Identification of cash-generating units – grouping of assets
Example A – A tour operator’s hotels
A tour operator owns three hotels of a similar class near the beach at a large holiday resort. These hotels are advertised as alternatives in the operator’s brochure, at the same price. Holidaymakers are frequently transferred from one to another and there is a central booking system for independent travellers. In this case, it may be that the hotels can be regarded as offering genuinely substitutable products by a sufficiently high proportion of potential guests and can be grouped together as a single cash-generating unit. Effectively, the hotels are being run as a single hotel on three sites. The entity will have to bear in mind that disposal decisions may still be made on a hotel-by-hotel basis and have to weight this appropriately in its determination of its CGUs.
Example B – Flagship stores
Store Z is a flagship store located in a prime site location in a capital city. Although store Z is loss making, its commercial performance is in line with expectations and with budgets. How should the impairment issues of the flagship store Z be considered?
It is difficult to conclude that a flagship store is a corporate asset, discussed at below. It may be possible to argue for the aggregation of a flagship store with others in the vicinity into a single CGU as flagship stores are usually designed to enhance the image of the brand and hence other stores as well. They may be budgeted to run with negative cash flows; perhaps in substance the losses are not an impairment. However, this argument for not recognising an impairment would generally only be acceptable during a start-up phase and it must be borne in mind that the added function of the flagship store is largely marketing. As marketing expenditures are expensed, it would not necessarily be inconsistent to take an impairment loss and the entity may have to consider whether it should have capitalised these costs in the first place.