sets of operating segments — units Xenon, Yolk and Zebra, and geographic regions Oceania and North America. It is in this situation that IFRS 8 paragraph 10 directs the entity to the core principle of the standard to decide which set will best ‘enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates’. In this situation, management must exercise judgement. Arguably, in this case, identifying units Xenon, Yolk and Zebra as the operating segments best reflects the core principle because the organization of the company along product lines seems to be dominant over the organization by geographic lines.
