Output with an active market and internal transfer prices

Learning objectives

• Determine that a group of assets whose output has an active market is a cash-generating unit even if the output is used internally, and adjust internal transfer prices accordingly.L3, L4

Normative references

• IAS 36 §70If an active market exists for the output produced by an asset or group of assets, that asset or group is a CGU even if some or all of the output is used internally; when internal transfer prices affect the cash flows, the entity uses management's best estimate of future arm's length prices, both for the inflows of that CGU and for the outflows of the other CGUs concerned.
• IAS 36 §71Even if some or all of the output produced by an asset or group of assets is used internally (intermediate products), that group forms a separate CGU if the entity could sell that output on an active market; forecasts affected by internal transfer prices are adjusted to the best estimate of arm's length prices.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

6 questions

• The Bauxor group operates an alumina mine whose entire output is delivered to its own smelter. Alumina is nevertheless traded on an active market. How should the mine be treated when identifying cash-generating units (CGUs)?L3
• The subsidiary Verrania sells its entire output of flat glass to another unit of the group, at an internal transfer price below the prices on the active market for this glass. To estimate the value in use of Verrania's CGU, which selling prices does the entity use in the cash flow projections?L3
• The Alpilait cooperative collects and pasteurises milk in a dedicated plant. The plant sells 40% of the pasteurised milk to third-party manufacturers, on an active market, and delivers the remaining 60% to the group's cheese factory. The financial controller proposes to treat the plant as a CGU only for the portion sold externally and to attach the portion delivered internally to the cheese factory. Which analysis is correct?L3
• At Solvaro, the Synthesis CGU produces a solvent, traded on an active market, which it sells entirely to the group's Paints CGU at an internal price of 130 per tonne. Management estimates that future arm's length prices for the solvent will be around 100 per tonne. The Paints CGU shows indications of impairment and both values in use must be estimated. Which approach complies with IAS 36?L4
• The Granitex group owns a quarry that delivers all its granite blocks to its own cutting plant. Raw blocks are traded on an active regional market, but the group invoices them internally at a price well below market. Management wishes to treat the quarry and the plant as a single CGU and to build the value in use projections on internal prices. Write a judgement memo on the identification of the CGUs and on the prices to be used.L4
• The Electrovia group's power plant supplies, through a direct line, all the needs of the group's neighbouring aluminium smelter. The plant is connected to the grid, and electricity is traded on an active wholesale market. The auditor asks which element is decisive in concluding that the plant is a separate CGU. Which one?L4