Syllabus D. Audit of Historical Financial Information D3. Evaluation and review

D3a. IFRS 8 Determining Reporting segments 37 / 41

Syllabus D3a)

Evaluate the matters (e.g. materiality, risk, relevant accounting standards, audit evidence) relating to:
vi)  segmental reporting

IFRS 8 Determining Reporting segments

Identifying Business and Geographical Segments

  • An entity must look to its organisational structure and internal reporting system to identify reportable segments. 

    In fact, the segmentation used for internal reports for the board should be the same for external reports

  • Only if internal segments are not along either product/service or geographical lines is further disaggregation appropriate.

Primary and Secondary Segments

  • For most entities one basis of segmentation is primary and the other is secondary (with considerably less disclosure required for secondary segments)

  • To decide which is primary, the entity should see whether business or geographical factors most affect the risk and returns. 

    This should be helped by looking at entity’s internal organisational and management structure and its system of internal financial reporting to senior management.


Product External Revenue Internal Revenue Profit Assets Liabilities
The Nose picker 2,000 30 (100) 3,000 2,000
The Earwax extractor 3,000 20 600 8,000 3,000
Other Products 5,000 50 1,050 20,000 14,000

Which segments should be reported upon?

Let’s look at the 3 reportable segment tests:
10% of combined revenue = 1,010
10% of profits = 165
10% of losses = 10
10% of assets = 3,100

  1. The Nose picker only passes the revenue test, it fails the profits test as a loss of 100 is less than 165 (165 is higher than 10), it fails the assets test. 

    It is still a reportable segment though as only 1 test needs to be passed

  2. The Earwax extractor passes all 3 tests

  3. Other Products These are not separate segments and can only be added together if the nature of the products are similar, as are their customer type and distribution method. 

    So ordinarily these would not be disclosed. However we need to check whether the 2 reported segments meet the 75% external revenue test:

  4. Currently only 5,000 out of 10,000 (50%). 

    Therefore additional operating segments (other products) may be added until the 75% threshold is reached