What criteria must be met for an operating segment to be reportable under IFRS 8?
I'm studying segment reporting for CFA Level I and the quantitative thresholds confuse me. IFRS 8 mentions 10% tests but I'm not sure what exactly is being compared. Also, what is the 75% rule? Can someone lay out the decision process clearly?
Segment reporting under IFRS 8 (and the similar ASC 280 under US GAAP) follows a specific identification and aggregation process. Here is how it works step by step.
Step 1 — Identify operating segments:
An operating segment is a component of the entity that:
- Engages in business activities from which it earns revenues and incurs expenses
- Has operating results regularly reviewed by the chief operating decision maker (CODM)
- Has discrete financial information available
This is the "management approach" — segments are defined by how management actually views the business, not by product lines or geography.
Step 2 — Apply the 10% quantitative thresholds:
A segment is reportable if it meets any one of these tests:
| Test | Threshold |
|---|---|
| Revenue test | Segment revenue (internal + external) >= 10% of combined revenue of all segments |
| Profit/loss test | Segment profit or loss >= 10% of the greater of (a) combined profit of all profitable segments or (b) combined loss of all loss-making segments |
| Asset test | Segment assets >= 10% of combined assets of all segments |
Example: Graystone Conglomerate has four segments:
| Segment | Revenue | Profit/(Loss) | Assets |
|---|---|---|---|
| Industrial | $180M | $24M | $300M |
| Consumer | $60M | $8M | $100M |
| Tech Services | $40M | ($5M) | $80M |
| Real Estate | $20M | $3M | $120M |
| Total | $300M | — | $600M |
10% of revenue = $30M, 10% of assets = $60M
For profit test: Total profit of profitable segments = $35M, total loss = $5M. Greater = $35M. 10% = $3.5M.
- Industrial: $180M > $30M (revenue), $24M > $3.5M (profit), $300M > $60M (assets) — Reportable
- Consumer: $60M > $30M, $8M > $3.5M, $100M > $60M — Reportable
- Tech Services: $40M > $30M, $5M > $3.5M, $80M > $60M — Reportable
- Real Estate: $20M < $30M, $3M < $3.5M, $120M > $60M — Reportable (passes asset test)
Step 3 — Apply the 75% sufficiency test:
The reportable segments must collectively account for at least 75% of the entity's total external revenue. If not, add more segments until the threshold is met.
Exam tip: The 10% tests use combined segment figures (including intercompany), but the 75% test uses external revenue only. This nuance is testable.
For more segment reporting practice, check our CFA Level I FRA module.
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