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Interpretation analysis qstn

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Interpretation analysis qstn

  • This topic has 4 replies, 2 voices, and was last updated 4 years ago by cadhakan.
Viewing 5 posts - 1 through 5 (of 5 total)
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  • January 23, 2021 at 7:25 am #607600
    cadhakan
    Participant
    • Topics: 71
    • Replies: 123
    • ☆☆

    Siya co carries its property at revalued amount. Property values have fallen during the current period and an impairment loss has been recognised on the property, however it’s carrying amount is still higher than its depreciated historical cost. What is the effect of the impairment on the ROCE and Gearing ratios?

    Ans ::

    The effect of this impairment will increase in ROCE and increase in gearing ratio.

    Sir I am not able to understand why increase in both ROCE and gearing ratios. Can you please explain me why…it will really great help from you. Thank you in advance.

    January 23, 2021 at 9:53 am #607638
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    Hi,

    As the value of the property has fallen then the capital employed will have fallen, hence an increase in ROCE. Effectively we are making the same returns on a smaller asset base.

    As the impairment will have reduced the profits, it will also have reduced the equity balance via the retained earnings, hence an increase in the gearing. Effectively we have the same level of debt but a lower asset base as security, which is more risky, and hence shown by an increased gearing.

    Thanks

    Thanks

    January 23, 2021 at 12:54 pm #607659
    cadhakan
    Participant
    • Topics: 71
    • Replies: 123
    • ☆☆

    So if property Value have risen than ROCE and gearing both decrease??

    January 26, 2021 at 7:19 pm #608150
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    Hi,

    If the number on the bottom of the ratio (denominator) increases then the ratio will fall as you are dividing by a larger number.

    Thanks

    February 3, 2021 at 4:03 pm #608993
    cadhakan
    Participant
    • Topics: 71
    • Replies: 123
    • ☆☆

    Oh I see I. Understand now thank you so much sir.

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