What is a Cash Generating Unit (CGU) and why does it matter for impairment?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
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. It matters because many assets — especially goodwill — don't generate cash on their own, so they can't be impairment-tested individually; IAS 36 requires goodwill to be allocated to the CGUs (or groups of CGUs) expected to benefit from the synergies of the acquisition, at the level monitored by management and no larger than an operating segment. You then test each CGU by comparing its carrying amount (including allocated goodwill and a share of corporate assets) to its recoverable amount; an impairment hits goodwill first, then the other assets pro-rata. Getting CGU identification right is critical — defining CGUs too broadly can hide an impairment (a failing unit offset by a strong one), which is exactly what standard-setters and auditors scrutinize.
WHAT INTERVIEWERS LISTEN FOR
- ✓Smallest group of assets with largely independent cash inflows
- ✓Goodwill can't be tested alone → allocated to CGUs (≤ operating segment, at monitoring level)
- ✓Test carrying (incl. goodwill + corporate assets) vs recoverable amount
- ✓Impairment hits goodwill first; CGU definition can hide/reveal impairment
COMMON MISTAKES
- ✗Defining CGUs too broadly to mask impairment
- ✗Testing goodwill in isolation
- ✗Allocating goodwill above the operating-segment level
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