Final answer:
An operating segment is a business component that earns revenue, incurs expenses, is reviewed by the chief operating decision maker, and has discrete financial information for assessing performance and resource allocation.
Step-by-step explanation:
The criteria that must be met for a component of an enterprise to be identified as an operating segment are:
- It generates revenues and incurs expenses.
- It is regularly reviewed by the chief operating decision maker (CODM).
- It has discrete financial information available.
An operating segment is a component of a business for which separate financial information is available and is reviewed regularly by the company's CODM, typically an executive position like the CEO or CFO, to make decisions about resources to be allocated to the segment and assess its performance. It must engage in business activities, including earning revenues and incurring expenses. The determination of operating segments is important for the disclosure purposes in financial reporting under generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).