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IAS 36 Impairment of Assets: Cash-Generating Units Explained with Examples

Published March 3, 2026 Updated March 3, 2026 by Eduyush Team

IAS 36 Impairment of Assets

IAS 36 requires entities to test cash-generating units (CGUs) for impairment whenever indicators exist, comparing the CGU's carrying amount (excluding current assets) against its recoverable amount — the higher of fair value less costs of disposal and value in use.

💡 Key Takeaways

A CGU is the smallest group of assets generating largely independent cash inflows — never include current assets (inventory, receivables) in its carrying amount
Recoverable amount = higher of fair value less costs of disposal (FVLCD) and value in use (VIU)
Impairment losses are allocated first to goodwill, then pro-rata to other non-current assets within the CGU
No individual asset can be reduced below the highest of its FVLCD, VIU, or zero
Goodwill impairment is never reversed; other asset impairments may be reversed if conditions change

Table of Contents

What Is a Cash-Generating Unit Under IAS 36?
IAS 36 CGU Impairment vs Individual Asset Impairment
How to Calculate Impairment of a Cash-Generating Unit
Step-by-Step CGU Impairment Worked Example
How to Allocate an Impairment Loss Within a CGU
Is Reversal of Impairment Allowed for Indefinite-Life Intangible Assets Under IAS 36?
Common Exam Mistakes: Eduyush Faculty Insights
How to Score on IAS 36 CGU Questions in SBR and DIPIFR Exams
Frequently Asked Questions

What Is a Cash-Generating Unit Under IAS 36?

A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of cash inflows from other assets or groups of assets (IAS 36.6). When an individual asset's recoverable amount cannot be determined in isolation, IAS 36 requires the impairment test to be performed at the CGU level instead.

For example, a retail chain with five stores may treat each store as a separate CGU if each store generates its own revenue stream. However, if a central warehouse serves all stores and cannot generate cash flows independently, it would be a corporate asset allocated across CGUs. Understanding how to identify CGUs correctly is fundamental to scoring well on ACCA SBR and DIPIFR exam questions.

IAS 36 Definition

Cash-Generating Unit = Smallest identifiable group of assets generating largely independent cash inflows

Key points when identifying CGUs:

Consider how management monitors operations and makes decisions about continuing or disposing of assets
Active markets for the output of an asset may indicate it is a separate CGU even if some output is used internally
CGU identification should be consistent from period to period unless a change is justified

IAS 36 CGU Impairment vs Individual Asset Impairment

IAS 36 requires impairment testing at the individual asset level first. Only when an asset does not generate cash inflows largely independent of other assets should it be tested as part of a CGU. The key difference lies in how the carrying amount is assembled and how losses are allocated across multiple assets.

Feature	Individual Asset	Cash-Generating Unit
When tested	Asset generates independent cash inflows	Asset cannot generate independent cash inflows
Carrying amount includes	Single asset only	All non-current assets in the unit (exclude inventory, receivables)
Recoverable amount	Higher of FVLCD and VIU of the asset	Higher of FVLCD and VIU of the entire CGU
Loss allocation	Directly to the asset	First to goodwill, then pro-rata to other assets
Goodwill involvement	Not applicable	Goodwill from business combinations must be allocated to CGUs (IFRS 3)

⚠️ Important: Never include current assets such as inventory (IAS 2) or trade receivables (IFRS 9) in the carrying amount of a CGU. This is one of the most common errors candidates make in SBR examiner reports.

How to Calculate Impairment of a Cash-Generating Unit

To calculate whether a CGU is impaired under IAS 36, you compare the CGU's total carrying amount of non-current assets (including any allocated goodwill and corporate assets) with its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss equal to the difference must be recognised in profit or loss.

IAS 36 Impairment Formula

Impairment Loss = Carrying Amount of CGU (non-current assets only) – Recoverable Amount of CGU

Recoverable Amount = Higher of (FVLCD, VIU)

Identify the CGU — determine which assets form the smallest group generating independent cash inflows
Calculate carrying amount — sum all non-current assets (property, plant, equipment, goodwill, intangibles). Exclude inventory, receivables, and other current assets
Determine recoverable amount — estimate both FVLCD and VIU; take the higher figure
Compare — if carrying amount exceeds recoverable amount, the CGU is impaired
Allocate the loss — first reduce goodwill to zero, then allocate the remainder pro-rata to other non-current assets

Students preparing for ACCA FR (F7) exams will encounter simpler CGU calculations, while SBR technical article questions require deeper discussion of judgements involved in identifying CGUs and selecting appropriate discount rates for VIU.

Step-by-Step CGU Impairment Worked Example

This worked example demonstrates how to test a CGU for impairment and allocate the loss — the exact technique tested in ACCA SBR and DIPIFR exams. Follow each step carefully, noting which assets to include and exclude from the carrying amount calculation.

Scenario: Omega Co has a manufacturing division treated as a single CGU. At the reporting date, the division contains the following assets:

Asset	Carrying Amount ($000)
Goodwill	800
Property	2,400
Plant and equipment	1,600
Patent (indefinite life)	1,200
Inventory	500
Trade receivables	300
Total assets in division	6,800

Recoverable amount of the CGU: $4,800,000 (value in use, which exceeds FVLCD of $4,500,000).

Step 1: Determine the CGU Carrying Amount

Exclude current assets from the CGU carrying amount. Inventory ($500k) and trade receivables ($300k) are governed by IAS 2 and IFRS 9 respectively — they are not part of the CGU for impairment testing purposes.

CGU carrying amount = 800 + 2,400 + 1,600 + 1,200 = $6,000,000

Step 2: Compare With Recoverable Amount

CGU carrying amount ($6,000k) exceeds recoverable amount ($4,800k).

Impairment loss = $6,000k – $4,800k = $1,200,000

Step 3: Allocate the Impairment Loss

Under IAS 36.104, allocate the impairment loss in this order:

First, reduce goodwill to zero: $800k allocated to goodwill (goodwill reduced from $800k to $0)
Remaining loss ($400k) allocated pro-rata to remaining non-current assets based on their carrying amounts

Asset	Carrying Amt ($000)	Pro-rata %	Allocation ($000)	Post-Impairment ($000)
Goodwill	800	—	800	0
Property	2,400	46.2%	185	2,215
Plant & equipment	1,600	30.8%	123	1,477
Patent	1,200	23.0%	92	1,108
Total	6,000		1,200	4,800

✅ Pro Tip: In your exam answer, always state explicitly that you are excluding current assets from the CGU carrying amount and cite IAS 36.76 as your authority. This single sentence can earn you a professional mark in SBR.

Note that no individual asset should be reduced below the highest of its FVLCD, its VIU, or zero (IAS 36.105). If this floor applies to any asset, the excess is reallocated pro-rata to the remaining assets. For more on discounted cash flow techniques used to calculate VIU, see our DCF valuation guide.

How to Allocate an Impairment Loss Within a CGU

IAS 36.104 prescribes a strict allocation order for impairment losses recognised at the CGU level. The loss must first absorb any goodwill allocated to the unit, and only then be spread proportionally across the remaining non-current assets. Understanding this hierarchy is essential for both SBR and DIPIFR candidates.

Allocation Rule	Details
Step 1: Goodwill	Reduce goodwill allocated to the CGU to zero first
Step 2: Pro-rata to other assets	Allocate remaining loss proportionally based on carrying amounts of non-current assets
Floor limit (IAS 36.105)	No asset reduced below the highest of: FVLCD, VIU, or zero
Reallocation of excess	If floor limit applies, excess is reallocated pro-rata to remaining assets
Current assets	Never allocated any portion of the CGU impairment loss

The impairment loss is recognised in profit or loss, unless the asset is carried at a revalued amount under IAS 16 or IAS 38, in which case it is treated as a revaluation decrease. For a broader understanding of how financial reporting standards interact, explore our guide to ACCA Financial Reporting (F7).

Is Reversal of Impairment Allowed for Indefinite-Life Intangible Assets Under IAS 36?

Yes, reversal of a previously recognised impairment loss is permitted for indefinite-life intangible assets under IAS 36, provided there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised (IAS 36.109–110). However, reversal of goodwill impairment is strictly prohibited under IAS 36.124.

Asset Type	Reversal Allowed?	Key Condition
Goodwill	Never	IAS 36.124 — any reversal would be internally generated goodwill
Indefinite-life intangible (e.g. brand)	Yes	Change in estimates used to determine recoverable amount
Finite-life intangible	Yes	Same condition; cannot exceed pre-impairment carrying amount less amortisation
Property, plant and equipment	Yes	Cannot exceed pre-impairment carrying amount less depreciation

When reversing an impairment loss for a CGU, the reversal is allocated pro-rata to the non-current assets of the unit, but no asset's carrying amount may exceed what it would have been (net of depreciation/amortisation) had no impairment been recognised. Goodwill is never increased as part of a CGU reversal.

This topic frequently appears in SBR Question 3 scenarios and in DIPIFR questions that combine IAS 36 with IAS 38 intangible asset classification. For the underlying principles of NPV calculations used in VIU estimation, see our dedicated guide.

Common Exam Mistakes: Eduyush Faculty Insights

Based on analysis of recent ACCA SBR and DIPIFR exam sessions, our Eduyush faculty have identified the most common errors candidates make on IAS 36 CGU questions. Avoiding these pitfalls can immediately improve your marks by 5–10 points on a typical 20-mark question.

⚠️ Mistake 1: Including current assets in CGU carrying amount

Candidates frequently add inventory and trade receivables to the CGU total. These are tested under IAS 2 and IFRS 9 respectively and must be excluded. This single error invalidates the entire impairment calculation.

⚠️ Mistake 2: Incorrect allocation of impairment losses

Many candidates allocate the entire impairment loss to a single asset or allocate losses to current assets. IAS 36.104 requires allocation first to goodwill, then pro-rata to remaining non-current assets only.

⚠️ Mistake 3: Wasting time on indicators of impairment

When the question states that an indicator of impairment exists, do not waste time listing or discussing indicators. Move directly to the impairment calculation and allocation. Discussing indicators when not required earns zero marks and wastes valuable exam time.

⚠️ Mistake 4: Attempting to reverse goodwill impairment

IAS 36.124 is absolute — goodwill impairment is never reversed. Candidates who suggest a reversal of goodwill impairment lose marks and demonstrate a fundamental misunderstanding of the standard.

For detailed guidance on how examiners award marks, read our analysis of ACCA SBR examiner feedback and learn from our F7 retake strategy guide if you need to revisit fundamentals.

How to Score on IAS 36 CGU Questions in SBR and DIPIFR Exams

IAS 36 CGU impairment questions appear regularly in both ACCA SBR and DIPIFR exams, but the approach to answering differs significantly between the two papers. Knowing the exam format and marking expectations helps you structure your answer for maximum marks.

Component	ACCA SBR	DIPIFR
Exam Duration	3 hours 15 minutes	3 hours
Question Format	Scenario-based constructed response	Scenario-based constructed response
IAS 36 CGU Marks	Typically 8–15 marks within Q1 or Q3	Typically 8–12 marks in Section B
Answer Style Required	Application + discussion of principles; professional marks available	More calculation-focused with brief explanation
Exam Sessions	March, June, September, December	June, December

Scoring Framework for IAS 36 CGU Questions

State the rule — define CGU and recoverable amount with IAS 36 paragraph references
Apply to the scenario — identify which assets belong in the CGU and which must be excluded
Calculate — show the carrying amount, recoverable amount, and impairment loss clearly
Allocate — demonstrate the two-step allocation (goodwill first, then pro-rata)
Discuss judgements — in SBR, discuss the appropriateness of estimates (discount rate, cash flow projections); in DIPIFR, a brief note suffices

✅ Pro Tip: In SBR, allocate roughly 1.5 minutes per mark. For a 12-mark IAS 36 question, spend 18 minutes. Begin with the calculation (6–8 marks) then discuss principles and judgements (4–6 marks). Never start by discussing indicators unless the question specifically asks you to.

For a comprehensive overview of the differences between SBL and SBR, or to find the best SBR online course for your preparation, explore our dedicated guides. Students deciding their exam order may also benefit from our article on whether to sit FR or AA first.

About the Author

Sandhya B — ACCA, IFRS Specialist & Eduyush Faculty Lead

Sandhya has over 15 years of experience in financial reporting and IFRS training. She has coached hundreds of SBR and DIPIFR candidates, specialising in complex standards including IAS 36, IFRS 3, and IAS 38. Her practical approach to exam technique has consistently helped students achieve pass rates above the global average.

Frequently Asked Questions

Q: What is a cash-generating unit under IAS 36?

A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of other assets. IAS 36 requires impairment testing at the CGU level when individual asset recoverable amounts cannot be determined independently.

Q: Is reversal of impairment allowed for indefinite-life intangible assets?

Yes, IAS 36 permits reversal of impairment losses on indefinite-life intangible assets when the estimates used to determine recoverable amount have changed favourably. However, goodwill impairment can never be reversed (IAS 36.124).

Q: How is an impairment loss allocated within a CGU?

Under IAS 36.104, the impairment loss is first allocated to reduce goodwill to zero. Any remaining loss is then allocated pro-rata to the other non-current assets based on their carrying amounts, subject to the floor limit in IAS 36.105.

Q: Which assets require annual impairment testing under IAS 36?

Three categories require annual testing regardless of indicators: goodwill acquired in a business combination, intangible assets with indefinite useful lives, and intangible assets not yet available for use. All other assets are tested only when indicators of impairment exist.

Q: Why should current assets be excluded from a CGU's carrying amount?

Current assets like inventory (IAS 2) and trade receivables (IFRS 9) are dealt with under their own standards and have separate impairment requirements. Including them in the CGU carrying amount would overstate the unit's carrying value and produce an incorrect impairment calculation.

Q: Can goodwill impairment ever be reversed?

No. IAS 36.124 explicitly prohibits the reversal of goodwill impairment. Any subsequent increase in recoverable amount would effectively represent internally generated goodwill, which IAS 38 does not permit to be recognised as an asset.

📚 Next Steps

Ready to master IAS 36 and other complex IFRS standards for your exam? Explore our BPP ACCA Strategic Professional coaching (ECR) — including SBR and DIPIFR study materials with mock tests. Also check out our ACCA Books at regional pricing, and browse the full collection of FR technical articles and SBR technical articles for more exam-ready content.