Identifying the cash-generating unit for plant impairment testing

Getting the CGU wrong is a first-order risk in impairment testing: aggregating lines that have largely independent cash inflows can hide a weak line's impairment inside the headroom of stronger lines, materially overstating assets and profit, while testing interdependent lines separately relies on internal transfer prices and produces recoverable amounts that are not meaningful. Auditors and regulators treat CGU identification as a key area of scrutiny precisely because it is judgmental and difficult to challenge externally, and the choice also affects how impairment losses are allocated across specific asset classes, with downstream effects on future depreciation and deferred tax.

Do individual production lines sell output externally at observable market prices, or only transfer intermediate goods internally at non-market transfer prices? Is the independence of cash inflows (not physical or organizational separation) the actual basis for determining whether lines are tested individually or as a single CGU? Has the CGU definition been reassessed since the prior test for any change in how lines are operated or sold?

1. Map the plant's production lines and identify which lines sell output externally at observable market prices versus which only produce intermediate goods transferred internally at non-market (e.g., cost-plus or budget-set) transfer prices.
2. Determine whether cash inflows from any individual line are largely independent of the cash inflows of other lines and other assets - independence, not physical or organizational separation, is the deciding factor.
3. Aggregate lines into a single CGU only where their cash inflows are not largely independent, for example where one line's output has no active market and is used only as an input to the next line, so the lines produce a saleable product only together. Shared utilities, common feedstock, a common sales channel or a shared sales function do not by themselves make cash inflows dependent. A line whose output has an active market is identified as a CGU even if that output is currently used internally, with internal transfer prices replaced by management's best estimate of arm's-length prices. Do not aggregate more widely than the independence test supports: a broader CGU can absorb one line's impairment within the headroom of other lines.
4. Confirm the CGU identification is consistent with how management monitors operations internally (e.g., for internal reporting purposes) unless internal reporting itself is not a faithful proxy for independent cash-generating ability.
5. Test the identified CGU's carrying amount against its recoverable amount (higher of fair value less costs of disposal and value in use) whenever an impairment indicator exists (or annually if goodwill/indefinite-life intangibles are allocated to it).
6. Re-evaluate the CGU boundary whenever the plant's operations change materially (e.g., a line begins selling externally, transfer pricing is reformed to arm's length, or a line is disposed of), and disclose any such change and its impact.

Measurement basis: the CGU's recoverable amount is the higher of fair value less costs of disposal and value in use, compared against its carrying amount including all assets that generate the CGU's cash inflows (and a reasonable allocation of shared/corporate assets, if any). Included: all assets directly attributable or reasonably allocable to the CGU's cash-generating activity. Excluded: assets that generate independent cash inflows of their own and belong to a different CGU, and financial assets/liabilities not part of the CGU's operating cash flows unless the CGU cannot be tested without them. Remeasurement trigger: retest whenever an impairment indicator arises (e.g., adverse market, technology, or performance changes) and at least annually for CGUs carrying goodwill or indefinite-life intangibles; if recoverable amount later recovers, reverse a previously recognized impairment loss (except for goodwill, which is never reversed) up to the asset's carrying amount had no impairment been recognized.

Disclose: (1) the basis used to identify the CGU (whole plant versus individual line) and the rationale for aggregation; (2) the carrying amount of the CGU tested and the recoverable amount determined, and whether based on fair value less costs of disposal or value in use; (3) key assumptions in the impairment test - discount rate, terminal/growth rate, forecast period, and the transfer-pricing or allocation assumptions used for shared inputs/outputs; (4) sensitivity of the recoverable amount to reasonably possible changes in key assumptions; (5) the amount and line-item location of any impairment loss (or reversal, for non-goodwill assets) recognized, and any change in CGU composition since the prior period.

• Aggregating lines whose output has an active market into a wider CGU (for example because they share a sales channel or utilities), masking one line'
• s impairment by offsetting a weak line against a strong one
• conversely, testing individual production lines in isolation when their cash flows are not independent (e.g., one line'
• s output has no external market of its own), which forces reliance on internal transfer prices and produces recoverable amounts that do not reflect cash the line can actually generate
• using internal, non-arm'
• s-length transfer prices to estimate an individual line'
• s '
• external'
• cash inflows without adjusting to market-based assumptions, distorting the value-in-use calculation
• changing CGU boundaries between periods without disclosure, potentially to avoid triggering or to dilute an impairment indicator
• allocating shared corporate or head-office assets and costs inconsistently across CGUs, either omitting them entirely or double-counting them across multiple plant CGUs
• failing to re-assess CGU composition after an operational change (e.g., a line starts selling externally), continuing to test at the old, now-inappropriate aggregation level.