What is a Cash-Generating Unit?
A Cash-Generating Unit (CGU), also known as an Income-Generating Unit, is defined as the smallest identifiable group of assets, liabilities, and associated goodwill that generates cash inflows independently of other assets or groups of assets within the entity. This concept is vital in the context of impairment testing under accounting standards like IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles).
Key Components:
- Assets: Tangible or intangible resources owned by the entity that contribute to generating cash inflows.
- Liabilities: Obligations that arise from past transactions or events.
- Goodwill: Intangible asset representing excess purchase price paid over the fair value of net identifiable assets in business combinations.
Examples of Cash-Generating Units:
- Retail Stores: Each location of a retail chain could be considered a CGU as each can independently generate cash inflows.
- Manufacturing Plants: Different manufacturing facilities within the same company.
- Product Line: A specific line within a company that generates distinct cash inflows.
Frequently Asked Questions (FAQs)
1. What is the purpose of identifying a CGU?
The primary purpose is to conduct impairment testing to ensure that the assets and goodwill are not carried at amounts exceeding their recoverable amounts.
2. How is a CGU determined?
A CGU is determined based on the smallest group of assets that generates independent cash inflows. Judgment is required to allocate assets and goodwill to different units.
3. What are the accounting standards that govern CGUs?
International Financial Reporting Standards (IFRS), specifically IAS 36 - “Impairment of Assets,” govern CGUs. US GAAP also has related guidelines for impairment testing.
4. What happens if a CGU is impaired?
If the carrying amount of a CGU exceeds its recoverable amount, an impairment loss must be recognized. The loss is allocated first to goodwill and then to other assets on a pro-rata basis.
5. Can a CGU consist of a single asset?
Yes, in cases where an individual asset generates cash flows that are independent of other assets, that single asset could form a CGU.
Related Terms
1. Impairment Testing
The process of determining if an asset’s carrying amount exceeds its recoverable amount and subsequently recognizing an impairment loss if necessary.
2. Recoverable Amount
The higher of an asset’s fair value less costs of disposal and its value in use.
3. Goodwill
An intangible asset that arises when a buyer acquires an existing business, reflecting the excess purchase price over the fair value of identifiable net assets.
4. Carrying Amount
The amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and impairment losses.
5. Value in Use
The present value of future cash flows expected to be derived from an asset or CGU.
Online References
Suggested Books for Further Studies
- “International Financial Reporting Standards (IFRS) - Practical Implementation Guide and Workbook” by Abbas A. Mirza and Graham Holt
- “Accounting for Goodwill and Other Intangible Assets” by Mark L. Zyla
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil
Accounting Basics: “Cash-Generating Unit” Fundamentals Quiz
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