How is a cash-generating unit identified under IAS 36?

Under IAS 36, a cash-generating unit (CGU) 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 (IAS 36.6). - Independence test is paramount (IAS 36.69): Management must assess whether an asset's cash inflows are largely independent from others. If an active market exists for the output of an asset or group of assets, that asset or group qualifies as a CGU — even if output is internally transferred. Where no active market exists, the asset must be grouped with others whose cash flows are interdependent. - Bottom-up identification (IAS 36.72): CGUs are identified at the lowest level at which management monitors return on assets for internal management purposes. This is a facts-and-circumstances judgment — a single retail store, a geographic segment, a product line, or an entire division could each qualify, depending on how cash inflows are generated and tracked internally. - Consistency over time (IAS 36.72): Once identified, CGUs must be defined consistently from period to period unless a change is justified. Arbitrary redefinition to avoid or trigger impairment is not permitted and will draw audit scrutiny. - Goodwill allocation (IAS 36.80): Goodwill acquired in a business combination must be allocated to each CGU or group of CGUs expected to benefit from the synergies of the combination. The CGU to which goodwill is allocated cannot be larger than an operating segment as defined under IFRS 8 before aggregation.

When an entity reorganises its operations and CGU boundaries change, how should previously allocated goodwill be reallocated under IAS 36.87?

- Corporate assets (IAS 36.102): Assets that do not generate independent cash inflows (e.g., a shared IT infrastructure or group headquarters) must be allocated proportionally to relevant CGUs for impairment testing. If a reasonable basis of allocation exists, the corporate asset is included in the CGU's carrying amount; if not, a separate impairment test is performed at the group of CGUs level. - Recoverable amount comparison (IAS 36.74): Once the CGU is identified, its carrying amount is compared to its recoverable amount — the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). An impairment loss arises when carrying amount exceeds recoverable amount. A retail group operates 50 stores. Each store generates revenue from external customers independently; no store relies on another store's output to earn its cash inflows. Management monitors performance store by store. CGU identification: Each individual store is a CGU. The group's shared distribution centre (carrying amount €8m) cannot generate independent cash inflows. It is allocated across stores using floor area as a reasonable basis.

If a CGU's recoverable amount is determined using FVLCD based on a Level 3 valuation, what specific disclosures are required under IAS 36.130 and IFRS 13?

- Ignoring internal transfer pricing when an active market exists: IAS 36.70 requires that even where output is sold internally, if an active market exists for that output, the asset (or group) should be treated as a standalone CGU using market prices. Failing to apply market prices when testing VIU overstates recoverable amount. - Misallocating goodwill to CGUs that received no synergies: IAS 36.80 restricts goodwill allocation to CGUs that benefit from the combination's synergies. Spreading goodwill mechanically across all CGUs by revenue or asset value — without synergy analysis — is a common error that misrepresents impairment risk in each unit. - IAS 36.6 — definition of a cash-generating unit (largest independent cash inflow group that is the smallest identifiable unit) - IAS 36.69–72 — guidance on identifying CGUs, independence of cash inflows, and consistency requirement - IAS 36.80–84 — allocation of goodwill to CGUs and the operating segment ceiling - IAS 36.102–103 — treatment of corporate assets that cannot be allocated on a reasonable basis - IAS 36.104 — order of allocation of impairment losses within a CGU (goodwill first, then pro-rata)

IAS 36 Cash-Generating Unit Definition

IAS 36 Cash-Generating Unit Definition — Core Rule

Under IAS 36, a cash-generating unit (CGU) 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 (IAS 36.6).

How IAS 36 Cash-Generating Unit Definition Works

Independence test is paramount (IAS 36.69): Management must assess whether an asset's cash inflows are largely independent from others. If an active market exists for the output of an asset or group of assets, that asset or group qualifies as a CGU — even if output is internally transferred. Where no active market exists, the asset must be grouped with others whose cash flows are interdependent.

Bottom-up identification (IAS 36.72): CGUs are identified at the lowest level at which management monitors return on assets for internal management purposes. This is a facts-and-circumstances judgment — a single retail store, a geographic segment, a product line, or an entire division could each qualify, depending on how cash inflows are generated and tracked internally.

Consistency over time (IAS 36.72): Once identified, CGUs must be defined consistently from period to period unless a change is justified. Arbitrary redefinition to avoid or trigger impairment is not permitted and will draw audit scrutiny.

Goodwill allocation (IAS 36.80): Goodwill acquired in a business combination must be allocated to each CGU or group of CGUs expected to benefit from the synergies of the combination. The CGU to which goodwill is allocated cannot be larger than an operating segment as defined under IFRS 8 before aggregation.

Corporate assets (IAS 36.102): Assets that do not generate independent cash inflows (e.g., a shared IT infrastructure or group headquarters) must be allocated proportionally to relevant CGUs for impairment testing. If a reasonable basis of allocation exists, the corporate asset is included in the CGU's carrying amount; if not, a separate impairment test is performed at the group of CGUs level.

Recoverable amount comparison (IAS 36.74): Once the CGU is identified, its carrying amount is compared to its recoverable amount — the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). An impairment loss arises when carrying amount exceeds recoverable amount.

IAS 36 Cash-Generating Unit Definition — Practical Example

A retail group operates 50 stores. Each store generates revenue from external customers independently; no store relies on another store's output to earn its cash inflows. Management monitors performance store by store.

CGU identification: Each individual store is a CGU.

The group's shared distribution centre (carrying amount €8m) cannot generate independent cash inflows. It is allocated across stores using floor area as a reasonable basis.

Store #12 data after allocation:

Carrying amount of net assets: €2,400,000
Allocated share of distribution centre: €160,000
Total CGU carrying amount: €2,560,000
Recoverable amount (VIU): €1,900,000
Impairment loss: €660,000

IAS 36.104 requires the impairment loss to be allocated first to goodwill within the CGU, then pro-rata to other assets. Assuming no goodwill, the loss reduces PPE:

Account	Dr (€)	Cr (€)
Impairment loss – P&L	660,000
Accumulated impairment – Store #12 PPE		660,000

The impairment loss is recognised immediately in profit or loss (IAS 36.60) unless the asset was previously revalued, in which case it is first offset against any revaluation surplus in OCI.

IAS 36 Cash-Generating Unit Definition — Common Pitfalls

Defining CGUs too broadly to avoid impairment: Grouping loss-making assets with profitable ones dilutes the test. Auditors will challenge whether cash inflows are truly independent or whether management has deliberately aggregated to suppress an impairment charge — always document the independence analysis rigorously.

Ignoring internal transfer pricing when an active market exists: IAS 36.70 requires that even where output is sold internally, if an active market exists for that output, the asset (or group) should be treated as a standalone CGU using market prices. Failing to apply market prices when testing VIU overstates recoverable amount.

Misallocating goodwill to CGUs that received no synergies: IAS 36.80 restricts goodwill allocation to CGUs that benefit from the combination's synergies. Spreading goodwill mechanically across all CGUs by revenue or asset value — without synergy analysis — is a common error that misrepresents impairment risk in each unit.

IAS 36 Cash-Generating Unit Definition — Key Paragraphs

IAS 36.6 — definition of a cash-generating unit (largest independent cash inflow group that is the smallest identifiable unit)
IAS 36.69–72 — guidance on identifying CGUs, independence of cash inflows, and consistency requirement
IAS 36.80–84 — allocation of goodwill to CGUs and the operating segment ceiling
IAS 36.102–103 — treatment of corporate assets that cannot be allocated on a reasonable basis
IAS 36.104 — order of allocation of impairment losses within a CGU (goodwill first, then pro-rata)