Basis of determining Operating Segments:
Currently, segments are identified as either business segments based on related products and services, or geographical segments based on the economic environment. Ind AS requires segment disclosure based on the components of the company that management monitors in making decisions about operating matters.
How are operating segments identified?
There are four key steps. Entities will need to:
1 Identify the CODM.
2 Identify their business activities (which may not necessarily earn revenue or incur expenses).
3 Determine whether discrete financial information is available for the business activities.
4 Determine whether that information is regularly reviewed by the CODM.
Consequently, the segments are evident from the structure of the company’s internal organisation and the information regularly reported internally to the CODM. The adoption of the management approach results in the disclosure of information for segments in substantially the same manner as they are reported internally for purposes of evaluating performance and making resource allocation decisions.
Now, a question arises, Who is a CODM?
The Chief Operating Decision Maker (CODM) is a function and not necessarily a person. That function is to allocate resources to, and assess the performance of, the operating segments. It is likely to vary from entity to entity
– it may be the CEO, the COO or the board of directors. The title identified as CODM is not relevant, as long as it is
the person(s) responsible for making strategic decisions about the entity’s segments.
In this way, financial statements users are able to see the company through the eyes of management. However, Ind AS permits the aggregation of segments if certain criteria are met.
