Reducing the number of cash generating units (CGUs) can help simplify the reporting process and manage impairment risks, particularly regarding intangibles and goodwill, as this article from Richard Mallett, technical director of Intangible Business, explains

IAS36, Impairment of Assets requires that an asset should not be carried on the balance sheet at more than its recoverable amount – which is determined as the higher of ‘fair value less costs to sell’ and ‘value in use’. If the carrying amount is higher than the recoverable amount then it has to be reduced by taking an impairment loss. Most assets only need to be assessed when there is an indication that the asset is impaired. However, goodwill and intangible assets with an indefinite life (which will include many brands) have to be tested for impairment on an annual basis. This exposes companies with large amounts of intangibles and goodwill on their balance sheets to potentially significant write-downs. However, there are a number of ways of managing the issues and risks arising.

The standard does allow individual assets to be grouped into cash generating units or CGUs with the impairment review then covering the CGU as a whole. Other things being equal, a reduced number of broader CGUs can:

• Manage the risk of impairment loss by the portfolio effect
• Cushion the risk of impairment loss if the CGU also contains unrecognised internally generated intangible assets
• Lessen what can be an onerous annual task of preparing detailed discounted cash flows
• Reduce audit fees
• Allow management time to be focused on value-adding activity

The standard does however set some constraints on which assets can be grouped into CGUs. In particular, that the recoverable value of the individual asset cannot be determined – for example, if it does not generate cash flows that are largely independent of cash flows from the other assets in the CGU. 

The standard also links with IFRS 8, Operating Segments which replaced IAS 14 Segment Reporting and which has been effective from January 2009. Whereas IAS 14 was prescriptive in requiring reporting by product and geography, IFRS 8 is less so and prefers the segments to be determined through the eyes of management. It sets criteria as to how they should be selected including that a segment’s ‘operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and asses its performance.’ Companies will need to take care to assess the interaction between IFRS 8 and IAS 36. The Financial Reporting Review Panel has already looked at a selection of companies’ impairment disclosures, has flagged an interest in accounting for intangibles under IFRS 3, Business Combinations and also stated that it will be taking a particular interest in first time application of IFRS 8.

In practice, a wide range of approaches is evident with some companies impairment testing individual brands whereas others are taking a broader view with significantly sized cash generating units often based on type of product/service or geography. With a thorough understanding of the relevant accounting standards, the requirements of the regulatory bodies and best practice, efficient reporting processes, it is possible to navigate these issues to manage impairment risks and simplify the reporting process.

If you have an acquisition or a potential impairment issue you would like advice on, or for more information, please call us on + 44 (0) 20 7089 9236 or send us an email.