ACCA Financial Reporting (F7) Practice Exam

What is meant by a cash-generating unit (CGU)?

1. The largest division of the company that produces cash flows

2. The smallest identifiable group of assets that generates cash inflows

3. A group of assets expected to be sold together

4. A single asset that produces cash inflows

The correct answer is: The smallest identifiable group of assets that generates cash inflows

A cash-generating unit (CGU) is defined as the smallest identifiable group of assets that generates cash inflows independently of other assets. This definition emphasizes the need for assets to be grouped in a way that allows for the assessment of their ability to generate cash flows. When evaluating the carrying amount of assets and assessing impairment, it's vital to identify the smallest unit that can produce cash inflows that are largely independent from other units. This concept is particularly important in financial reporting as it affects how impairments are recognized. For instance, if a CGU is found to be impaired, the company must write down the assets within that unit to their recoverable amount, which is typically the higher of fair value less costs to sell and value in use. In contrast, defining a CGU as the largest division of the company that produces cash flows would not align with the criteria since it may encompass more assets than necessary to evaluate cash inflows. Similarly, a CGU is not merely a grouping of assets expected to be sold together or a single asset generating cash inflows. Instead, it is the smallest combination of assets that consistently produces independent cash flows, which ensures accurate impairment assessment and financial reporting.