IAS 36 - Allocating assets to cash-generating units

Operational assets

As discussed in our previous article, recoverable amount is determined (if required) at the level of individual assets when possible. Where it is not possible to estimate the recoverable amount of the individual operational asset it is allocated to the CGU to which it belongs.

Assets that contribute to the cash flows of a CGU also need to be allocated to that CGU even if it is possible to determine recoverable amount individually (because, for example, an asset’s value in use (VIU) can be estimated as similar to its fair value less costs of disposal (FVLCOD)). This is to ensure a like-for-like comparison when the CGU is tested and its recoverable amount is compared to its carrying value.

The discussion in ‘Insights into IAS 36 – Identifying cash-generating units’ provides guidance on identifying the CGU to which an asset belongs.

Corporate assets

In some cases, management may identify certain assets that contribute to the estimated future cash flows of more than one CGU. It would be inappropriate to allocate these assets entirely to a single CGU. Such assets are referred to as ‘corporate assets’ or ‘shared assets’ and may include (for example):

• a headquarters building
• IT equipment
• research centre, or
• corporate or global brands.

Distinctive characteristics of corporate assets are that they do not generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the CGU under review.

If there is an indication of impairment for the corporate asset itself, recoverable amount cannot be determined at the individual asset level, unless management has decided to dispose of it (because corporate assets do not generate separate cash inflows).

Corporate assets therefore need to be incorporated into the impairment review at the CGU level – not only to test the asset in question (when necessary), but also to test the CGUs that benefit from those assets. To do so, the entity should:

• identify corporate assets that relate to the CGU under review, and
• allocate the carrying amount of the corporate assets on a reasonable and consistent basis to the CGU under review (if a reasonable and consistent basis can be identified).

Where a portion of the carrying amount of a corporate asset cannot be allocated on a reasonable and consistent basis, the assets are incorporated into the impairment review at a higher level and the analysis becomes more complicated. This will be addressed in a later article.

Example 1 -Identification and allocation of corporate assets to CGUs

Entity E has four CGUs: A, B, C and D. The carrying amounts of those units do not include goodwill. During the period, significant adverse changes in the legal environment in which Entity E operates take place. Entity E conducts impairment tests of each of its CGUs in accordance with IAS 36. At the end of the period, the carrying amounts of CGUs A, B, C and D are CU100, CU200, CU300 and CU250, respectively.

The four CGUs all utilise a central office and a shared global brand (carrying amounts of CU100 and CU75, respectively). Management of E has determined the relative carrying amounts of the CGUs are a reasonable approximation of the proportion of the central office building devoted to each CGU, but the carrying amount of the global brand cannot be allocated on a reasonable and consistent basis to the individual CGUs.

The remaining estimated useful life of CGUs A, B, C and D are 10, 15, 15 and 20 years respectively. The central office has a remaining useful life of 20 years and is depreciated on a straight-line basis.

Analysis

Ignoring tax effects, Entity E identifies all corporate assets that relate to the individual CGUs under review (the central office and shared global brand).

Entity E concludes the carrying amount of the central office can be allocated on a reasonable and consistent basis to the CGUs under review while the carrying amount of the global brand cannot.

Although not the only way to do so, Entity E allocates the carrying amount of the central office to the carrying amount of each individual CGU using a weighted allocation basis because the estimated remaining useful life of A’s CGU is 10 years, whereas the estimated remaining useful lives of B and C’s CGUs are 15 years and D’s CGU is 20 years.

How we can help

We hope you find the information in this article helpful in giving you some insight into IAS 36. If you would like to discuss any of the points raised, please speak to our experts Christoph Zimmel and Rita Gugl.