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Case study
The XYZ Group is a world-wide supplier of business systems, which it also installs and maintains. The Group is divided into seven business groups (BGs) that serve different geographical areas. Within these groups smaller business units (BUs) exist. Typically one BU is identified for each country where the Group operates.
The customers of XYZ are often multinational customers with subsidiaries in different countries. Due to this, when one BG enters into a sales agreement with a multinational customer in one region/country this agreement will typically also create income for other BGs through sales from subsidiaries of the customer in the different countries. On average 42% of all sales will lead to a sale in another BG as well (referred sale).
The company is managed on a group wide basis where strategic decisions are made, for example: product development, product range, and business development.. BG management is focused on the successful delivery of systems and relationship management for the key global clients in their territory. Forecasts and budgets exist for each BU where local sales, installation and maintenance are carried out. If a BU is under-performing, the Group’s strategy is that it is not closed down, but BG management is expected to take action to improve the position.
Based on the above, XYZ is of the opinion that the CGUs cannot be identified at a lower level than “group level”
Questions:
a) Do you agree with the client? At what level should XYZ identify CGUs for impairment testing purposes?
- Group wide (one CGU)
- Business Groups (seven CGUs)
- Business Units (multiple CGUs)
b) What impact do the referred sales have?
c) What further information would you require from XYZ to determine how to identify the CGUs?
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