will generate largely independent cash inflows, but brands and goodwill may be tested
at a higher level.
In Example 20.2 below Example A illustrates a practical approach which involves
working down to the smallest group of assets for which a stream of cash inflows can be
identified. These groups of assets will be CGUs unless the performance of their cash
inflow-generating assets is dependent on those generated by other assets, or their cash
inflows are affected by those of other assets. If the cash inflows generated by the group
of assets are not largely independent of those generated by other assets, other assets
should be added to the group to form the smallest collection of assets that generates
largely independent cash inflows.
Example 20.2: Identification of cash-generating units
Example A – newspapers
An entity publishes 10 suburban newspapers, each with a different mast-head, across 4 distinct regions within
a city centre. The price paid for a purchased mast-head is recognised as an intangible asset. The newspapers
are distributed to residents free of charge. No newspaper is distributed outside its region. All of the revenue
generated by each newspaper comes from advertising sales. An analysis of advertising sales shows that for
each mast-head:
Impairment of fixed assets and goodwill 1437
• approximately 90% of sales come from advertisers purchasing ‘bundled’ advertisements that appear in
all those newspapers published in one particular region of the city;
• approximately 6% of sales come from advertisers purchasing ‘bundled’ advertisements that appear in all
10 newspapers in the city centre; and
• approximately 4% of sales come from advertisers purchasing advertisements that appear in one
newspaper only.
What is the cash-generating unit for an individual mast-head?
Identify the smallest aggregation of assets for which a stream of cash inflows can be identified.
The fact that it is possible to use a pro-rata allocation basis to determine the cash inflows attributable to each
newspaper means that each mast-head is likely to represent the smallest aggregation of assets for which a
stream of cash inflows can be identified.
Are the cash inflows generated by an individual mast-head largely independent of those of other mast-heads
and, conversely, is that individual mast-head affecting the cash inflows generated by other mast-heads?
As approximately 96% of cash inflows for each mast-head arise from ‘bundled’ advertising sales across
multiple mast-heads, the cash inflows generated by an individual mast-head are not largely independent.
Therefore, the individual mast-heads would most likely need to be aggregated to form the smallest collection
of assets that generates largely independent cash inflows. On the basis that approximately 90% of cash inflows
for each mast-head arise from ‘bundled’ advertising sales across all of the newspapers published in a
particular region, it is likely that those mast-heads published in one region will together form a cash-
generating unit.
Example B – retail outlets
An entity has a chain of retail outlets located in the same country. The business model of the entity is highly
integrated and the majority of the entity’s revenue generating decisions, such as decisions about investments
and monitoring of performance, are carried out at an entity level by the executive committee, with some
decisions (such as product range and marketing) delegated to the regional or store levels. The majority of the
operations, such as purchasing, are centralised. Management operates its business on a regional basis; but
sales are monitored at the individual store level.
The outlets are usually bought and sold in packages of outlets that are subject to common economic
characteristics, e.g. outlets of similar size or location such as a shopping centre or city or region. Only in rare
situations has the entity sold or closed down an individual outlet.
The determining factor for CGUs is the level at which largely independent cash inflows are generated, and
not the manner in which the entity’s operations are organised and monitored. The fact that operations and
costs are managed centrally does not in itself affect the source and independence of the cash inflows. The
interdependence of cash outflows is unlikely to be relevant to the identification of CGUs.
The key issue in deciding whether CGUs should be identified at the level of the individual store as
opposed to a group of stores is whether, if a store is closed down, all the customers of that store would
seek out another of the entity’s stores such that there is no significant ‘leakage’ of customers from the
store closure. Unless the customers transfer their business to another of the entity’s stores, the individual
stores are separate CGUs.
Management in Example B may consider that the primary way in which they monitor
their business is on a regional or segmental basis, but cash inflows are monitored at the
level of an individual store. Individual stores generate independent cash inflows in most
circumstances and the overriding requirement under IAS 36 is that the identification of
CGUs is based on largely independent cash inflows.
However, the business models of some retailers have significantly changed over the last
years and with the increased importance of internet sales will probably further change
in the years ahead. The following example illustrates a new evolving omni-channel
business model and its potential impact on the identification of CGUs in the retail sector.
1438 Chapter 20
Example 20.3: Omni-channel business model
Retailer A sells a wide range of general household merchandise online and through its retail stores which are
located in most large and medium-sized cities in the same country. In order to cater to the changing habits of
consumers and significant growth of online shoppers, A established an online platform. Retailer A offers the
same products in each of its stores and on the online platform.
A uses the ‘click and collect’ business model. With ‘click and collect’ a customer is able to place an order
online for items and then choose from which store to collect. If the preferred store runs out of an item, the
customer might choose another store in the same city instead of waiting until the item arrives in its preferred
store. This is the case for both customers buying online for store collection and for customers wanting to
purchase the product directly in the store. The customer could either choose to pay online for the goods or
make payment in store at the point of pick up. The customer could also purchase an item online and wait for
it to be delivered in 3 working days. Sales generated online account for a significant portion of total sales,
ranging from 20% to 25% depending on the city, and are projected to grow steadily in the coming years. The
stores also serve as a point of return for products that customers ordered online. A product purchased online
or in a store can be returned in any store and experience shows that customers make use of this option by
returning products to stores in the same city where the product was originally purchased, picked up or
delivered. The customers may exchange the products returned with products from the store shelves or they
may purchase other products within the store when pic
king up or returning products. Hence, the activity of
picking up and returning products also triggers sales in the stores. Retailer A considers the stores as well as
showrooms for the online business whereby customers get professional buying advice and are able to
experience the look and feel of the products, but then acquire the products only later through the online
platform. For supply chain optimisation purposes Retailer A through its store personnel also encourages its
customers to order online.
The performance of the stores together with the relevant online sales is assessed by city and not on an
individual store-level. The employees of the stores are paid on an hourly basis and have performance-based
compensation which is based on sales in all stores in one city together with online sales generated by
customers located in the same city.
In assessing the CGU level for impairment purposes the key question is at which level of the retailer’s
organisation are independent cash inflows generated? In the specific fact pattern above, customers treat stores
in the same city as an alternative means of making purchases and transacting returns which seems to indicate
that all stores in one city might be one CGU. In addition, in the above described integrated omni-channel
business model, the cash-inflows generated by stores and the cash-inflows generated by the online channel
may not be largely independent from each other as the online revenues influence the store revenues and vice
versa. Online customers treat stores as a collection and return point for online sales and as showrooms to
experience the products. All of this together, as well as the fact that the performance of the stores and of the
employees is assessed by city including online sales for the city, suggests that independent cash inflows are
generated at the city level. Therefore, in the specific fact pattern above, it would be reasonable to treat the
stores in a city together with the allocated assets of the online sales channel as one CGU for impairment
testing purposes. The recoverable amount would consider the sales in the stores in a city plus the online sales
to customers in the city.
Alternatively, if the sales generated online are an insignificant component of total sales and stores are not
treated to a large extent as substitutes for each other by customers, then each single store may be considered
a CGU for impairment testing purposes, even if the performance of the stores are monitored together at a
higher level.
As explained above, IAS 36 states that the identification of CGUs involves judgment and
that in identifying CGUs an entity should consider various factors including how
management monitors the entity’s operations (such as by product line, business,
individual location, district or regional area) or how management makes decisions about
continuing or disposing of the entity’s assets and operations. [IAS 36.68-69].
Impairment of fixed assets and goodwill 1439
Applying this guidance, the following quantitative and qualitative criteria might be
considered in determining the appropriate CGUs in an omni-channel business model
for impairment testing purposes:
• Whether the interdependency of the revenues from different sales channels
(online, stores) is evidenced in the business model.
• Whether the retailer is able to measure the interdependencies of the revenues (i.e.
online and stores).
• Whether the business model provides evidence that the sales channels are
monitored together (e.g. on the level of customers allocated based on ZIP-Codes
to stores in an area).
• Whether the profitability as well as the remuneration system are
monitored/assessed on the combined basis of online and store revenues on a
regional level (e.g. cities in Example 20.3 above).
• Whether in deciding about store openings and closures, the revenues of the online-
business in the region (city in the example above) are considered.
• Whether online revenues are reaching a significant quantitative proportion of the
overall revenues of the retailer’s CGUs. It is important to note that IAS 36 does not
give any specific guidance on when cash inflows are largely independent and
therefore judgement is required. The level of interdependent online sales in
Example 20.3 above is not meant to be a bright line but rather part of the specific
fact pattern in the example and in practice the determination of CGUs will have to
be made in the context of the overall facts and circumstances.
As illustrated in Example 20.4 below, it may be that the entity is capable of identifying
individual cash inflows from assets but this is not conclusive. It may not be the most
relevant feature in determining the composition of its CGUs which also depends on
whether cash inflows are independent from cash inflows of other assets and on how
cash inflows are monitored. If, however, the entity were able to allocate VIU on a
reasonable basis, this might indicate that the assets are separate CGUs.
Example 20.4: Identification of cash-generating units – grouping of assets
Example A – A tour operator’s hotels
A tour operator owns three hotels of a similar class near the beach at a large holiday resort. These hotels
are advertised as alternatives in the operator’s brochure, at the same price. Holidaymakers are frequently
transferred from one to another and there is a central booking system for independent travellers. In this
case, it may be that the hotels can be regarded as offering genuinely substitutable products by a
sufficiently high proportion of potential guests and can be grouped together as a single cash-generating
unit. Effectively, the hotels are being run as a single hotel on three sites. The entity will have to bear in
mind that disposal decisions may still be made on a hotel-by-hotel basis and have to weight this
appropriately in its determination of its CGUs.
Example B – Flagship stores
Store Z is a flagship store located in a prime site location in a capital city. Although store Z is loss making,
its commercial performance is in line with expectations and with budgets. How should the impairment issues
of the flagship store Z be considered?
It is difficult to conclude that a flagship store is a corporate asset as it does generate separate cash inflows
(corporate assets are discussed at 4.2 below). It may be possible to argue for the aggregation of a flagship
store with other stores in the vicinity into a single CGU as flagship stores are usually designed to enhance the
1440 Chapter 20
image of the brand and hence other stores as well. They may be budgeted to run with negative cash flows;
perhaps in substance the losses are not an impairment. However, this argument for not recognising an
impairment would generally only be acceptable during a start-up phase and it must be borne in mind that the
added function of the flagship store is largely marketing. As marketing expenditures are expensed, it would
not necessarily be inconsistent to take an impairment loss and the entity may have to consider whether it
should capitalise these costs in the first place.
Example C – Container ships
A shipping company operates a series of container vessels of similar size in a specific region that it considers
to be a single CGU. As well as this shipping business, it has other typ
es and regions of shipping operations
where CGUs are established on an appropriate basis.
Management can identify the actual cash inflows from the individual vessels but it determines that the
following are the principal features that indicate that these container ships comprise a single CGU:
• the vessels are interchangeable within the contracts and none is on a long-term hire to any individual
client, meaning that the allocation of the estimated cash inflows to individual vessels becomes arbitrary;
• the pricing of the contract is not vessel specific;
• a reasonable portion of the contracts require the operator to have a certain level of capacity available,
comprising multiple vessels;
• the investment, continuance and disposal decisions are made by class of vessel and not linked to the
actual revenue generated by that vessel;
• the class of vessels has a clear and distinctive market and management views and makes decisions by
reference to the CGU, not individual assets.
The fact that one or more of the assets could be used individually, i.e. taken out of the ‘pool’, would not in
itself prevent the assets being considered part of a single CGU.
Example C is illustrated in Extract 20.1 below.
Extract 20.1: A.P. Møller – Mærsk A/S (2017)
NOTES
NOTE 24 Significant accounting estimates and judgements [extract]
Intangible assets and property, plant and equipment [extract]
The determination of cash generating units differs for the various businesses. Maersk Line operates its fleet of
container vessels in an integrated network for which reason the global container shipping activities are tested for
impairment as a single cash generating unit. APM Terminals considers each terminal individually in impairment tests,
unless when the capacity is managed as a portfolio, which is the case for certain terminals in Northern Europe and
Global Ports Investments (Russia). Svitzer groups vessels according to type, size, etc. in accordance with the structure
governing management’s ongoing follow-up.
In Example C above, an analogy can be made to the conclusion in illustrative example
IE11-IE16 of IAS 36 that plants B and C of entity M are part of one CGU which is
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