CAF-6 · Chapter 6

IFRS 8 Operating Segments MCQs with Answers

15 multiple-choice questions on IFRS 8 Operating Segments for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   According to IFRS 8, which of the following is an 'Operating Segment'?

   • A) Any department within an entity, including head office.
   • B) A component that engages in business activities, whose results are reviewed by the CODM, and for which discrete financial information is available.
   • C) Only parts of the business that are located in different countries.
   • D) Any product line that generates at least 5% of total revenue.
   Show answer & explanation

   Answer: B) A component that engages in business activities, whose results are reviewed by the CODM, and for which discrete financial information is available.

   An operating segment is a component of an entity: (a) that engages in business activities from which it may earn revenues and incur expenses, (b) whose operating results are regularly reviewed by the entity's Chief Operating Decision Maker (CODM), and (c) for which discrete financial information is available.

2. Question 2

   What is meant by the 'Chief Operating Decision Maker' (CODM) in IFRS 8?

   • A) It must be a single individual, such as the CEO.
   • B) It is a function that allocates resources and assesses performance of operating segments.
   • C) It is always the Board of Directors.
   • D) It is the external auditor of the entity.
   Show answer & explanation

   Answer: B) It is a function that allocates resources and assesses performance of operating segments.

   CODM is a function, not necessarily an individual. It refers to the person or group responsible for allocating resources and assessing the performance of the operating segments.

3. Question 3

   A segment is 'Reportable' if its reported revenue (including inter-segment sales) is what percentage or more of the combined revenue of all operating segments?

   • A) 5%
   • B) 10%
   • C) 25%
   • D) 75%
   Show answer & explanation

   Answer: B) 10%

   A segment is reportable if its reported revenue (including internal and external) is 10% or more of the combined revenue of all internal and external segments.

4. Question 4

   In addition to the revenue test, a segment is reportable if the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:

   • A) The combined reported profit of all operating segments that did not report a loss.
   • B) The combined reported loss of all operating segments that reported a loss.
   • C) Both A and B above.
   • D) Total assets of the segment.
   Show answer & explanation

   Answer: C) Both A and B above.

   The 10% profit/loss test compares a segment's profit/loss to the greater of (i) total profit of profitable segments or (ii) total loss of loss-making segments.

5. Question 5

   If the total external revenue reported by reportable segments constitutes less than what percentage of the entity's total revenue, additional reportable segments must be identified?

   • A) 50%
   • B) 70%
   • C) 75%
   • D) 90%
   Show answer & explanation

   Answer: C) 75%

   IFRS 8 requires that at least 75% of the entity's total external revenue must be included in reportable segments.

6. Question 6

   Two or more operating segments may be aggregated into a single operating segment if they have similar economic characteristics and are similar in several respects. Which of the following is NOT one of those respects?

   • A) The nature of the products and services.
   • B) The nature of the production processes.
   • C) The geographical location of the assets.
   • D) The type or class of customer for their products and services.
   Show answer & explanation

   Answer: C) The geographical location of the assets.

   Aggregation criteria include nature of products, nature of processes, types of customers, distribution methods, and regulatory environment. Geographical location is not a primary aggregation criterion under IFRS 8.

7. Question 7

   Which of the following must be disclosed for each reportable segment under IFRS 8?

   • A) A measure of segment profit or loss.
   • B) The name of the segment manager.
   • C) The exact date the segment was established.
   • D) The salary of the CODM.
   Show answer & explanation

   Answer: A) A measure of segment profit or loss.

   IFRS 8 requires disclosing a measure of profit or loss for each reportable segment as reviewed by the CODM.

8. Question 8

   An entity must disclose information about 'Major Customers' if revenues from transactions with a single external customer amount to what percentage or more of the entity's total revenue?

   • A) 5%
   • B) 10%
   • C) 15%
   • D) 20%
   Show answer & explanation

   Answer: B) 10%

   Disclosure about major customers is required if a single customer generates 10% or more of the entity's total revenue.

9. Question 9

   How should an entity handle segments that do not meet any of the 10% thresholds?

   • A) They must be ignored completely.
   • B) They are combined and disclosed in an 'all other segments' category.
   • C) They must be disclosed separately regardless of the thresholds.
   • D) They should be merged into the largest reportable segment.
   Show answer & explanation

   Answer: B) They are combined and disclosed in an 'all other segments' category.

   Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an 'all other segments' primary category.

10. Question 10

    If an entity has a matrix organizational structure where several managers are responsible for different facets of the business, who is the CODM?

    • A) The manager who has been at the company the longest.
    • B) The manager responsible for the highest revenue segment.
    • C) It depends on which set of components is used for allocating resources and assessing performance.
    • D) The Board of Directors by default.
    Show answer & explanation

    Answer: C) It depends on which set of components is used for allocating resources and assessing performance.

    In matrix structures, management determines the operating segments based on the core internal reporting used by the CODM to allocate resources.

11. Question 11

    IFRS 8 uses a specific approach for segment reporting. What is this approach called?

    • A) The Geographical approach
    • B) The Management approach
    • C) The Risk and Reward approach
    • D) The Asset-based approach.
    Show answer & explanation

    Answer: B) The Management approach

    IFRS 8 uses the 'management approach' where segments are identified based on internal reports used by management.

12. Question 12

    An entity must provide reconciliations of the total of reportable segments' measures to the entity's amounts. Which of the following does NOT require a reconciliation?

    • A) Total Revenue
    • B) Total Profit or Loss
    • C) Total Assets (if reported to CODM)
    • D) Total number of employees
    Show answer & explanation

    Answer: D) Total number of employees

    IFRS 8 requires reconciliations for revenue, profit/loss, assets (if disclosed), liabilities (if disclosed), and other material items. Employee count is not a required reconciliation.

13. Question 13

    According to IFRS 8, segment information must be reported based on:

    • A) International Financial Reporting Standards (IFRS).
    • B) The basis used for internal reporting to the CODM.
    • C) The tax laws of the parent company's country.
    • D) The historical cost accounting method.
    Show answer & explanation

    Answer: B) The basis used for internal reporting to the CODM.

    Segment measures are reported as they are provided to the CODM, even if that basis differs from the logic used in the consolidated financial statements.

14. Question 14

    In identifying its segments, Zenith Ltd has 12 operating segments. Management believes that showing 12 segments would be too detailed for users. Does IFRS 8 provide a suggested limit?

    • A) No limit is mentioned.
    • B) A maximum of 5 segments.
    • C) A practical limit of around 10 segments.
    • D) Exactly 8 segments.
    Show answer & explanation

    Answer: C) A practical limit of around 10 segments.

    IFRS 8 states that if the number of reportable segments exceeds 10, the entity should consider whether a practical limit has been reached.

15. Question 15

    Which of the following entities are REQUIRED to apply IFRS 8?

    • A) All private limited companies.
    • B) All entities whose debt or equity instruments are traded in a public market (or are in the process of doing so).
    • C) Only non-profit organizations.
    • D) All entities regardless of size or listing status.
    Show answer & explanation

    Answer: B) All entities whose debt or equity instruments are traded in a public market (or are in the process of doing so).

    IFRS 8 applies to the separate or individual financial statements of an entity (and the consolidated financial statements of a group) whose debt or equity instruments are traded in a public market.