Business and Geographical SegmentsBusiness and Geographical Segments

Business and Geographical Segments

31. An entity’s business and geographical segments for external reporting purposes shall be those organisational units for which information is reported to key management personnel for the purpose of evaluating the unit’s past performance and for making decisions about future allocations of resources, except as provided in paragraph 32.

32. If an entity’s internal organisational and management structure and its system of internal financial reporting to key management personnel are based neither on individual products or services or on groups of related products/services nor on geography, paragraph 27(b) requires that key management personnel of the entity shall choose either business segments or geographical segments as the entity’s primary segment reporting format based on their assessment of which reflects the primary source of the entity’s risks and returns, with the other its secondary reporting format. In that case, key management personnel of the entity must determine its business segments and geographical segments for external reporting purposes based on the factors in the definitions in paragraph 9 of this Standard, rather than on the basis of its system of internal financial reporting to key management personnel, consistent with the following:

(a) if one or more of the segments reported internally to key management personnel is a business segment or a geographical segment based on the factors in the definitions in paragraph 9 but others are not, subparagraph (b) below shall be applied only to those internal segments that do not meet the definitions in paragraph 9 (that is, an internally reported segment that meets the definition shall not be further segmented);

(b) for those segments reported internally to key management personnel that do not satisfy the definitions in paragraph 9, management of the entity shall look to the next lower level of internal segmentation that reports information along product and service lines or geographical lines, as appropriate under the definitions in paragraph 9; and

(c) if such an internally reported lower-level segment meets the definition of business segment or geographical segment based on the factors in paragraph 9, the criteria in paragraphs 34 and 35 for identifying reportable segments shall be applied to that segment.

33. Under this Standard, most entities will identify their business and geographical segments as the organisational units for which information is reported to key management personnel, or the senior operating decision maker, which in some cases may be a group of people, for the purpose of evaluating each unit’s past performance and for making decisions about future allocations of resources. And even if an entity must apply paragraph 32 because its internal segments are not along product/service or geographical lines, it will look to the next lower level of internal segmentation that reports information along product and service lines or geographical lines rather than construct segments solely for external reporting purposes. This approach of looking to an entity’s organisational and management structure and its internal financial reporting system to identify the entity’s business and geographical segments for external reporting purposes is sometimes called the “management approach”, and the organisational components for which information is reported internally are sometimes called “operating segments”.