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When calculating gearing based on the market value, we should not include reserves under equity right? Can I know what’s the reason for this? Is it because the reserves value has already been included in the market value of share price?
Effectively yes. The most obvious reason (but not the only reason) for the market value being higher than the book value is because the company has been retaining profits.
Also you will remember from Paper FA (was F3) that the SOFP is never showing the real value of a business anyway – the book values of non-current assets are not going to be the true value of those assets.
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