Identifying Cash-Generating Units (CGUs) by Audit Firms in Dubai Per IAS 36

This article explains how to identify cash-generating units (CGUs) under IAS 36. We look at how Audit Firms in Dubai & UAE assign assets and goodwill to CGUs during an impairment review. Identifying CGUs correctly can significantly change the outcome of an impairment review, but the process requires judgment, and the CGUs an entity settles on can change as its operations or the way it conducts them change.

In an impairment review, the CGU serves two primary purposes:

• Determining the recoverable amount for assets that cannot be assessed individually
• Assessing corporate acquisitions and goodwill for impairment

Dubai audit professionals performing impairment testing on goodwill and corporate assets must allocate those assets to a CGU or group of CGUs before testing can begin.

Identifying Cash-Generating Units

To identify a CGU, financial audit experts need to find the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets. Identifying CGUs at the lowest possible level matters because it reduces the risk of a high-performing asset masking the impairment of a weaker one sitting alongside it. An entity in Dubai and the wider UAE identifies a CGU by asking two questions:

• Are the cash inflows from this group of assets largely independent of cash inflows from other assets or groups of assets?
• Is there an active market for the output, even if some or all of that output is also used internally?

In practice, identifying CGUs means separating the entity into distinct parts based on how it generates cash, not how it is organized on paper. Since a CGU is defined by cash inflows, the process should focus on the entity’s revenue sources and how assets are used to generate that revenue. Management typically needs to consider how it monitors operations through Audit Services in Dubai (by product line, business unit, location, district, or region), or how it decides whether to continue or dispose of specific operations and assets.

Operations Over Legal Structures

In some cases, a Dubai entity’s operational and management structure does not line up neatly with its legal structure. A CGU can be an entity such as a company, a division, a product line, a geography, or a physical location such as a hotel or a retail store. The sections below work through how the lowest level of largely independent cash inflows is identified in a few different scenarios.

CGU Identification: Lowest Level of Largely Independent Cash Flows

Under a contract with a municipality, a bus company in Dubai runs five different routes, each with its own minimum service requirements. Because cash flows can be traced separately to the assets devoted to each route, each route is assessed as its own CGU, which makes it possible to identify an unprofitable route rather than having it absorbed into an overall profitable average.

Also check: External Audit Services in Dubai

Example: Identifying the CGU in a Chain of Supermarkets

Entity A owns and operates ten supermarkets across different suburbs of City B. All ten purchase inventory from Entity A’s central purchasing function, and Entity A sets pricing, marketing, advertising, and HR policy centrally, except for hiring local staff at each store. Entity A also operates 50 more supermarkets across other cities in the country.

Can a CGU combine more than one store location given this level of shared infrastructure, pricing, marketing, and HR policy? This question went to the IFRS Interpretations Committee (IFRIC).

The IFRIC’s answer: IAS 36 identifies CGUs primarily based on independent cash inflows, not independent net cash flows, meaning shared cost items like infrastructure and marketing spend are not the deciding factor. On that basis, each store, generating its own largely independent cash inflows from customer sales, is typically its own CGU despite the shared back-office functions. The IFRIC decided in March 2007 not to add this item to its agenda, on the basis that IAS 36’s existing guidance on independent cash inflows was sufficient.

Related: Financial Statement Audit Services in Dubai

Does the Output Have an Active Market?

When a group of assets produces an output but the resulting cash inflows are not clearly independent of other assets, management and the audit team need to check whether an active market exists for that output.

If the Dubai entity could sell the asset or group of assets on an active market, that group represents a CGU even if other parts of the entity actually use some or all of the output internally. The reasoning is that if the output could be sold externally, its cash inflows are, in substance, largely independent of the rest of the business.

Vertically Integrated Businesses and Active Markets

Vertically integrated businesses run into this issue often, since some of their assets don’t generate independent cash flows simply because their output is consumed internally rather than sold externally. As above, if the output could be sold on an active market, the asset or group of assets forms its own CGU regardless of whether it is currently used internally.

IFRS 13 Fair Value Measurement defines an active market as one where transactions for the asset or output occur frequently enough, and in sufficient volume, to provide ongoing pricing information. Commodities such as oil and gold are typical examples of assets with active markets.

Worked Example: A Manufacturer With No External Market for a Component

Enterprise X manufactures a single product, widgets, in Dubai across three production facilities in different regions. Plant 1 produces a core component. That component is then assembled into the finished widget at either Plant 2 or Plant 3, and the finished widgets are sold worldwide from whichever plant did the assembly. Neither assembly plant has spare capacity, so how orders get allocated between Plant 2 and Plant 3 determines what happens to Plant 1’s output.

This creates two distinct scenarios for Plant 1:

• Scenario 1: An active market exists for Plant 1’s component. Plant 1 can be treated as its own CGU, because its output could be sold externally at an observable market price even though it is currently transferred internally.
• Scenario 2: No active market exists for Plant 1’s component. Plant 1’s cash inflows depend entirely on internal transfer pricing decisions tied to how Plant 2 and Plant 3 use the component, so Plant 1 cannot be assessed as an independent CGU on its own.

In Scenario 2, where internal transfer pricing applies, the entity estimates value in use (VIU) using management’s best estimate of the price that would apply in an arm’s length transaction. This involves two elements:

• VIU is estimated from the future cash inflows the asset or CGU would generate at an arm’s length transfer price.
• VIU also reflects the future cash outflows relating to other assets or CGUs affected by that same internal transfer pricing arrangement.

Unless a group of assets generates largely independent cash inflows, or there is an active market for its output, it does not stand on its own as a CGU. In that case, Dubai internal auditors need to combine it with the other assets that jointly contribute to the same revenue stream.

Also check: Internal Audit Services in Dubai

How to Identify a CGU: A Practical Checklist

1. Map out how the entity actually generates cash, independent of its legal or reporting structure.
2. Identify the smallest group of assets that could be tested on its own.
3. Check whether that group’s cash inflows are largely independent of other assets’ cash inflows.
4. If independence is unclear, check whether an active market exists for the group’s output.
5. Where internal transfer pricing applies, estimate VIU using an arm’s length pricing assumption for both inflows and related outflows.
6. Document the basis for the CGU determination, since it needs to be applied consistently in future periods.

Common Mistakes in CGU Identification

• Defaulting to the legal entity structure. CGUs follow how cash is actually generated, not how the business is legally organized or reported for statutory purposes.
• Ignoring shared costs incorrectly. Some preparers assume shared infrastructure or marketing costs automatically merge locations into one CGU. Per the IFRIC’s 2007 position, shared costs are not the deciding factor, independent cash inflows are.
• Testing at too high a level. Aggregating assets into a CGU that is larger than necessary can let a genuinely impaired asset hide inside a better-performing group.
• Changing CGU structure without justification. IAS 36 expects CGU identification to stay consistent period to period unless the entity’s underlying operations have genuinely changed.

CGU Identification Tests at a Glance

Test	What It Asks	Example
Independent cash inflows	Do this group’s cash inflows stand apart from other assets’ cash inflows?	Each bus route under its own service contract
Active market for output	Could the output be sold externally, even if it is currently used internally?	Plant 1’s component in Scenario 1 of the widget example

Units With Cash-Generating Potential That Have Changed

Where possible, CGUs for the same asset or asset type should be identified consistently from one period to the next. If a change in CGU structure is genuinely justified, Dubai companies should disclose that change along with the reasoning behind it.

Changing the Structure of the CGU Based on Certain Triggers

IAS 36 does not treat the examples above as automatic grounds for a change. Generally, a change in CGU structure is only appropriate when the entity’s operations themselves have changed, for example through different revenue-generating activities or a different way of using its assets. Typical triggers include:

• Business combinations and divestitures
• Organizational restructuring
• Introduction or withdrawal of a product or service
• Entry into or exit from a market

Changing CGU Structure Over Time

A change in CGU structure is not always tied to one identifiable event. A Dubai entity might gradually start allocating orders differently across production facilities, or use its assets more efficiently to generate revenue. A CGU change is justified once the underlying cash inflows have genuinely become more (or less) independent, even without a single triggering event. It can help to pin down roughly when management’s own view of how it monitors and reviews CGUs actually shifted.

Related: Corporate Governance Audit Services in Dubai

Frequently Asked Questions

What is a cash-generating unit under IAS 36?

A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets.

Why does CGU identification matter for impairment testing?

Testing at the wrong level, particularly one that is too aggregated, can hide the impairment of an individual asset inside a group that is performing well overall.

Can shared costs like marketing or infrastructure combine two locations into one CGU?

Not on their own. IAS 36 focuses on independent cash inflows rather than independent net cash flows, so shared cost items are generally not the deciding factor.

How is value in use estimated when internal transfer pricing applies?

Value in use is estimated using management’s best estimate of the price that would apply in an arm’s length transaction, covering both the future cash inflows and the related cash outflows affecting other assets or CGUs.

Can a company change its CGU structure whenever it wants?

No. A change needs to be justified by an actual change in how the entity operates or generates cash, and any justified change should be disclosed.

Where Companies Usually Need a Second Opinion

CGU identification is one of the more judgment-heavy areas of an impairment review, and it is common for internal teams to test at a level that’s more convenient for reporting than technically correct. An independent review at this stage, before impairment testing itself, often catches structural issues that would otherwise carry through the whole calculation.

AFD – Audit Firm in Dubai can review how your CGUs have been identified and whether the structure still reflects how the business actually generates cash today.