CGU vs Business Segment Impairment — Which Unit, Which Test
CGU vs business segment impairment — what each unit is, why the unit of measurement matters for goodwill impairment under IAS 36 and IFRS 8, and how CFOs reconcile the two.
Two unit-of-measurement concepts sit at the heart of intangible-asset impairment testing and segment disclosure: the cash-generating unit (CGU) under IAS 36, and the operating segment under IFRS 8 (UK and global IFRS) or ASC 280 (US GAAP). The CGU is the smallest identifiable group of assets generating largely independent cash inflows. The operating segment is the unit at which the chief operating decision maker allocates resources and assesses performance. Goodwill is allocated to CGUs and tested at that level, but the CGU cannot exceed the operating segment containing it (IAS 36 paragraph 80).
| Criteria | Cash-Generating Unit (CGU) | Operating Segment / Business Segment |
|---|---|---|
| Purpose | Unit of measurement for impairment testing | Unit of measurement for segment disclosure |
| Standard reference | IAS 36 paragraphs 6, 68, 80-90 | IFRS 8 (UK and global); ASC 280 (US GAAP) |
| Test | Smallest group of assets generating largely independent cash inflows | Component reviewed by CODM for resource allocation and performance assessment |
| Defining viewpoint | Cash-flow independence (operational) | Management reporting (internal control) |
| Typical scale | Smaller — often a site, product line, or regional cluster | Larger — typically a business line, geographic region, or product category |
| Relationship | One operating segment may contain multiple CGUs | Equal to or larger than the CGUs within it |
| Goodwill allocation | Allocated to CGUs (or CGU groups) that benefit from the acquisition | Goodwill is disclosed at operating-segment level but tested at CGU level |
| Frequency of review | At least annually for goodwill and indefinite-life intangibles | At each reporting period |
| Quantitative thresholds | No formal threshold — judgement-based | 10% revenue / 10% profit-or-loss / 10% assets |
| Aggregation rules | Not aggregated — each CGU tested separately | Permitted under IFRS 8 paragraph 12 / ASC 280 where economic characteristics are similar |
| Disclosure requirement | IAS 36 paragraph 134 — CGU-level impairment disclosure | IFRS 8 / ASC 280 segment disclosure |
| Upper boundary | Cannot exceed the operating segment that contains it (IAS 36 paragraph 80) | Bounded by the entity itself |
| Common error | Drawing CGU boundaries too wide to maximise headroom | Aggregating segments without meeting the aggregation criteria |
When to Use Each Approach
Cash-Generating Unit (CGU)
- Goodwill impairment testing under IAS 36 paragraph 80
- Indefinite-life intangible impairment testing
- Indicator-based impairment for finite-life intangibles
- Asset-level recoverable-amount calculations
Operating Segment / Business Segment
- Public segment disclosure under IFRS 8 / ASC 280
- Internal resource-allocation and performance reporting
- External segment narrative and analyst communication
- Setting the upper boundary for goodwill CGU allocation
Our Verdict
CGUs and operating segments answer different questions. CGUs are the smallest unit of independent cash flows; operating segments are the largest unit of management reporting below entity level. Goodwill impairment is tested at CGU level but capped at operating-segment level. The two units should be considered together, not interchangeably.
Related Glossary Terms
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