illustrated in the following Example 20.5:
Example 20.5: Identification of cash-generating units – single product entity
Entity M produces a single product and owns plants A, B, C. Each plant is located in a different continent. A
produces a component that is assembled in either B or C. The combined capacity of B and C is not fully
utilised. M’s products are sold worldwide from either plant B or C. For example, B’s product can be sold
in C’s continent if the products can be delivered faster from B than from C. Utilisation levels from B and C
depend on the allocation of sales between the two sites. There is no active market for A’s products.
Most likely A, B and C together, therefore M as a whole, are the smallest identifiable group of assets that
generates cash inflows that are largely independent. This is due to:
Impairment of fixed assets and goodwill 1441
(a)
A’s cash inflows depending on sales of the final product by B and C; and
(b)
cash inflows for B and C depend on the allocation of the production across the two sites.
As explained at 3.2 below, the conclusion would be different if an active market for A’s product existed,
resulting in A being one CGU and B and C together another CGU.
As a result of applying the methodology illustrated in Example 20.2 above, an entity
could identify a large number of CGUs. However, the standard allows reasonable
approximations and one way in which entities may apply this in practice is to group
together assets that are separate CGUs, but which if considered individually for
impairment would not be material. Retail outlets, usually separate CGUs, may be
grouped if they are in close proximity to one another, e.g. all of the retail outlets in a
city centre owned by a branded clothes retailer, if they are all subject to the same
economic circumstances and grouping rather than examining individually will have an
immaterial effect. However, the entity will still have to scrutinise the individual CGUs
to ensure that those that it intends to sell or that have significantly underperformed are
not supported by the others with which they are grouped. They would need to be
identified and dealt with individually.
In practice, different entities will inevitably have varying approaches when determining
their CGUs. There is judgement to be exercised in determining an income stream and
in determining whether it is largely independent of other streams. Given this, entities
may tend towards larger rather than smaller CGUs, to keep the complexity of the
process within reasonable bounds.
IAS 36 also requires that identification of cash generating units be consistent from
period to period unless the change is justified; if changes are made and the entity records
or reverses an impairment, disclosures are required. [IAS 36.72, 73].
Assets held for sale cannot remain part of a CGU. They generate independent cash
inflows being the proceeds expected to be generated by sale. Once they are classified
as held for sale they will be accounted for in accordance with IFRS 5 and carried at an
amount that may not exceed their FVLCD (see 5.1 below and Chapter 4 for a further
discussion of IFRS 5’s requirements).
3.1
CGUs and intangible assets
IAS 36 requires certain intangible assets to be tested at least annually for impairment
(see 2 above). These are intangible assets with an indefinite life and intangible assets that
have not yet been brought into use. [IAS 36.10-11].
Although these assets must be tested for impairment at least once a year, this does
not mean that they have to be tested by themselves. The same requirements apply
as for all other assets. The recoverable amount is the higher of the FVLCD or VIU
of the individual asset or of the CGU to which the asset belongs (see 3 above). If the
individual intangible asset’s FVLCD is lower than the carrying amount and it does
not generate largely independent cash flows then the CGU to which it belongs must
be reviewed for impairment.
Many intangible assets do not generate independent cash inflows as individual assets and so
they are tested for impairment with other assets of the CGU of which they are part. A trade
1442 Chapter 20
mark, for example, will generate largely independent cash flows if it is licensed to a third
party but more commonly it will be part of a CGU.
If impairment is tested by reference to the FVLCD or VIU of the CGU, impairment
losses, if any, will be allocated in accordance with IAS 36. Any goodwill allocated to the
CGU has to be written off first. After that, the other assets of the CGU, including the
intangible asset, will be, reduced pro rata based on their carrying amount (see 11.2
below). [IAS 36.104]. However, the carrying amount of an asset should not be reduced
below the highest of its fair value less costs of disposal, value in use or zero. 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).
If the intangible asset is no longer useable then it must be written off, e.g. an in-process
research and development project that has been abandoned, so it is no longer part of
the larger CGU and its own recoverable amount is nil. Intangible assets held for sale are
treated in the same way as all other assets held for sale – see 5.1 below.
3.2
Active markets and identifying CGUs
The standard stresses the significance of an active market for the output of an asset or
group of assets in identifying a CGU. An active market is a market in which transactions
take place with sufficient frequency and volume to provide pricing information on an
ongoing basis. [IFRS 13 Appendix A]. If there is an active market for the output produced by
an asset or group of assets, the assets concerned are identified as a cash-generating unit,
even if some or all of the output is used internally. [IAS 36.70]. The reason given for this
rule is that the existence of an active market means that the assets or CGU could
generate cash inflows independently from the rest of the business by selling on the
active market. [IAS 36.71]. There are active markets for many metals, energy products
(various grades of oil product, natural gas) and other commodities that are freely traded.
When estimating cash inflows for the selling CGU or cash outflows for the buying CGU,
the entity will replace internal transfer prices with management’s best estimate of the
price in a future arm’s length transaction. Note that this is a general requirement for all
assets and CGUs subject to internal transfer pricing (see 7.1.6 below).
Example A below, based on Example 1B in IAS 36’s accompanying section of illustrative
examples, illustrates the point. Example B describes circumstances in which the existence
of an active market does not necessarily lead to the identification of a separate CGU.
Example 20.6: Identification of cash-generating units – internally-used products
Example A – Plant for an Intermediate Step in a Production Process
A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of
the same entity. X’s products are sold to Y at an internal price that passes all margins to X. 60 per cent
of X’s
final production is sold to Y and the remaining 40 per cent is sold to customers outside of the entity. Y sells
80 per cent of its products to customers outside of the entity. Transfer pricing is discussed at 7.1.6 below.
If X can sell its products in an active market and generate cash inflows that are largely independent of the cash
inflows from Y, it is likely that X is a CGU even though part of its production is used by Y. Therefore, its cash
inflows can be regarded as being largely independent. It is likely that Y is also a separate CGU. However, internal
transfer prices do not reflect market prices for X’s output. Therefore, in determining value in use of both X and
Y, the entity adjusts financial budgets/forecasts to reflect management’s best estimate of future prices that could
be achieved in arm’s length transactions for those of X’s products that are used internally.
Impairment of fixed assets and goodwill 1443
If, on the other hand, there is no active market, it is likely that the recoverable amount of each plant cannot
be assessed independently of the recoverable amount of the other plant. The majority of X’s production is
used internally and could not be sold in an active market. Cash inflows of X depend on demand for Y’s
products. Therefore, X cannot be considered to generate cash inflows that are largely independent of those of
Y. In addition, the two plants are managed together. As a consequence, it is likely that X and Y together are
the smallest group of assets that generates cash inflows that are largely independent. [IAS 36.IE5-10].
Example B – ‘Market’ for intermediate product not relevant to identification of a separate CGU
A vertically integrated operation located in Australia produces an intermediate product that is fully used
internally to manufacture the end product. The Australian market is the principal market for the intermediate
product and there is no active market as defined by IFRS 13 (see Chapter 14) for it in Australia. The entity
has only one other competitor in Australia, which is also vertically integrated and, likewise, uses the
intermediate product internally. Both entities are, and have always been, very profitable when looking at their
vertically integrated manufacturing processes to the end-stage product.
There is an active market for the intermediate product in China, but the prices at which the product can be
sold are so low that a company based in Australia whose sole activity is to sell the intermediate product into
China would never be profitable and a company would never set up manufacturing operations in Australia in
order to sell into China.
Each of the Australian companies will occasionally sell small surpluses of their intermediate products into
the active market in China, rather than make that product available to their competitor in Australia.
The existence of an active market for the intermediate product in China might suggest that the operations
involved should be treated as a separate CGU. However, the mere existence of an active market somewhere
in the world does not mean that the asset or CGU could realistically generate cash inflows independently
from the rest of the business by selling on that active market. If such sales are a genuine incidental activity
(i.e. if it is genuinely a case of obtaining some proceeds from excess product that would otherwise be
scrapped), it may be appropriate not to regard that market as an active market for the intermediate product
for IAS 36 purposes.
If the market is not regarded as an active market for IAS 36 purposes, the assets/operations involved in
producing the intermediate product will not be treated as a separate CGU.
4
IDENTIFYING THE CARRYING AMOUNT OF CGU ASSETS
After an entity has established its CGU(s) for the impairment assessment, it needs to
determine the carrying amount of the CGU(s). The carrying amount must be determined
on a basis that is consistent with the way in which the recoverable amount is
determined. [IAS 36.75].
The carrying amount of a CGU includes only those assets that can be attributed directly,
or allocated on a reasonable and consistent basis. These must be the assets that will
generate the future cash inflows used in determining the CGU’s recoverable amount. It
does not include the carrying amount of any recognised liability, unless the recoverable
amount of the cash-generating unit cannot be determined without taking it into account.
Both FVLCD and VIU of a CGU are determined excluding cash flows that relate to assets
that are not part of the cash-generating unit and liabilities that have been recognised.
[IAS 36.76].
The standard emphasises the importance of completeness in the allocation of assets to
CGUs. Every asset used in generating the cash flows of the CGU being tested must be
included in the CGU; otherwise an impaired CGU might appear to be unimpaired, as its
carrying value would be understated by having missed out assets. [IAS 36.77].
1444 Chapter 20
There are exceptions to the rule that recognised liabilities are not included in arriving
at the CGU’s carrying value or VIU. If the buyer would have to assume a liability if it
acquired an asset or group of assets, then the fair value less costs of disposal would be
the price to sell the assets or group of assets and the liability together. The liability would
then need to be deducted from the CGU’s carrying amount and VIU. This will enable a
meaningful comparison between carrying amount and recoverable amount, whether the
latter is based on FVLCD or VIU. [IAS 36.78]. See 4.1.1 below.
For practical reasons the entity may determine the recoverable amount of a CGU after
taking into account assets and liabilities such as receivables or other financial assets,
trade payables, pensions and other provisions that are outside the scope of IAS 36 and
therefore not part of the CGU. [IAS 36.79]. If the value in use calculation for a CGU or its
FVLCD are determined taking into account these sorts of items, then it is essential that
the carrying amount of the CGU is determined on a consistent basis. However, this
frequently causes confusion in practice, as described at 4.1 below.
Other assets such as goodwill and corporate assets may not be able to be attributed on
a reasonable and consistent basis and the standard has separate rules regarding their
treatment. The allocation of goodwill is dealt with separately at 8.1 below and corporate
assets at 4.2 below.
4.1
Consistency and the impairment test
Consistency is a very important principle underlying IAS 36. In testing for impairment
entities must ensure that the carrying amount of the CGU is consistent for VIU and
FVLCD calculations. In calculating VIU, or using a discounted cash flow methodology
for FVLCD, entities must ensure that there is consistency between the assets and
liabilities of the CGU and the cash flows taken into account, as there must also be
between the cash flows and discount rate.
The exceptions to the rule that recognised liabilities are not included in arriving at the
CGU’s carrying value. If the buyer would have to assume a liability if it acquired an asset
or group of assets (CGU), then the fair value less costs of disposal of the CGU would be
the price to sell the assets of the CGU and the liability together, less the costs of disposal.
/> [IAS 36.78]. To provide a meaningful comparison this liability should then be deducted as
well from the VIU and the carrying amount of the asset or group of assets (CGU).
The standards requirement to deduct the liability from both the CGU’s carrying amount and
from its VIU avoids the danger of distortion that can arise when cash flows that will be paid
to settle the contractual obligation are included in the VIU discounted cash flow calculation.
If the liability cash flows are included in the VIU discounted cash flow calculation, they
would potentially be discounted using a different discount rate to the rate used to calculate
the carrying value of the liability causing distortion. See 4.1.1 below for further discussion.
From a practical point of view an entity could simply calculate the VIU of a CGU
excluding the liability cash outflows and compare that to the CGU carrying amount
excluding the liability. While this would mean that the VIU is not comparable to the
FVLCD, this would not cause an issue as long as the calculated VIU is above the CGU’s
carrying amount, therefore providing evidence that the CGU is not impaired.
Impairment of fixed assets and goodwill 1445
It is also accepted in IAS 36 that an entity might for practical reasons determine the
recoverable amount of a CGU after taking into account assets and liabilities such as
receivables or other financial assets, trade payables, pensions and other provisions that
are outside the scope of IAS 36.
In all cases:
• the carrying amount of the CGU must be calculated on the same basis for VIU and
FVLCD, i.e. including the same assets and liabilities; and
• it is essential that cash flows are prepared on a consistent basis to the assets and
liabilities within CGUs.
In addition, some of these assets and liabilities have themselves been calculated using
discounting techniques. Therefore a danger of distortion arises resulting from differing
discount rates, as discussed above.
4.1.1
Environmental provisions and similar provisions and liabilities
IAS 36.78 illustrates liabilities that should be deducted from the carrying amount of
the assets of a CGU because a buyer would assume the liability using an example of
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