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question in revision says an entity carries its property at revalued amount, property values fallen during current period and impairment loss has been recognised on the property, however its carrying amount is still higher than dep historical cost.
what is the effect of the impairment on these ratiosroce gearing
a decrease decrease
b decrease increase
c increase decrease
d increase increase
the ans is d why would this increase roce if the cap emp asset had decrease, I kind of get the gearing ratio increase as equity less against debt, can you explain what roce is measuring pls still a bit confused with this ratio. thanksIf you accept that ‘capital employed’ is the same as net assets (the fundamental accounting equation learned at F3) and you accept that a reversal of a revaluation will involve the double entry:
Dr Revaluation reserve
Cr TNCAthen you must be able to see the fall in the value of net assets and that is therefore also the fall in value of capital employed
But that double entry has not affected the statement of profit or loss so pbit is unaffected
Therefore ‘return’ (the numerator) stays the same but capital employed (the denominator) falls so ROCE increases
OK now?
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