A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (IFRS Foundation, IAS 36, paragraph 6). It is an IFRS Accounting Standards term, and it exists so an asset whose own recoverable amount cannot be worked out is still tested for impairment inside the smallest group that can be measured. A US firm runs into cash-generating units on an IFRS-reporting client or in a foreign parent’s group reporting package, because US GAAP has no unit of that name.
How a Cash-Generating Unit Is Identified
The unit is found from the bottom up. Where an asset shows any indication of impairment, recoverable amount is estimated for that asset alone, and only if that is impossible does the entity determine the recoverable amount of the unit it belongs to (IFRS Foundation, IAS 36, paragraph 66). Recoverable amount, and the comparison it feeds, are covered in impairment losses.
Two conditions have to hold together before an asset drops out of its own test: its value in use cannot be estimated to be close to fair value less costs of disposal, and it does not generate cash inflows that are largely independent of those from other assets (IFRS Foundation, IAS 36, paragraph 67).
The entity then identifies the lowest aggregation of assets generating largely independent cash inflows, and the standard says outright that this involves judgment (IFRS Foundation, IAS 36, paragraph 68). Cash inflows are received from parties external to the entity, and in judging independence an entity looks at how management monitors operations, by product lines, businesses, locations, districts or regional areas (IFRS Foundation, IAS 36, paragraph 69).
The word largely is what makes the call hard. In the standard’s own bus company, a contract requires minimum service on each of five separate routes, and the assets and cash flows of each route can be identified separately, yet because the entity cannot curtail any one route the unit for each route is the bus company as a whole (IFRS Foundation, IAS 36, the example following paragraph 68). Separately identifiable cash flows are not the test. Independence is.
Internal use does not settle it either. Where an active market exists for the output produced by an asset or group of assets, that asset or group is identified as a cash-generating unit even if some or all of the output is used internally (IFRS Foundation, IAS 36, paragraph 70).
Nor is the boundary redrawn each year to suit the answer. Cash-generating units are identified consistently from period to period for the same asset or types of assets, unless a change is justified (IFRS Foundation, IAS 36, paragraph 72).
Corporate Assets and Goodwill Have to Be Tested in a Unit
Corporate assets are assets other than goodwill, such as a headquarters building, that contribute to the future cash flows of both the unit under review and other units. They generate no cash inflows independently of other assets or groups of assets, and their carrying amount cannot be fully attributed to the unit under review (IFRS Foundation, IAS 36, paragraphs 6 and 100). A portion allocable on a reasonable and consistent basis joins the unit’s carrying amount. A portion that is not means the unit is tested first excluding that corporate asset, and only then does the entity move up to the smallest group of units to which a portion can be allocated on a reasonable and consistent basis (IFRS Foundation, IAS 36, paragraph 102).
Goodwill is there for the same reason. It generates no cash flows independently of other assets and often feeds several units (IFRS Foundation, IAS 36, paragraph 81). From the acquisition date it is allocated to each unit, or group of units, expected to benefit from the synergies of the combination, and each has to be the lowest level at which the goodwill is monitored for internal management purposes and no larger than an operating segment under paragraph 5 of IFRS 8 before aggregation (IFRS Foundation, IAS 36, paragraph 80). What goodwill itself is sits in goodwill in business.
What a Cash-Generating Unit Is Not
The two things a US reviewer reaches for instead are not synonyms for it or for each other.
The first is the asset group. A long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (FASB Statement No. 144, paragraph 10), guidance that now sits in Subtopic 360-10 of the Codification (FASB Accounting Standards Update 2017-04). How a Codification address is built is set out in ASC accounting.
The second is the reporting unit. A reporting unit is an operating segment or one level below an operating segment, referred to as a component, and a component of an operating segment is a reporting unit if it constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component (FASB Statement No. 142, paragraph 30). That is where the goodwill test runs, under Subtopic 350-20 (FASB Accounting Standards Update 2017-04). One is drawn from cash flow independence, the other from the reporting structure, and the two can coincide: goodwill is included in an asset group to be tested for impairment only if the asset group is or includes a reporting unit (FASB Statement No. 144, paragraph 12).
The frameworks part company on a headquarters. Under US GAAP, where a long-lived asset such as a corporate headquarters facility has no identifiable cash flows largely independent of those of other assets and liabilities and of other asset groups, the asset group for it includes all assets and liabilities of the entity (FASB Statement No. 144, paragraph 11). IAS 36 never jumps to the whole entity that way. It allocates.
Common Questions
CGU is the abbreviation for cash-generating unit and carries the same meaning. It turns up that way in group reporting packages, impairment memos and audit workpapers prepared under IFRS Accounting Standards.
An impairment loss is recognized for the unit if, and only if, its recoverable amount is less than its carrying amount, and the loss reduces any goodwill allocated to the unit first, then the other assets pro rata on each asset’s carrying amount (IFRS Foundation, IAS 36, paragraph 104). Measuring the loss itself is covered in impairment losses.
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