In v3.1 every unit has a readiness state that always remains at 100% so it has no actual effect. Also, a unit is either completely intact or totally destroyed. Both of these situations will change in v3.2. In v3.2, when a unit is damaged as a result of combat it will lose a random amount of readiness from 1-50%. This is modified by current morale using the formula: Modified Readiness Loss = Readiness Loss / (Morale/100)
A unit with a readiness of less than 40% will be unable to attack. Defending units will continue defending until destroyed. Readiness will return at a rate of 100% per year. A commander with a ground force training rating can add this to the rate of readiness recovery. So a unit with a commander with a training rating of 100 will regain readiness at 200% per year.
In v3.1, morale is only ever modified by training. In v3.2, there is a one third chance than morale will increase or decrease as a result of casualties. If after suffering casualties the unit readiness is still above 80%, the unit will increase morale from 1-10 as a result of combat experience. If after casualties, readiness is below 81, the unit will lose morale due to heavy losses. Morale is recovered in the same way as readiness but will never rise to more than 100 due to recovery. It can only exceed 100 due to training or combat experience.
Steve