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Sir,
My question is
Why is
a. An increase in interest rates which increases the discount rate an entity uses.
b.The carrying amount of an entity’s net assets is higher than the entity’s number of shares in issue multiplied by its share price.Is considered as impairment?
option (b) says when net assets(assets-liability) > then share capital, how can it be can impairment?
Thank you in advance
a) Because when assets are valued on a discounted value basis and that discount is unrolled over the ensuing years, an increase in the discount factor will reduce the discounted vale of those assets
b) Share prices are determined by all sorts of stock exchange beasts like stags, bulls and bears and move in mysterious ways. I gather from your question that you have never experimented in share acquisitions and disposals but I remember a case where a company announced record profits, a 1 for 2 bonus issue and a 5% increased dividend
Good news or what?
The share price fell an that announcement
Why?
Because the market had been looking for even greater profits, a 1 for 1 bonus issue and a 10% increase in the dividend
A low share price leading to a lower market capitalisation that is now less than the carrying value of net assets suggests that the stock market and all its players have a generally pessimistic outlook for the company and that its assets could well be overvalued
OK?
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