Identifying the cash-generating unit

Learning objectives

• Identify the smallest group of assets that generates cash inflows that are largely independent to which an asset belongs.L2, L3
• Justify the identification of units in the light of how management monitors operations and makes decisions about continuing or disposing of them.L3, L4

Normative references

• IAS 36 §65States that paragraphs 66 to 108 and Appendix C deal with identifying the CGU to which an asset belongs, determining the carrying amount of CGUs and recognising impairment losses for CGUs and goodwill.
• IAS 36 §66If there is an indication, the recoverable amount is estimated for the individual asset; if that is not possible, it is estimated for the CGU to which the asset belongs.
• IAS 36 §67The recoverable amount of an individual asset cannot be determined when its value in use cannot be estimated to be close to its fair value less costs of disposal (cash flows from continuing use are not negligible) and it does not generate cash inflows that are largely independent; it can then be determined only at the level of its CGU, as illustrated by the example of a private railway of a mine, tested together with the mine as a whole.
• IAS 36 §68An asset's CGU is the smallest group of assets that includes the asset and generates cash inflows that are largely independent; its identification involves judgement and targets the lowest aggregation of assets. The Standard illustrates this with the example of a bus company required to operate several routes, which together form the CGU.
• IAS 36 §69To assess whether cash inflows are largely independent, the entity considers various factors, including how management monitors the operations (product lines, businesses, individual locations, geographical areas) or makes decisions about continuing or disposing of the assets and operations.

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

13 questions

• There is an indication that a packaging machine of Lavandor may be impaired. At what level must the recoverable amount be estimated?L2
• What is the cash-generating unit of an asset?L2
• The quarry of Montrenard has a private access road that serves only the quarry. The road could be disposed of only for a low salvage value, far below the cash flows expected from its use, and it generates no cash inflows independent of those of the quarry. There is an indication that the road may be impaired. At what level is its recoverable amount determined?L3
• To assess whether the cash inflows of a group of assets are largely independent, which elements does the entity consider? (several answers)L2
• Which of the following statements about the level at which the recoverable amount is estimated are correct? (several answers)L3
• Hôtelvia operates five hotels located in five different towns. Each hotel has its own customers, bookings and cash receipts; management analyses results hotel by hotel and has already sold one establishment on its own. There is an indication of impairment for the Port-Aurel hotel, whose rooms and furniture do not generate independent cash inflows. Which CGU should be used?L3
• Under a concession, Navilia operates four sea routes to islands. The concession requires it to operate all four routes: it cannot abandon any of them. The revenue of each route is separately identifiable and the route to the island of Kerbian is loss-making. Which CGU should be used to test the vessel assigned to this route?L3
• Bricolis operates twelve DIY stores in different towns. Each store has its own customers and cash receipts; purchasing is negotiated by a common buying office. Management accounts present an income statement for each store, and the executive committee decides on closures and extensions store by store. The finance director argues that a single CGU should cover the chain, since purchasing is centralised. Which position should be adopted?L4
• A laser cutter of Pradelle has been idle for several months and will remain so; the cash flows expected from its use are negligible. Its value in use can therefore be estimated to be close to its fair value less costs of disposal, measurable from dealer prices (given). It belongs to a workshop whose cash inflows are largely independent. There is an indication of impairment. At what level is the recoverable amount of the cutter estimated?L3
• Aldara, a single legal entity, carries on three activities: dairy, road haulage and printing. Each activity has its own customers; management monitors them separately and is considering selling the printing business. For impairment testing, Aldara uses the entire entity as a CGU: the printing loss is thus offset by the profitability of the dairy. What do you think of this choice?L4
• Cinévia operates six cinemas in six towns. Each cinema sells its tickets and confectionery to local customers; management accounts present a monthly income statement for each cinema, and the executive committee decides on refurbishments and closures cinema by cinema. There is an indication of impairment for the Montclar cinema, whose projectors and seats do not generate independent cash inflows. The finance director proposes testing the six cinemas together, as the profitability of the other sites comfortably covers Montclar. Write a judgement memo on the level of the test.L4
• Éolisa operates several wind farms. One of them, with twelve turbines, is connected to the grid by a power line and a transformer substation built by Éolisa and used only by this farm. The farm sells its output to a single buyer and its cash inflows are independent of those of the other farms (given). The line could be disposed of only for a low scrap value, unrelated to the cash flows expected from its use. A landslide has damaged the line, which is an indication of impairment. The controller proposes testing the line alone on the basis of its scrap value; the finance director proposes testing all the group's farms together. Write a judgement memo.L4
• The audit committee of Ostréa is reviewing the method for identifying CGUs. Which of the following statements are correct? (several answers)L3