IAS 36 Cash-Generating Units and Goodwill Impairment: Allocating the Loss

Most assets do not earn cash on their own. A machine works with other machines, a shop is a group of fittings, stock and staff, and goodwill belongs to a whole business. Testing each asset separately would then make no sense, because the cash flows cannot be split. International Accounting Standard (IAS) 36 therefore tests assets in groups called cash-generating units.

This topic covers what a cash-generating unit is, how goodwill is allocated and tested, how an impairment loss is shared out among the assets of a unit, and what is not reversed. The next topic covers inventories.

In the diets reviewed for this page the goodwill impairment appears in November Diet, 2021, Question 6(b), where a goodwill impairment loss of ₦82 million is added to accumulated impairment in a schedule of movement in intangibles. Read impairment indicators, recoverable amount and impairment loss first.

Cash-generating units

It is not always possible to find the recoverable amount of one asset. Value in use in particular is often a figure for a group, because assets do not generate cash in isolation. 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.

A single shop in a chain, a production line or a subsidiary can be a CGU.

When an asset might be impaired and does not generate cash independently, the entity finds the recoverable amount of the CGU it belongs to and compares that with the CGU’s carrying amount. A loss on the CGU is then shared among its assets.

Goodwill and impairment

Goodwill acquired in a business combination cannot be valued on its own, because it relates to a whole business. It is tested at least annually. For the test it is allocated, from the acquisition date, to each CGU or group of CGUs that is expected to benefit from the combination.

The CGU to which goodwill is allocated is tested by comparing its carrying amount, including the goodwill, with its recoverable amount.

If goodwill cannot be allocated on a non-arbitrary basis to individual CGUs, the test is done in two stages. First, each CGU is tested without the goodwill and any losses are recognised. Second, the group of CGUs to which the goodwill relates, or the entity as a whole, is tested with the goodwill included. Any extra loss is allocated first to the goodwill.

Assets that serve several units, such as a head office, are handled the same way: they are allocated to CGUs where a reasonable basis exists, and if not, they are tested at the level of the group of units.

Allocating an impairment loss within a CGU

The loss on a CGU is allocated to reduce the carrying amounts of its assets in this order:

1. first, to the goodwill allocated to the CGU;
2. then, to the other assets of the CGU pro rata to their carrying amounts.

No asset is reduced below the highest of its fair value less costs of disposal (if it can be measured), its value in use (if it can be determined) and zero. Any loss that cannot be allocated to an asset because of that limit is allocated to the other assets pro rata.

Reversal

An impairment loss on goodwill is never reversed. If a reversal is recognised for a CGU, it is allocated to the assets of the unit, other than goodwill, pro rata to their carrying amounts, and no asset is raised above the carrying amount it would have had, net of depreciation, if no loss had been recognised.

Disclosure

The notes disclose the impairment losses recognised in profit or loss and the line item they are in, and the amounts recognised in other comprehensive income. For each CGU with goodwill, the carrying amount of the goodwill and the basis used for recoverable amount are disclosed.

The ideas in more depth

Goodwill and the schedule of movement

Goodwill has no amortisation, so the only movements in its carrying amount are additions from business combinations and impairment. In a schedule of movement in intangibles, a goodwill impairment loss is shown in the accumulated impairment block, and the closing carrying amount is closing cost less closing accumulated impairment.

In the diet mentioned above, goodwill of ₦4,050 million was shown at cost with ₦540 million of opening impairment; adding ₦102 million acquired in a combination and a ₦82 million loss gave cost of ₦4,152 million and impairment of ₦622 million.

Why goodwill is allocated at all

Goodwill could be tested only for the business as a whole, but a loss in a weak unit could then be hidden by headroom in a strong unit. Allocating it to the units expected to benefit makes the test more sensitive.

Sources and references

• IAS 36 Impairment of Assets: cash-generating units, goodwill, allocation of an impairment loss, reversal and disclosure.
• International Financial Reporting Standard (IFRS) 3 Business Combinations, for how goodwill arises.

These points are stated as at 5 November 2026.

Worked examples

1. Loss.
   ₦180m − ₦138m = ₦42m.
2. Goodwill first. ₦30m, so goodwill is nil and ₦12m remains.
3. Pro rata. The other assets total ₦150m.
   Property, plant and equipment: ₦12m × 100/150 = ₦8m.
   Other assets: ₦12m × 50/150 = ₦4m.
4. Result. Goodwill nil, property, plant and equipment ₦92m, other assets ₦46m, a total of ₦138m.

1. Loss.
   ₦140m − ₦110m = ₦30m.
2. Pro rata first.
   A: ₦30m × 80/140 = ₦17.14m.
   B: ₦30m × 60/140 = ₦12.86m.
3. Apply the floor. A cannot go below ₦70m, so it can be written down by only ₦10m.
4. Reallocate.
   The excess ₦7.14m goes to B, so B takes ₦30m − ₦10m = ₦20m.
5. Result. A ₦70m, B ₦40m, a total of ₦110m.

1. Stage 1.
   A: ₦400m − ₦380m = ₦20m loss.
   B: no loss.
2. Stage 2.
   Carrying amount including goodwill: ₦380m + ₦300m + ₦100m = ₦780m.
   Recoverable amount ₦740m.
   Further loss ₦40m.
3. Allocate. Goodwill first: ₦40m, leaving goodwill of ₦60m.
4. Total loss.
   ₦20m + ₦40m = ₦60m.

How to answer in the exam

• Define. Give the CGU definition and say why it is needed.
• Allocate. Show the loss, then goodwill, then the pro rata working with the weights, then a proof line.
• Check the floors. If a question gives a fair value less costs of disposal for an asset, test it.
• State the rules. Goodwill: annual test, never reversed.

Common mistakes in the exam

• Sharing the loss pro rata across all assets including goodwill. Goodwill takes it first.
• Using the weights with goodwill included after goodwill has been written off.
• Ignoring the floor for an asset with a known fair value less costs of disposal.
• Reversing a goodwill loss.
• Testing goodwill only when there is an indication.
• Amortising goodwill.

Quick revision

• CGU: smallest group with largely independent cash inflows.
• Goodwill: allocate to CGUs expected to benefit; test annually; never reverse a loss.
• Loss on a CGU: goodwill first, then pro rata; respect the floor.
• Goodwill that cannot be allocated: test each CGU without it, then the group with it.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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