Cash-Generating Unit (CGU)

What is Cash-Generating Unit (CGU)?

IAS 36.66 requires an entity to identify CGUs whenever it cannot estimate the recoverable amount of an individual asset. Most fixed assets in a manufacturing plant or retail chain do not generate cash independently, so the entity groups them into CGUs based on how the business produces revenue. The test is whether the cash inflows are largely independent of those from other asset groups. That word "largely" is doing real work: IAS 36.70 acknowledges that some internal transfers exist (a factory selling components to a sister division, for instance) and permits the entity to use external market prices to assess independence even when internal pricing applies.

Once identified, CGU boundaries should remain consistent from period to period unless a reorganisation changes how management monitors operations (IAS 36.72). Each CGU carrying amount includes the assets directly attributable to it plus a reasonable allocation of corporate assets under IAS 36.102. The recoverable amount is the higher of fair value less costs of disposal and value in use. When the carrying amount exceeds the recoverable amount, the entity recognises an impairment loss and allocates it first to any goodwill within the CGU, then pro rata to the remaining assets.

Worked example

Client: German electronics manufacturer, FY2025, revenue EUR 310M, IFRS reporter. Schafer operates two product divisions: industrial sensors (revenue EUR 195M) and consumer lighting (revenue EUR 115M). The consumer lighting division was acquired in 2022, and goodwill of EUR 14M was allocated to it at acquisition. At 31 December 2025, the carrying amount of the consumer lighting CGU (including goodwill) is EUR 82M. Demand has fallen after a competitor launched a lower-cost product line.

Step 1 — Confirm CGU identification

Consumer lighting generates cash inflows from external customers independently of the industrial sensors division. The two divisions share a head office but have separate production facilities, distribution channels, and customer bases. Consumer lighting is a single CGU.

Documentation note: record the CGU identification analysis under IAS 36.66–68, referencing the divisional revenue split and separate customer order books. Note that management monitors the two divisions as distinct operating units.

Step 2 — Determine recoverable amount

Management prepares a value-in-use calculation using five-year cash flow projections. Projected operating cash flows for consumer lighting are EUR 11.2M in year one, declining to EUR 9.8M by year five, with a terminal growth rate of 1.5%. The pre-tax discount rate is 10.4%, derived from the weighted average cost of capital adjusted for the risk profile of the division. The resulting value in use is EUR 74M.

Documentation note: record the discount rate build-up (risk-free rate, equity risk premium, beta, debt spread, tax gross-up), the five-year projection approved by the board, and the terminal growth rate. Cross-reference to IAS 36.30–57 for the value-in-use requirements. File management's sensitivity analysis showing value in use under discount rates of 9.4% and 11.4%.

Step 3 — Compare carrying amount to recoverable amount

The carrying amount of the CGU is EUR 82M. The recoverable amount (value in use) is EUR 74M. The impairment loss is EUR 8M.

Documentation note: record the comparison, the resulting impairment of EUR 8M, and the date of the test per IAS 36.10.

Step 4 — Allocate the impairment loss

Under IAS 36.104, the EUR 8M loss is allocated first to goodwill. Goodwill of EUR 14M absorbs the full EUR 8M, reducing goodwill to EUR 6M. No allocation to other assets is required because goodwill absorbs the entire loss.

Documentation note: record the allocation waterfall under IAS 36.104(a). Confirm that no individual asset is written down below the highest of its fair value less costs of disposal, its value in use, or zero per IAS 36.105. File the post-impairment carrying amounts of all material assets within the CGU.

Conclusion: the consumer lighting CGU carries an impairment loss of EUR 8M absorbed entirely by goodwill, supported by a board-approved cash flow projection, an independently derived discount rate, and a documented sensitivity analysis.

Why it matters in practice

• Teams often define CGUs at too high a level of aggregation (the legal entity or the operating segment) rather than identifying the smallest group of assets with independent cash inflows. IAS 36.68 is explicit: the CGU is the smallest group, not the most convenient one. Over-aggregation conceals impairments in underperforming units by blending their carrying amounts with profitable ones. The FRC's 2023 thematic review of IAS 36 disclosures flagged insufficient explanation of how entities determined CGU boundaries as a recurring deficiency.
• The discount rate used in value-in-use calculations frequently reflects the entity-wide WACC rather than a rate adjusted for the specific risks of the CGU. IAS 36.55–56 requires a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. ISA 540.13(b) requires the auditor to evaluate whether the inputs and assumptions are appropriate for the method used, which means testing the rate against the CGU's own risk profile rather than accepting the group rate without adjustment.

CGU vs. operating segment

A CGU sits at or below the operating segment level. The distinction matters when an entity argues that a single segment is also a single CGU. Auditors should test that claim against IAS 36.68 by verifying whether the segment genuinely generates cash inflows that are largely independent at the segment level or whether sub-groups within the segment operate independently.

Related terms

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