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Hello dear ACCA tutor,
My main question is: when calculating Capital Gearing ratio (Debt/ debt+Equity), do we include RESERVES into the Equity part of the formula?
Bonus question: Would also be appreciated, if you could list (most appropriate items for F9) what’s included in Debt and Equity for this ratio.
Thanks a lot and have a nice day
Vera
If you are calculating the gearing using book values (i.e. values from the Statement of financial position) then yes – reserves are included as part of equity.
If you are calculating it using market values, the no – you do not include reserves. (One of the reasons why the market value is usually higher than the nominal value of the share capital is precisely because the company has been retaining earnings – the market value effectively already includes the reserves.)
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