Saturday Brain Storming Thought (238) 31/08/2024

CASH GENERATING UNIT (CGU)

A Cash Generating Unit is the smallest identifiable group of assets that generates cash inflows from continuing use and is largely independent of the cash inflows from other assets or groups of assets

Examples of CGUs include

1) Individual stores or store chains in the retail sector

2) Individual properties in the real estate sector

3) Service lines in the technology industry like cloud computing, syber security or data analytics

4) Product lines in the technology industry like smartphones, laptops or software solutions

5) Business units like retail banking, investment banking or asset management in the financial sector

6) Hotels, resorts or theme parks in the hospitality and entertainment industry

7) Content divisions like film production, television and streaming services in the media industry

8) Oil fields in the energy sector

Characteristics of CGU

1) Individual cash flow generation

2) Operational autonomy

Recoverable Amount

The recoverable amount of an asset is determined by its higher value in use or fair value less costs to sell

CGU as a measurement unit

A CGU serves as a unit of measurement for impairment testing

If the carrying amount of an asset exceeds the recoverable amount of its CGU an impairment loss is recognized

Carrying Value of CGU

The carrying amount of a CGU consists of

1) Assets that are directly and exclusively attributable to the CGU

2) An allocation of assets that are indirectly attributable on a reasonable and consistent basis to the CGU

3) including corporate assets and goodwill

Value in use of CGU

The present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life

Key Takeaways of CGU

1) CGU refers to a group of identifiable assets that yield cash inflow for a business independent of other asset groups

2) CGUs are instrumental in financial reporting and valuation as they help eliminate asset impairment and ensure accurate goodwill allocation by International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) 36

3) The importance of defining CGUs can be seen in asset impairment cases and situations where goodwill accounting is to be done

Is goodwill is CGU

No

While goodwill ensures future cash flows for a company, it does not do so independently

A firm earns goodwill through its entire group of assets, as understood from its accounting procedure

Difference between CGU and Asset

An Asset isxan individual item or resource that may or may not contribute to cash flow directly

A CGU is a group of assets that independently or collectively generates cash inflows

Recoverable amount of CGU

It is the higher value between its fair value minus selling costs and its value in use

It represents the anticipated future cash flows generated by the CGU

This figure is vital in assessing whether the CGU is impaired, which affects financial reporting and asset valuation

Can a CGU include Intangible Assets

Yes

A CGU can include Intangible Assets

CGUs are not limited to tangible assets alone

Intangible Assets like goodwill, patents, trademarks and copyrights that independently or collectively generate cash inflows can be a part of CGU

COMPILED BY:-

Er. Avinash Kulkarni
9822011051

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer