What does a cash-generating unit (CGU) represent?

A cash-generating unit (CGU) represents the smallest identifiable group of assets that generates independent cash inflows. This definition reflects the concept in International Financial Reporting Standards (IFRS), particularly IAS 36, which pertains to the impairment of assets.

In practice, identifying a CGU involves assessing how different assets contribute to cash flows. Sometimes, assets may not produce cash inflows on their own but are part of a group that does. This makes the identification of the smallest group essential because it allows for a more precise assessment of impairment. The focus on independent cash inflows emphasizes that the assets within a CGU must be able to support their evaluation for impairment based on the cash they can generate apart from other units or assets.

The misunderstanding of a CGU often lies in thinking it is merely a group of assets working together to generate cash, an entire company's assets, or only liquid assets. However, a CGU must be determined specifically by the capacity to generate cash independently, which underscores why the correct answer is focused on the smallest identifiable group that accomplishes this.