What is a CGU (cash-generating unit) and how is it defined?
A CGU (cash-generating unit) is the smallest identifiable group of assets that generates cash flows largely independent of other assets. Defined under IAS 36 — critical for goodwill allocation and impairment tests.
Practical definition, typically at one of these levels:
- A business area or segment — e.g. Bayer's Pharma, Crop Science, Consumer Health.
- A subsidiary with separate cash-flow generation.
- A region, if run independently.
- A product line, if sold or marketed separately.
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- Too coarse (group level): a goodwill impairment is almost never triggered, because profitable areas offset weak ones.
- Too fine (product level): frequent, highly volatile impairments — usually not IAS 36-compliant, because product cash flows are not independent.
Standard: segment level or sub-segment, no finer.
before the Monsanto acquisition there were 3 CGUs (Pharma, Consumer Health, Crop Science). After integrating Monsanto, Crop Science was split into sub-CGUs — Seeds & Traits and Crop Protection. The Monsanto goodwill was allocated to these sub-CGUs.
'The sell-side will want to define the CGU broadly to lower impairment risk. In DD, watch whether the CGU definition has become progressively coarser since the IFRS 3 transition — often aggressive accounting'.