Cash-generating unit definition
/What is a Cash-Generating Unit?
A cash-generating unit is a concept used within the International Financial Reporting Standards accounting framework to analyze assets for impairment. It 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.
Without the cash-generating unit concept, it would be excessively difficult to determine the cash flows associated with individual assets for an impairment analysis. An impairment analysis is used to determine whether the fair value of an asset has dropped below the amount at which it is recorded in an organization’s accounting records; if so, the business must write off the amount by which the carrying amount of the asset exceeds its fair value.
Example of a Cash-Generating Unit
An example of a cash-generating unit is a retail store within a chain of stores. This store generates its own cash inflows through sales of goods to customers. These cash inflows are largely independent of other stores in the chain. In this case, the cash-generating unit includes all assets directly involved in the store’s operations, such as leasehold improvements, fixtures, and equipment.
If there are indications of impairment (e.g., a decline in profitability or a competitor opening nearby), the retail store's assets would be assessed collectively as a cash-generating unit.
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FAQs
Can Goodwill be Allocated to a Cash Generating Unit?
Goodwill must be allocated to one or more cash-generating units that are expected to benefit from the synergies of a business combination. This allocation is required for impairment testing under IFRS and should be done at the lowest level at which goodwill is monitored internally. Once allocated, the cash generating unit is tested for impairment at least annually or when indicators of impairment arise.