A cash generating unit is the smallest identifiable group of assets that includes an asset and generates cash inflows largely independent of the inflows from other assets (FRS 102 paragraph 27.8). When an asset’s recoverable amount cannot be estimated on its own, impairment is tested for its unit instead. Goodwill is always tested this way, through the units expected to benefit from the acquisition that created it.

Why does FRS 102 use cash generating units at all?

Section 27 compares an asset’s carrying amount with its recoverable amount, the higher of fair value less costs to sell and value in use (paragraph 27.11). Value in use needs a cash flow forecast, and most individual assets do not produce cash flows on their own. A till, a kitchen or a delivery van contributes to the cash a shop earns but cannot be valued in isolation. Paragraph 27.8 therefore requires the recoverable amount to be estimated for the unit the asset belongs to whenever it cannot be estimated for the asset itself.

Goodwill is the clearest case. Paragraph 27.24 notes that goodwill cannot be sold by itself and does not generate cash flows independent of other assets, so its recoverable amount can only be derived from the unit or units it forms part of. The overall impairment framework is in FRS 102 Section 27: impairment of assets; this page concentrates on identifying units and putting assets and goodwill into them.

How do you identify a cash generating unit in practice?

The definition turns on cash inflows, not costs. Shared purchasing or a shared finance team does not stop two sites being separate units if their customers and revenue are separate. Useful questions include:

  • Does the site, product line or contract earn revenue from its own customers, or do customers buy from the business as a whole?
  • Could management close or sell this part without materially affecting the inflows of the rest?
  • How do the directors monitor performance and make decisions on continuing or closing operations?
  • Is output sold externally, or does it feed another part of the business that earns the revenue?
Business Likely unit Why
Chain of cafés Each café Each serves its own walk in customers
Bus company bidding for routes as a package The package of routes Routes cannot be dropped individually under the contract
Manufacturer with one factory and two product lines sold separately Possibly each product line Separate external revenue streams, if specialised assets can be attributed
Accountancy practice with one office and central client base The whole practice No part earns independent inflows

The table shows typical outcomes, not fixed rules; the answer depends on the facts. Once units are identified they should be applied consistently from year to year unless the business genuinely changes.

Where do shared assets such as a head office fit?

Section 27 does not contain separate rules for shared or corporate assets. A head office building, a booking system or a central warehouse does not earn independent inflows, so it is tested as part of the unit, or the group of units, whose cash flows it supports. In a small business this often means testing it with the business as a whole. What should be avoided is leaving a shared asset out of every test, so that its carrying amount is never compared with any cash flows.

How is goodwill allocated to units?

Paragraph 27.25 requires goodwill acquired in a business combination to be allocated, from the acquisition date, to each of the acquirer’s units expected to benefit from the synergies of the combination, whether or not other assets or liabilities of the acquired business are assigned to those units. A buyer that acquires a competitor to win its customers for an existing operation may therefore allocate goodwill to that existing operation.

If goodwill cannot be allocated to units on a non arbitrary basis, paragraph 27.27 provides a fallback. Goodwill on an acquired entity that has not been integrated is tested using the recoverable amount of that entity as a whole. Goodwill on an entity that has been integrated, meaning restructured or dissolved into the reporting entity or other subsidiaries, is tested using the whole group excluding any entities not integrated. Goodwill has to be split between integrated and non integrated businesses for this purpose.

Where a subsidiary is not wholly owned, paragraph 27.26 requires the goodwill in the unit to be notionally grossed up to include the goodwill attributable to the non controlling interest before the unit’s carrying amount is compared with its recoverable amount. See business combinations and goodwill for how goodwill is first measured and consolidated accounts under FRS 102 for where it appears.

How is a unit tested?

The recoverable amount of the unit is the higher of its fair value less costs to sell and its value in use (paragraph 27.11). Only one needs to be calculated if it already exceeds the unit’s carrying amount (paragraph 27.12). The carrying amount and the cash flows must cover the same assets: if a forecast includes the income from a leased site, the carrying amount should include the right of use asset for that site. The forecasting rules are set out in calculating value in use.

If the unit’s recoverable amount is below its carrying amount, paragraph 27.21 allocates the loss first to goodwill in the unit and then to the other assets pro rata to their carrying amounts. Paragraph 27.22 stops any asset going below the highest of its own fair value less costs to sell, its value in use and zero, with any excess reallocated under paragraph 27.23.

What does a worked example look like?

Illustration only. A company buys a rival for a price that includes goodwill of £60,000. It expects most of the benefit to come through its own existing workshop (Unit A) and the rest through the acquired branch (Unit B), so it allocates £40,000 to Unit A and £20,000 to Unit B.

Unit A Unit B
Goodwill allocated £40,000 £20,000
Other assets £260,000 £180,000
Carrying amount £300,000 £200,000
Recoverable amount £380,000 £170,000
Impairment loss Nil £30,000

Unit B’s loss of £30,000 removes its £20,000 of goodwill and the remaining £10,000 is spread across its other assets in proportion to their carrying amounts. The surplus headroom in Unit A cannot be used to absorb the loss in Unit B. Had the company tested the business as one unit, the combined recoverable amount of £550,000 would have exceeded the carrying amount of £500,000 and the loss would have been hidden, which is why units should not be drawn wider than the definition allows.

Can a loss on a unit be reversed later?

A reversal on a unit is allocated to the assets other than goodwill (paragraph 27.31), because paragraph 27.28 prohibits reversing a goodwill impairment. The mechanics are explained in whether an impairment loss can be reversed. The goodwill written off in Unit B stays written off even if the branch recovers.

What mistakes come up most often?

  • Treating the whole company as one unit by default, so that profitable parts mask a failing site.
  • Not allocating goodwill to units at the acquisition date, leaving no basis for testing it.
  • Including cash flows from assets that are not in the carrying amount, or the reverse.
  • Changing the units from one year to the next to avoid recognising a loss.
  • Forgetting to gross up goodwill for a non controlling interest.
  • Assuming amortised goodwill never needs testing; amortisation under paragraph 19.23 does not replace the impairment review in Section 27 when there is an indicator (goodwill useful life and amortisation).

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.