Applicable Standard: IFRS 8 – Operating Segments

IFRS 8 – Operating Segments requires an entity to report financial and descriptive information about its operating segments. An operating segment is defined as a component of an entity:

1. That engages in business activities from which it earns revenue and incurs expenses (including transactions with other components of the same entity).
2. Whose operating results are regularly reviewed by the Chief Operating Decision Maker (CODM) to allocate resources and assess performance.
3. For which discrete financial information is available.

Analysis of the Laboratories

1. First Laboratory:
   • Funding and Activities:
     • The laboratory’s research and development activities are funded internally and centrally for the three divisions.
     • It does not provide services to external customers.
   • Accountability:
     • The laboratory is directly accountable to the divisional heads, and its expenditures are reviewed by these heads, not the CODM.
   • Conclusion:
     • This laboratory does not qualify as an operating segment because:
       • It does not generate external revenue.
       • Its results are not directly reviewed by the CODM.
2. Second Laboratory:
   • Funding and Activities:
     • This laboratory performs contract investigation activities for external customers and earns 75% of its revenue from external sources, which represents 18% of the total revenue of Fine Face Limited.
     • The remaining 25% of revenue comes from internal customers.
   • Accountability and Review:
     • The head of the second laboratory is directly accountable to the CODM.
     • The CODM reviews the laboratory’s performance, allocates resources, and discusses its financial results.
   • Conclusion:
     • This laboratory qualifies as an operating segment because:
       • It engages in revenue-generating activities.
       • It earns significant external revenue (75%).
       • Its performance is regularly reviewed by the CODM.

Recommendation to the Directors

• The first laboratory should not be reported as a separate operating segment under IFRS 8 because it does not generate external revenue and is not directly reviewed by the CODM.
• The second laboratory should be reported as a separate operating segment because it meets the criteria under IFRS 8.
• Disclosures for the second laboratory should include information on its revenue, profit or loss, and other key financial metrics.