Why cash generating unit is necessary

Identifying the cash-generating unit to which an asset belongs. In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset's cash-generating unit.

A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine. It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value.

Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, ie the mine as a whole.

A bus company provides services under contract with a municipality that requires minimum service on each of five separate routes. Assets devoted to each route and the cash flows from each route can be identified separately.

One of the routes operates at a significant loss. Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the five routes together. The cash-generating unit for each route is the bus company as a whole. Recoverable amount and carrying amount of a cash-generating unit.

This is because fair value less costs of disposal and value in use of a cash-generating unit are determined excluding cash flows that relate to assets that are not part of the cash-generating unit and liabilities that have been recognised see paragraphs 28 and A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations.

The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence.

A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine's useful life.

The carrying amount of the provision for restoration costs is CU, a which is equal to the present value of the restoration costs. The entity is testing the mine for impairment.

The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around CU This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately CU1,, excluding restoration costs. The carrying amount of the mine is CU1, The cash-generating unit's fair value less costs of disposal is CU This amount considers restoration costs that have already been provided for.

As a consequence, the value in use for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be CU CU1, less CU The carrying amount of the cash-generating unit is CU, which is the carrying amount of the mine CU1, less the carrying amount of the provision for restoration costs CU Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount.

Allocating goodwill to cash-generating units. In such circumstances, it might also not be possible to complete the initial allocation of the goodwill recognised in the combination before the end of the annual period in which the combination is effected. When this is the case, the entity discloses the information required by paragraph An entity sells for CU an operation that was part of a cash-generating unit to which goodwill has been allocated.

The goodwill allocated to the unit cannot be identified or associated with an asset group at a level lower than that unit, except arbitrarily. The recoverable amount of the portion of the cash-generating unit retained is CU Because the goodwill allocated to the cash-generating unit cannot be non-arbitrarily identified or associated with an asset group at a level lower than that unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of the operation disposed of and the portion of the unit retained.

Therefore, 25 per cent of the goodwill allocated to the cash-generating unit is included in the carrying amount of the operation that is sold. Goodwill had previously been allocated to cash-generating unit A.

The goodwill allocated to A cannot be identified or associated with an asset group at a level lower than A, except arbitrarily. A is to be divided and integrated into three other cash-generating units, B, C and D. Because the goodwill allocated to A cannot be non-arbitrarily identified or associated with an asset group at a level lower than A, it is reallocated to units B, C and D on the basis of the relative values of the three portions of A before those portions are integrated with B, C and D.

Testing cash-generating units with goodwill for impairment. Minority Interest. Timing of impairment tests. Corporate assets. Corporate assets include group or divisional assets such as the building of a headquarters or a division of the entity, EDP equipment or a research centre. The structure of an entity determines whether an asset meets this Standard's definition of corporate assets for a particular cash-generating unit.

The distinctive characteristics of corporate assets are that they do not generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the cash-generating unit under review. Because corporate assets do not generate separate cash inflows, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset.

As a consequence, if there is an indication that a corporate asset may be impaired, recoverable amount is determined for the cash-generating unit or group of cash-generating units to which the corporate asset belongs, and is compared with the carrying amount of this cash-generating unit or group of cash-generating units.

Any impairment loss is recognised in accordance with paragraph In testing a cash-generating unit for impairment, an entity shall identify all the corporate assets that relate to the cash-generating unit under review. If a portion of the carrying amount of a corporate asset:. Any impairment loss shall be recognised in accordance with paragraph Illustrative Example 8 illustrates the application of these requirements to corporate assets.

Impairment loss for a cash-generating unit. These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with paragraph The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit group of units. This applies even if the asset's fair value less costs of disposal is less than its carrying amount. A machine has suffered physical damage but is still working, although not as well as before it was damaged.

The machine's fair value less costs of disposal is less than its carrying amount. The machine does not generate independent cash inflows. The smallest identifiable group of assets that includes the machine and generates cash inflows that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired.

The recoverable amount of the machine alone cannot be estimated because the machine's value in use: a may differ from its fair value less costs to sell; and b can be determined only for the cash-generating unit to which the machine belongs the production line.

The production line is not impaired. Therefore, no impairment loss is recognised for the machine. Nevertheless, the entity may need to reassess the depreciation period or the depreciation method for the machine.

Perhaps a shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful life of the machine or the pattern in which economic benefits are expected to be consumed by the entity.

Cash flows from continuing use of the machine until its disposal are estimated to be negligible. The machine's value in use can be estimated to be close to its fair value less costs of disposal. Therefore, the recoverable amount of the machine can be determined and no consideration is given to the cash-generating unit to which the machine belongs ie the production line. Because the machine's fair value less costs of disposal is less than its carrying amount, an impairment loss is recognised for the machine.

IFRS Foundation. Table of contents Cash-generating units and goodwill. Link copied. Related content 1 of. Examples 1 of. IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated.

The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period: [IAS These lists are not intended to be exhaustive. Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections.

Cash flow projections should relate to the asset in its current condition — future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated.

Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments. In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset.

For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio.

If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS If it is not possible to determine the recoverable amount i.

To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.

Each unit or group of units to which the goodwill is so allocated shall: [IAS A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit: [IAS The impairment loss is allocated to reduce the carrying amount of the assets of the unit group of units in the following order: [IAS If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit group of units.

Using the full goodwill method, the impairment loss charged to profit or loss is higher for an entity that elects to adopt the fair value method. There will almost always be a difference in the impairment figure calculated under the two methods. Under the full goodwill method, the impairment loss is recognised in full.

There are requirements for allocating goodwill impairment losses between the holding company and the NCI. Where the subsidiary with the NCI represents a CGU for goodwill impairment-testing purposes, the allocation of the loss is done on the same basis as the allocation of profit. The allocation of impairment losses between the holding company and the NCI can become more complex if the subsidiary is not a CGU itself but part of a larger CGU for impairment testing purposes.

The full goodwill method introduces some complexities in impairment testing in this scenario and management should consider the impact on impairment tests when choosing goodwill method. Difficulties may well occur where entities have a CGU that has goodwill from several sources.

Examples will be subsidiaries acquired before IFRS 3 was revised that apply the partial goodwill method, subsidiaries acquired after IFRS 3 was revised that apply the full goodwill method, and entities that have goodwill from per cent-owned subsidiaries. Assume that goodwill of GBP 27m arose on the acquisition of the wholly owned subsidiary. If the full goodwill method is used, the results are as shown in the Impairment Problems table below:. Under IAS 36, impairment losses are allocated first to goodwill and then to the identifiable assets on a pro rata basis.

All the impairment loss in the example relates to goodwill and is allocated to the two subsidiaries that form the CGU. The loss will be allocated based on their relative carrying amounts of goodwill. Thus the goodwill of wholly owned subsidiary B will be charged with a GBP 9m impairment loss and that of partially owned subsidiary A with a GBP 6m impairment loss.

This example does not reflect all of the complexities that might well occur in practice. Under IFRS 3, impairment losses have to be allocated between each component of the goodwill in the CGU, which will mean detailed tracking of each component of goodwill. CPD technical article Multiple-choice questions. Written by Graham Holt. An amendment to IAS 36 has clarified that a cash-generating unit cannot be larger than an operating segment before aggregation. Graham Holt explains. Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs.

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