A Cash-Generating Unit (CGU) is the smallest identifiable group of assets that generates cash flows largely independent of other assets. Correct CGU identification determines goodwill allocation and impairment testing scope. Get it wrong, and impairments are missed or overstated.
Three-Step CGU Process
- Identify separate cash flows: Which assets generate distinct, independent cash flows?
- Determine unit boundaries: Are they a single CGU or multiple?
- Allocate goodwill: Which CGU(s) benefited from the acquisition?
CGU Examples by Industry
| Business Type | CGU Level | Why |
|---|---|---|
| Retail chain (Tesco) | Individual stores or regions | Each store has independent P&L, customers, supply chain |
| Software (SaaS) | Product line | Each product has distinct revenue, churn, pricing |
| Bank | Retail, commercial, investment banking | Different customer bases, risk profiles, cash flows |
| Manufacturing | Production facility or division | Each facility serves distinct markets/customers |
Worked Example: Retail Acquisition
Scenario: Company acquires a retail chain with 50 stores for £100m. Goodwill: £30m.
- CGU definition: Each store (or region) is a separate CGU
- Goodwill allocation: £30m allocated across the 50 stores proportionally
- Impairment testing: Each store's recoverable amount is tested separately
- Example: If Store A's recoverable amount < carrying amount (including allocated goodwill), Store A is impaired; goodwill attached to Store A is written down
Audit Challenge: CGU Boundaries
Auditors often challenge whether management has identified CGUs too broadly. For example:
Company position: "All our software products are interdependent; one CGU."
Auditor challenge: "Product A is declining 20% YoY, Product B is growing 5%. They have separate revenue streams. Shouldn't they be separate CGUs?"
Result: CGU split, separate impairment tests, potential additional impairments on Product A.
Real-Life Case Study: Where Does the CGU Boundary Sit?
Scenario. A retail chain wonders whether to test each store individually or the region as a whole. Some stores are loss-making but sit in a profitable region.
Analysis. A CGU is the smallest group of assets generating largely independent cash inflows. Because each store attracts its own customers and takes its own till receipts, each store is a separate CGU, so the loss-making ones must be tested individually and cannot hide behind regional profits.
Takeaway. Drawing the CGU boundary too widely is a classic way impairment gets missed. The test is independence of cash inflows, not management's reporting structure. If a store's revenue does not depend on the one next door, it stands alone.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
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