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Hi Ken
I need some help with below question please.
Part 2 answer states: Capital employed is being calculated using statement of financial position figure which may exclude many intangible assets. As such it may overemphasise tangible capital base which is not as important in a service business.
My question is what sort of assests would be excluded from SOFP and if we cannot/dont use this figure then which figure we use for ROCE calculation in Service business?
Regards
Goodwill, if internally generated, is not recognised on the SOFP. Brands are usually valued and are contentious anyhow. Research costs are expensed, yet for EVA they are capitalised.
You can’t really do anything very quantitative to remedy omissions as there is too much guesswork. However, the omissions need to be taken into account in a qualitative way, if only by recognising that ROCE might be over stated.
OK. So the comments in exam kit are more to highlight drawbacks of using ROCE in service business rather than the profit figures used?
Yes – it is the appropriateness and usefulness of the measures rather than their calculation.
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