Cash generating units under IAS 36

What is CGU……. We have heard a lot of times that impairment should be carried at the individual CGU levels. now, what is this CGU… Here is what we have discussed some of the excerpts;

A cash-generating unit is “the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group of assets”

Impairment should be identified at the individual asset level, where possible. The recoverable amount should be calculated for the CGU to which the asset belongs only where the recoverable amount for the individual asset cannot be identified.

Cash inflows are cash flows received from external parties. The independence of cash flows will be indicated by various factors – for example, how management monitor’s the entity’s operations (this could be the by-product
lines, businesses, individual locations, districts or regional areas), or how management makes decisions about continuing or disposing of the entity’s assets and operations. Management’s day-to-day operation of the business might not reflect the legal structure through which the operations are conducted

Now, another thing to notice is about finding an active market.

An asset or group of assets is identified as a separate CGU if there is an active market for the output generated by the asset(s), even if the output is used internally.

An active market = “A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis”

Value in use is based on management’s best estimate of future cash flows. Management should use its best estimate of future arm’s length prices for the internal cash flow to: estimate the future cash inflows that relate to the sale of the output by the CGU to the entity’s other CGUs; and estimate the future cash outflows that relate to the purchase of the output by the other CGUs.

How to calculate the VIU?

IAS 36 provides detailed guidance on the principles to be applied when calculating value in use. In some industries, specific valuation models are used for internal purposes. An example of this is the use of the dividend discount model in the financial services sector. There are numerous variations of the dividend discount model, some discounting only future expected dividend receipts and others based on a more detailed analysis of recoverable value.

Internal valuation models could be adopted, to calculate the value in use of a CGU for purposes of impairment testing, provided that they are consistent with the principles and requirements of IAS 36.