Primary and Secondary Segment Reporting Primary and Secondary Segment Reporting Formats

Primary and Secondary Segment Reporting Formats

26. The dominant source and nature of an entity’s risks and returns shall govern whether its primary segment reporting format will be business segments or geographical segments. If the entity’s risks and rates of return are affected predominantly by differences in the products and services it produces, its primary format for reporting segment information shall be business segments, with secondary information reported geographically. Similarly, if the entity’s risks and rates of return are affected predominantly by the fact that it operates in different countries or other geographical areas, its primary format for reporting segment information shall be geographical segments, with secondary information reported for groups of related products and services.

27. An entity’s internal organisational and management structure and its system of internal financial reporting to key management personnel (e.g. the board of directors and the chief executive officer) shall normally be the basis for identifying the predominant source and nature of risks and differing rates of return facing the entity and, therefore, for determining which reporting format is primary and which is secondary, except as provided in subparagraphs (a) and (b) below:

(a) if an entity’s risks and rates of return are strongly affected both by differences in the products and services it produces and by differences in the geographical areas in which it operates, as evidenced by a “matrix approach” to managing the company and to reporting internally to key management personnel, then the entity shall use business segments as its primary segment reporting format and geographical segments as its secondary reporting format; and

(b) 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, key management personnel of the entity shall determine whether the entity’s risks and returns are related more to the products and services it produces or more to the geographical areas in which it operates and, as a consequence, shall choose either business segments or geographical segments as the entity’s primary segment reporting format, with the other as its secondary reporting format.

28. For most entities, the predominant source of risks and returns determines how the entity is organised and managed. An entity’s organisational and management structure and its internal financial reporting system normally provide the best evidence of the entity’s predominant source of risks and returns for purpose of its segment reporting. Therefore, except in rare circumstances, an entity will report segment information in its financial report on the same basis as it reports internally to key management personnel. Its predominant source of risks and returns becomes its primary segment reporting format. Its secondary source of risks and returns becomes its secondary segment reporting format.