Cash-Generating Units (CGU) (IAS 36)

In most cases, companies do not test individual assets for impairment. Instead, IAS 36 requires assets to be combined into cash-generating units (‘CGU’) consisting of assets for which it is impossible to estimate the recoverable amount individually. This is the case when (IAS 36.67):

  • the asset does not generate cash inflows that are largely independent of those from other assets and
  • asset’s value in use cannot be estimated to be close to its fair value less costs of disposal.

CGU should be the smallest group of assets generating cash inflows that are largely independent of the cash inflows from other assets. CGUs are usually much bigger than that due to pragmatic reasons. Note that IAS 36 refers to cash inflows, not all cash flows,  which means that shared management of costs (e.g. shared service centers) does not impact identification of CGUs. See paragraphs IAS 36.66-73 for more discussion on identification of cash generating units.

IAS 36.70 states that if an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a CGU, even if some or all of the output is used internally. Moreover, internal pricing between CGUs should be adjusted in value in use calculation to arrive at estimated market prices.

Entity A has a warehouse X that is a part of a CGU Y. Due to change in production process, the warehouse X is no longer used and the building remains empty. CGU Y is not impaired.

Question: can the unused warehouse X still be a part of CGU Y?

Answer: No. Warehouse X no longer generates cash inflows that are dependent on other assets forming CGU Y. Moreover, its value in use can be estimated to be close to its fair value less costs of disposal. Warehouse should therefore be tested for impairment separately. As its use doesn’t generate any cash flows, the recoverable amount will determined based on fair value less costs of disposal. See also a footnote to paragraph IFRS 5.4.

Parents of multinational groups that carry out operations through subsidiaries in different countries often give the management boards of each subsidiary the power to make largely independent decisions relating to activities on local market. For the purpose of local financial statements (prepared also under IFRS), management boards of each subsidiary often identify several CGUs. However, the ultimate parent of such a group monitors group’s operations on a country-by-country basis and is often inclined to identify each country (i.e. each subsidiary) as a single CGU in consolidated financial statements. Such an approach is a practical simplification based on materiality, as it would be hard to present a conceptually sound reasoning why CGUs identified by a subsidiary at a local level do not generate independent cash inflows from the perspective of the whole group.

Let’s consider the following example: Entity A has two subsidiaries: X and Y. Additionally, it owns other individual non-financial assets directly. In consolidated financial statements of A, there is only one CGU consisting of assets held directly by A and its subsidiaries.

Question: In separate financial statements, is it possible for Entity A to keep the same CGU consisting of assets held directly by A and, this time, investments in subsidiaries X and Y?

Answer: Yes. IAS 36 does not address this issue specifically, but based on general requirements of IAS 36 entities can argue that investments in subsidiaries X and Y do not generate independent cash inflows. Of course, it is possible to identify dividends paid by X and Y to A, but their amount is still dependent on other assets directly owned by A.

We should keep in mind that the carrying amount of such a CGU will most likely be different in separate financial statements, as individual assets of X and Y will be substituted with the value of investments in X and Y, typically carried at historical cost.

See other pages relating to IAS 36:

Scope of IAS 36 Impairment of Assets
IAS 36 Impairment of Assets: Cash-Generating Units (CGU)
IAS 36 Impairment of Assets: Value in Use as the Recoverable Amount
IAS 36 Impairment of Assets: Allocation and Reversal of Impairment Losses
IAS 36 Impairment of Assets: Disclosure

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