Identification of cash-generating units
Example A – newspapers
An entity publishes 10 suburban newspapers, each with a different mast-head, across 4 distinct regions within a major city. The price paid for a purchased mast-head is recognised as an intangible asset. The newspapers are distributed to residents free of charge. No newspaper is distributed outside its region. All of the revenue generated by each newspaper comes from advertising sales. An analysis of advertising sales shows that for each mast-head:
- Approximately 90% of sales come from advertisers purchasing ‘bundled’ advertisements that appear in all those newspapers published in one particular region of the city;
- Approximately 6% of sales come from advertisers purchasing ‘bundled’ advertisements that appear in all 10 newspapers in the major city; and
- Approximately 4% of sales come from advertisers purchasing advertisements that appear in one newspaper only.
What is the cash-generating unit for an individual mast-head?
Stage 1: Identify the smallest aggregation of assets for which a stream of cash inflows can be identified.
The fact that it is possible to use a pro-rata allocation basis to determine the cash inflows attributable to each newspaper means that each mast-head is likely to represent the smallest aggregation of assets for which a stream of cash inflows can be identified.
Stage 2: Are the cash inflows generated by an individual mast-head largely independent of those of other mast-heads and, conversely, is that individual mast-head affecting the cash inflows generated by other mast-heads?
As approximately 96% of cash inflows for each mast-head arise from ‘bundled’ advertising sales across multiple mast-heads, the cash inflows generated by an individual mast-head are not largely independent.
Therefore, the individual mast-heads would most likely need to be aggregated to form the smallest collection of assets that generates largely independent cash inflows. On the basis that approximately 90% of cash inflows for each mast-head arise from ‘bundled’ advertising sales across all of the newspapers published in a particular region, it is likely that those mast-heads published in one region will together form a cash-generating unit.
Example B – retail outlets
An entity has a chain of retail outlets located in the same country. The business model of the entity is highly integrated and the majority of the entity’s revenue generating decisions, such as decisions about investments and monitoring of performance, are carried out at an entity level by the executive committee, with some decisions (such as product range and marketing) delegated to the regional or store levels. The majority of the operations, such as purchasing, are centralised. Management operates its business on a regional basis; but sales are monitored at the individual store level.
The outlets are usually bought and sold in packages of outlets that are subject to common economic characteristics e.g. outlets of similar size or location such as a shopping centre or city or region. Only in rare situations has the entity sold or closed down an individual outlet.
The determining factor for CGUs is the level at which largely independent cash inflows are generated, and not the manner in which the entity’s operations are organised and monitored. The fact that operations and costs are managed centrally does not of itself affect the source and independence of the cash inflows. The interdependence of cash outflows is unlikely to be relevant to the identification of CGUs.
The key issue in deciding whether CGUs should be identified at the level of the individual store as opposed to a group of stores is whether, if a store is closed down, all the customers of that store would seek out another of the entity’s stores such that there is no overall ‘leakage’ of custom from the store closure. In the highly likely event that all the customers would not do this, the individual stores are separate CGUs.