Definition of cash-generating unit
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. It is used in accounting to assess whether assets have become impaired.
Explanation of cash-generating unit
A cash-generating unit is identified when individual assets do not generate independent cash inflows. Instead of assessing those assets separately, they are grouped with other assets that collectively generate cash inflows which can be distinguished from those of other parts of the business.
Cash-generating units are particularly important when performing impairment reviews. If there is an indication that assets may be impaired and the recoverable amount of an individual asset cannot be determined, the recoverable amount of the related cash-generating unit is assessed instead. This allows impairment losses to be recognised where the carrying amount of the unit exceeds its recoverable amount.
Under UK accounting standards, including FRS 102, and under IAS 36 Impairment of Assets for entities applying IFRS, the concept of a cash-generating unit is central to the impairment testing process.
Key characteristics of a cash-generating unit
Key characteristics of a cash-generating unit include:
- It is the smallest identifiable group of assets that generates largely independent cash inflows.
- It may consist of a single asset or multiple assets working together.
- It is used when individual assets do not generate separate cash inflows.
- It forms the basis for certain impairment assessments.
- It is identified according to the economic substance of how cash inflows are generated.
How a cash-generating unit works
- An entity identifies whether an individual asset generates independent cash inflows.
- If it does not, the asset is grouped with other related assets.
- The smallest group generating largely independent cash inflows is identified as the cash-generating unit.
- The carrying amount of the unit is compared with its recoverable amount when impairment testing is required.
Example of a cash-generating unit in practice
A UK retail company operates a chain of stores. Individual shelving, tills and fixtures do not generate cash inflows independently, but each store generates its own identifiable sales revenue. For impairment purposes, each store may be treated as a separate cash-generating unit.
Related terms
Common misconceptions about cash-generating unit
- A cash-generating unit is not necessarily a legal entity or business division.
- It does not always consist of a single asset.
- It is not defined by physical location alone, but by how cash inflows are generated.
Cash-generating unit questions
What is a cash-generating unit?
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of those generated by other assets or groups of assets.
Why is a cash-generating unit important?
It provides the basis for impairment testing when individual assets do not generate independent cash inflows.
Can a cash-generating unit consist of one asset?
Yes. If an individual asset generates cash inflows independently, it may itself be treated as a cash-generating unit.
How is a cash-generating unit identified?
It is identified by analysing how assets generate cash inflows and determining the smallest group of assets with cash inflows that are largely independent of other parts of the business.
