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IFRS Definition of cash generating unit

IFRS Definition of cash generating unit

IFRS Definition of cash generating unit: A cash-generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets. The concept is used by the international financial reporting standards in the determination of asset impairment. Without the cash-generating unit concept, it would be excessively difficult to determine the cash flows associated with individual assets for an impairment analysis.

Cash-generating units other definition

Recoverable amount should be determined for the individual asset, if possible.

If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use) for the individual asset, then determine recoverable amount for the asset’s cash-generating unit (CGU). [IAS 36.66] The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

IFRS Definition of cash generating unit

IFRS Definition of cash generating unit

A little Bit Information about  IAS 36

IFRS Definition of cash generating unit: Objective of IAS 36

To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.

Scope

IAS 36 applies to all assets except:

  • inventories
  • assets arising from construction contracts
  • deferred tax assets
  • assets arising from employee benefits
  • financial assets
  • investment property carried at fair value
  • agricultural assets carried at fair value
  • insurance contract assets
  • non-current assets held for sale

Therefore, IAS 36 applies to (among other assets):

  • land
  • buildings
  • machinery and equipment
  • investment property carried at cost
  • intangible assets
  • goodwill
  • investments in subsidiaries, associates, and joint ventures carried at cost
  • assets carried at revalued amounts under IAS 16 and IAS 38

The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss.

The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures. Identifying an asset that may be impaired An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, an entity shall also:

(a) test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current annual period, that intangible asset shall be tested for impairment before the end of the current annual period.

(b) test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80-99. If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs .

A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

IFRS Definition of cash generating unit

Measuring recoverable amount The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense. Value in use is the present value of the future cash flows expected to be derived from an asset or cash generating unit.

The following elements shall be reflected in the calculation of an asset’s value in use:

(a) an estimate of the future cash flows the entity expects to derive from the asset.

(b) expectations about possible variations in the amount or timing of those future cash flows.

(c) the time value of money, represented by the current market risk-free rate of interest.

(d) the price for bearing the uncertainty inherent in the asset.

(e) other factors, such as liquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

Estimates of future cash flows shall include:

(a) projections of cash inflows from the continuing use of the asset.

(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset.

(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life

Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from:

(a) a future restructuring to which an entity is not yet committed.

(b) improving or enhancing the asset’s performance.

Estimates of future cash flows shall not include:

(a) cash inflows or outflows from financing activities.

(b) income tax receipts or payments.

IFRS Definition of cash generating unit

Reversing an impairment loss An entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset. An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets.

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another IFRS (for example, the revaluation model in IAS 16 Property, Plant and Equipment).

Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other IFRS. An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

IFRS Definition of cash generating unit

For More Information please visit the following link:

IFRS – IAS 36 Impairment of Assets  —> LINK

IFRS Definition of cash generating unit

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