Question

The Wentnor Dairy Company Ltd has run for many years dairy farms in Tasmania. In addition to the farms it has vertically integrated by purchasing factories that produce milk products. These products are then are further developed in other factories owned by the company by producing high grade yoghurts.

The chief financial officer for the company has asked your advice on how AASB 136 Impairment of Assets, should be applied to the company’s various activities. In particular she wishes to correctly identify the cash-generating units (CGUs) for the company.

One issue is whether the milk production section is a separate CGU even though the company does not sell milk directly to other entities but uses the products within its own vertically integrated structure or should it should be included in the milk-based products CGU.

Required

Write a letter to the chief financial officer of The Wentnor Dairy Company Ltd, including the following:

A. Define a CGU.            

B. Explain why impairment testing requires the use of CGUs, rather than being based on single assets.             

C. Explain the factors that the chief financial officer should consider in determining the CGUs for The Wentnor Dairy Company Ltd.            

Pay particular attention to referencing your advice to the relevant paragraphs of the accounting standard.  

Answer 1

(a) A cgu is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets. The concept is used by the ifrs in the determination of asses impairment.

(b) A single asset may not generating cash individually but may generating cash with group of other assets for example a single chair ma not generating cash in a cinema hall but group of chairs are genarating cash.

thats why its always better to test impairment on cash generating units rather than on individual assets.

(c)Milk production section should be treated as a seperate cgu because it is generating cash whether directly or indirectly