Financial Reporting · Impairment of assets

Cash-Generating Units and Allocating Impairment Losses in ACCA FR

Updated 11 October 2026 · Fact-checked

A cash-generating unit (CGU) is the smallest group of assets that generates cash inflows largely independent of other assets. If its carrying amount exceeds its recoverable amount, you write goodwill off first, then reduce the other assets pro rata to carrying amount, never taking any asset below its own recoverable amount.

Understand Cash-Generating Units and Allocating Impairment Losses

IAS 36 says an asset is impaired when its carrying amount is more than its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use. You test each asset on its own where you can.

Often you cannot. Many assets, such as a machine on a production line, do not produce cash flows by themselves. In that case you test the cash-generating unit: the smallest identifiable group of assets that produces cash inflows largely independent of the inflows from other assets or groups.

Goodwill never generates cash on its own. So goodwill is allocated to the CGU (or group of CGUs) that is expected to benefit from the business combination, and that unit is tested. The CGU's carrying amount includes the goodwill allocated to it.

If the CGU's carrying amount is higher than its recoverable amount, you have an impairment loss. You allocate it in a fixed order. First, reduce the carrying amount of goodwill. Second, reduce the other assets of the unit pro rata, based on their carrying amounts.

There is one limit. No asset may be reduced below the highest of its fair value less costs of disposal (if measurable), its value in use (if determinable), and zero. Any loss that cannot be given to one asset because of this limit is spread over the other assets pro rata.

Key rules to remember

Impairment loss of a CGU: Impairment loss = Carrying amount of CGU (including goodwill) − Recoverable amount of CGU; Recognise only if carrying amount is higher. Recoverable amount = higher of fair value less costs of disposal and value in use.
Allocation order: 1) Goodwill allocated to the CGU 2) Other assets pro rata to carrying amount; Goodwill is written down first, up to its full carrying amount.
Pro rata share: Share of loss = Remaining loss × (Asset carrying amount ÷ Total carrying amount of assets in scope); Only assets within the scope of the allocation share the loss. Assets with a floor are limited.
Floor for each asset: Asset cannot go below its individual floor: the highest of fair value less costs of disposal, value in use and zero; Use only the measures that can be determined. Excess loss is reallocated to other assets pro rata.

How to solve Cash-Generating Units and Allocating Impairment Losses questions

Use this method for any CGU impairment question. Lay it out as a table in the written answer.

1Identify the CGU and list its assets with carrying amounts. Include goodwill allocated to it.
2Total the carrying amount of the CGU.
3Find the recoverable amount of the CGU: the higher of fair value less costs of disposal and value in use.
4Compute the impairment loss as carrying amount minus recoverable amount. If it is zero or negative, stop: no impairment.
5Write off goodwill first, up to its carrying amount.
6Allocate the remaining loss pro rata to the other assets by carrying amount. Check each asset against its floor.
7If an asset hits its floor, limit its share and reallocate the excess pro rata to the remaining assets.
8Show the revised carrying amounts, which must total the recoverable amount, and state the charge to profit or loss.

Quickest way: Table method: goodwill first, then pro rata

When to use it: Use in Section C or in an OT case when you must find the revised carrying amount of one asset in a CGU.

Compute the loss: CGU carrying amount minus recoverable amount.
Subtract goodwill from the loss. If the loss is no bigger than goodwill, the other assets are untouched.
Work out the fraction: asset carrying amount ÷ total of the non-goodwill assets.
Revised asset = carrying amount − fraction × remaining loss.
Check the total of all revised carrying amounts equals recoverable amount, unless a floor applied.

Common mistakes in Cash-Generating Units and Allocating Impairment Losses

Allocating the loss pro rata across all assets including goodwill.
Students remember pro rata but forget the order of allocation.
Fix: Write off goodwill first. Only the loss left over is shared pro rata among the other assets.
Leaving goodwill out of the CGU's carrying amount.
Goodwill looks like a separate item, so it is dropped from the comparison.
Fix: Include the goodwill allocated to the CGU in the carrying amount before comparing with recoverable amount.
Reducing an asset below its individual floor (the highest of fair value less costs of disposal, value in use and zero).
The floor rule is overlooked when a pro rata figure looks neat.
Fix: Check each asset's floor after allocating. Cap it, then spread the excess over the other assets pro rata.
Including the capped asset again when reallocating the excess.
Students reuse the first set of proportions.
Fix: Recalculate the proportions using only the assets that can still absorb loss.
Using the wrong denominator for pro rata when goodwill is already written off.
Students divide by the full CGU total.
Fix: Divide by the total carrying amount of the assets sharing the loss, which excludes goodwill.
Treating the loss as a deduction from recoverable amount rather than carrying amount.
Confusion over which figure is being reduced.
Fix: Recoverable amount is the benchmark. You reduce carrying amounts until they total it.

Worked examples

Example 1

A CGU has these carrying amounts: goodwill $20,000, property $60,000, plant $40,000 and equipment $30,000. Total $150,000. Its recoverable amount is $110,000. Allocate the impairment loss. Assume no asset has a higher individual recoverable amount.

Show the solution

Impairment loss = 150,000 − 110,000 = $40,000.
Goodwill is written off first: $20,000. Remaining loss = $20,000.
Assets sharing the rest: property 60,000, plant 40,000, equipment 30,000. Total 130,000.
Property share = 20,000 × 60/130 = $9,231 (rounded).
Plant share = 20,000 × 40/130 = $6,154 (rounded).
Equipment share = 20,000 × 30/130 = $4,615 (rounded).
Revised amounts: goodwill 0; property 50,769; plant 33,846; equipment 25,385. Total = $110,000 (rounding).

Answer: Total loss $40,000: goodwill $20,000, property $9,231, plant $6,154, equipment $4,615. The CGU is carried at $110,000.

Example 2

A CGU has goodwill $10,000, machine A $50,000 and machine B $40,000. Total $100,000. Recoverable amount is $70,000. Machine A's fair value less costs of disposal is $45,000. Assume machine A's value in use cannot be determined above $45,000 and machine B has no higher individual recoverable amount. Allocate the loss.

Show the solution

Impairment loss = 100,000 − 70,000 = $30,000.
Goodwill first: $10,000. Remaining loss = $20,000.
Pro rata on machines: total 90,000.
Machine A share = 20,000 × 50/90 = $11,111. This would take A to $38,889, which is below its floor of $45,000.
Machine B's original share = 20,000 × 40/90 = $8,889. Check: 11,111 + 8,889 = 20,000.
Cap A's loss at 50,000 − 45,000 = $5,000.
Excess = 11,111 − 5,000 = $6,111 goes to machine B. B's total loss = 8,889 + 6,111 = $15,000.
Check: 5,000 + 15,000 = $20,000, the remaining loss after goodwill.
Revised: goodwill 0; machine A 45,000; machine B 40,000 − 15,000 = 25,000. Total = $70,000.

Answer: Goodwill $10,000, machine A $5,000 and machine B $15,000. Total loss $30,000. Machine A is carried at $45,000 and machine B at $25,000.

Exam tips

Always show a table with columns for carrying amount before, loss allocated and carrying amount after. Markers follow it easily.
Read the question for any asset with a stated fair value less costs of disposal. It is usually there to test the floor rule.
In OT questions, work only to the figure asked for, such as the revised plant value. Use the quick method.
Check that revised carrying amounts total the recoverable amount. This catches arithmetic slips.
If a question has a non-controlling interest and uses the partial goodwill method, add notional NCI goodwill to the CGU's carrying amount for the test. Calculate the full impairment loss on this grossed-up basis and allocate it to the grossed-up goodwill first. Then recognise only the parent's share of the goodwill impairment, because the NCI's share of goodwill is not in the financial statements. Follow the question's instructions closely.

Practice questions from Impairment of assets

Cash-Generating Units and Allocating Impairment Losses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cash-Generating Units and Allocating Impairment Losses: frequently asked questions

What is a cash-generating unit under IAS 36?

It is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. You test a CGU when an individual asset does not generate independent cash flows.

Why is goodwill written off first?

Goodwill cannot be sold or used on its own, and its value depends on the whole unit. IAS 36 therefore requires it to absorb the loss first, before any other asset in the unit is reduced.

Can an asset be reduced below the highest of its fair value less costs of disposal, value in use and zero?

No. An asset in a CGU cannot be reduced below the highest of its fair value less costs of disposal, its value in use if determinable, and zero. Any excess loss is spread over the other assets pro rata.

How do I know which assets share the loss?

The assets of the CGU, other than goodwill once it is fully written off, share the remaining loss. Use their carrying amounts as the weights.