IAS 36 (ii): cash-generating units and goodwill

A delivery van does not earn cash on its own. It earns cash together with the depot, the drivers and the customers’ contracts. So you cannot ask what the van alone will recover. You have to ask what the whole delivery business, or the smallest part of it that earns its own cash, will recover.

That group is a cash-generating unit, and it is also where goodwill is tested, because goodwill belongs to a business, not to a single asset.

This topic covers the definition of a cash-generating unit (CGU), allocating goodwill to CGUs, the two-stage test where goodwill cannot be allocated, the order in which an impairment loss is allocated to the assets of a unit, the floor below which an asset cannot be written, corporate assets, reversals in a unit, the rule against reversing goodwill, and the extra disclosures.

The previous topic covered impairment of individual assets. The next topic covers assets held for sale. November 2025 Question 2 tested impairment of single assets, and goodwill appears in the group questions, so unit tests are a natural next step.

Key terms in plain English

Syllabus check

This topic covers the part of the syllabus on impairment of non-financial assets and goodwill:

• B2(a) and (b) the effect of recognition and measurement on non-financial assets, and appraising their treatment under International Accounting Standard (IAS) 36;
• C2(b) and (c) the group procedures and amounts to include in group statements, where goodwill is tested each year;
• D1(a) and (b) assessing whether the treatment is valid and acceptable.

CAMA 2020 and goodwill and units

The Companies and Allied Matters Act 2020 (CAMA 2020) requires group statements and statements that follow International Financial Reporting Standards (IFRS).

Cash-generating units

It is not always possible to find the recoverable amount of a single asset, because assets often do not earn cash in isolation. IAS 36 defines a CGU as 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.

The unit is identified from how the business is managed: separate product lines, shops, plants or segments, each with its own inflows. Assets are grouped consistently from period to period.

Goodwill

Goodwill acquired in a business combination is tested for impairment at least annually, and it cannot be valued alone because it belongs to the business. It is allocated to the CGU or CGUs expected to benefit from the combination, on a consistent basis. Where goodwill is allocated, the unit is tested by comparing its recoverable amount with its carrying amount including the goodwill.

Where goodwill cannot be allocated, the review is done in two stages: (a) test each unit excluding goodwill and recognise any losses; then (b) test the entity as a whole including the goodwill.

Corporate assets

Corporate assets, such as the head office, do not generate cash by themselves. If part of a corporate asset can be allocated to a unit on a reasonable and consistent basis, it is included in that unit’s carrying amount. If not, the unit is tested without it, and then the smallest group of units to which a share can be allocated is tested including it.

Allocating an impairment loss within a unit

If the carrying amount of a unit (including allocated goodwill) is above its recoverable amount, the loss is allocated in this order:

1. First to goodwill allocated to the unit, reducing it towards nil.
2. Any assets that caused the loss or are specifically impaired (for example, damaged or no longer meeting recognition criteria) are written down.
3. Then to the other assets of the unit pro rata to their carrying amounts.

The floor. The carrying amount of an asset cannot be reduced below the highest of (i) its fair value less costs of disposal, if it can be measured, (ii) its value in use, if it can be determined, and (iii) zero. Monetary assets such as cash and receivables are not written down in this process.

Any loss not allocated because of the floor is spread over the other assets pro rata.

Reversals

At each reporting date the entity assesses whether an earlier loss, other than on goodwill, has decreased or no longer exists. A reversal must be justified by a change in the estimates used, for example an improvement in the indicators. The carrying amount cannot be raised above what it would have been without the original loss, net of depreciation.

In a unit, the reversal is allocated to the assets other than goodwill pro rata to their carrying amounts, subject to those caps. It goes to profit or loss, unless the original loss was charged to a revaluation surplus. Depreciation is adjusted for the future.

Goodwill losses are never reversed. A rise in the value of the business is more likely to be internally generated goodwill, which IAS 36 and IAS 38 do not allow to be recognised.

Disclosure and judgements

Beyond the general disclosures: for each material unit with goodwill or indefinite-life intangibles, a description of the unit, the carrying amount of goodwill, the basis of recoverable amount (fair value less costs of disposal or value in use), the key assumptions (growth rates, margins, discount rate), the period covered by forecasts, and a sensitivity analysis if a reasonably possible change in a key assumption would make the carrying amount exceed the recoverable amount.

Areas of judgement:

• whether indicators suggest a review is needed
• fair value where there is no active market
• the inputs to value in use (cash flows and discount rate)
• how to identify units
• how to allocate goodwill

The rules in more depth

Why goodwill goes first

Goodwill is the least certain asset: it has no value apart from the business. If the business is worth less than its book value, the first thing to go is the premium paid for it.

Why the floor exists

An asset that could be sold for ₦8 million or that would generate ₦8 million of value in use is not worth less than that just because the unit as a whole is impaired. Spreading the loss without a floor could push a specific asset below its own recoverable amount.

Why identifying units is a judgement

Two shops in one town selling to the same customers from a shared stock may be one unit. Two shops in different cities with separate management and customers are probably two. Different groupings give different answers, so the choice must be consistent and supportable.

Effect on group results

A goodwill impairment reduces group profit and equity in the year, and under the full goodwill method the loss is shared with non-controlling interests. Because goodwill is not reversed, the loss is permanent.

Worked examples

1. Impairment loss.
   ₦160m − ₦140m = ₦20 million.
2. To goodwill first: ₦10m, reducing it to nil.
3. The remaining ₦10m pro rata to property, plant and equipment (₦90m) and other assets (₦60m), total ₦150m: ₦10m × 90 ÷ 150 = ₦6m and ₦10m × 60 ÷ 150 = ₦4m.
4. After the loss: property, plant and equipment ₦84m, goodwill nil, other assets ₦56m, total ₦140m.

1. Loss = ₦50m. Goodwill takes ₦15m. The remaining ₦35m is spread over plant, patent and other assets (carrying amounts ₦100m, ₦30m and ₦55m, total ₦185m).
2. First share.
   plant ₦35m × 100 ÷ 185 = ₦18.9m
   patent ₦35m × 30 ÷ 185 = ₦5.7m
   other ₦35m × 55 ÷ 185 = ₦10.4m.
3. Floor on the patent: it cannot go below ₦28m, so it takes only ₦2m. The unallocated ₦3.7m is spread over plant and other assets pro rata (100 : 55), giving plant about ₦2.4m more and other assets about ₦1.3m more.
4. Final allocation of the loss: goodwill ₦15m, plant ₦21.3m, patent ₦2m, other assets ₦11.7m, total ₦50m.

1. Loss = ₦8m. Goodwill is written off first: ₦6m.
2. The remaining ₦2m goes to the other assets pro rata.

1. Goodwill is not reinstated, whatever the improvement.
2. The reversal is allocated to the other assets pro rata, each limited to what its carrying amount would have been, after depreciation, without the original loss.
3. The reversal is credited to profit or loss.

Under s. 377(1) and s. 378 of CAMA 2020 the directors must make sure the goodwill and other assets are not above their recoverable amounts.

How to score full marks

• Start with the unit’s total: carrying amount including goodwill against recoverable amount. State the loss.
• Follow the order: goodwill, specific assets, then pro rata. Show the pro rata fractions.
• Apply the floor when a fair value or value in use for an asset is given, and redistribute any excess.
• Do not write down cash, receivables or other monetary assets.
• For goodwill that cannot be allocated, give the two stages.
• For reversals, state the cap and say that goodwill is excluded.

Common mistakes in the exam

• Spreading the loss pro rata over all assets including goodwill.
• Forgetting that goodwill is tested every year, whether or not there is an indicator.
• Writing an asset below its own fair value less costs of disposal or value in use.
• Reversing a goodwill impairment.
• Writing down monetary assets.
• Testing an individual asset when it only earns cash as part of a unit.
• Leaving corporate assets out of the unit’s carrying amount.

Quick revision

• CGU: smallest group with largely independent cash inflows.
• Goodwill: allocate to benefiting units. Test every year. If it cannot be allocated, test units without it, then the entity with it.
• Allocate loss: goodwill first, specific assets, then pro rata. Floor at the highest of fair value less costs of disposal, value in use and zero.
• Corporate assets: include in the units that use them.
• Reversal: pro rata to assets other than goodwill, within caps, to profit or loss. Goodwill never reversed.
• Disclose key assumptions and headroom sensitivity.
• CAMA 2020: ss. 379 to 381, 377(1), 378, 404(7), 407(3).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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