Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Accounting Standards (PAS) 36, Impairment of Assets, to assist preparers of financial statements and those charged with governance of reporting entities in understanding the requirements of PAS 36, and to revisit some areas where confusion has been seen in practice.

Overview

The accounting requirements regarding impairment of tangible and intangible assets are governed by PAS 36, Impairment of Assets.  The requirements are not new, however, remain challenging as the guidance is detailed and complex in some areas.

Identifying cash-generating units (CGUs) is a critical step in the impairment review and can have a significant impact on its results. That said, the identification of CGUs requires judgement. The identified CGUs may also change due to changes in an entity’s operations and the way it conducts them.

This Accounting Alert discusses how to identify CGUs and its role in the impairment review.

Cash-Generating Unit 

A Cash-Generating Unit (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.

Roles of CGU in the Impairment Review

A CGU serves two primary roles in the impairment review. It facilitates the testing of:

• assets for which the recoverable amount cannot be determined individually, and
• goodwill and corporate assets for impairment.

Goodwill and corporate assets, by definition, do not generate cash inflows on their own and therefore, must be allocated to a CGU or groups of CGUs for impairment testing purposes.

Identifying CGUs

The objective of identifying CGUs is to identify the smallest identifiable group of assets that generates largely independent cash inflows. CGUs are identified at the lowest level to minimize the possibility that impairments of one asset or group will be masked by a high-performing asset. To identify a CGU, an entity asks two questions:

1. Does a group of assets generate largely independent cash inflows?
2. Is there an active market for the output?

The Accounting Alert also provides practical insights and illustrative examples on how to identify a CGU. It also provides practical insights on changes in the identified CGUs.

See attached Accounting Alert for further details.