ExpertMedium2 marksMultiple Choice
ACCA · Question 11 · Analyzing and Interpreting Financial Statements
SECTION A
Company X and Company Y operate in the same retail sector. Company X recently revalued its property portfolio upwards by 40%, while Company Y continues to hold its properties at historical cost.
Assuming all other financial metrics are identical, what is the most likely impact of this revaluation on Company X's Return on Capital Employed (ROCE) compared to Company Y?
SECTION A
Company X and Company Y operate in the same retail sector. Company X recently revalued its property portfolio upwards by 40%, while Company Y continues to hold its properties at historical cost.
Assuming all other financial metrics are identical, what is the most likely impact of this revaluation on Company X's Return on Capital Employed (ROCE) compared to Company Y?
Answer options:
A.
Company X will have a higher ROCE than Company Y.
B.
Company X will have a lower ROCE than Company Y.
C.
Company X and Company Y will have the same ROCE.
D.
The impact on ROCE cannot be determined without knowing the tax rate.
How to approach this question
Analyze the ROCE formula: PBIT / Capital Employed. Determine how an upward revaluation affects both the numerator (via depreciation) and the denominator (via equity).
Full Answer
B.Company X will have a lower ROCE than Company Y.✓ Correct
ROCE is calculated as Profit Before Interest and Tax (PBIT) divided by Capital Employed (Equity + Non-Current Liabilities). An upward revaluation increases the carrying amount of assets and equity, increasing the denominator. It also leads to higher subsequent depreciation charges, which reduces PBIT (the numerator). Both of these effects cause the ROCE to decrease compared to a company using historical cost.
Common mistakes
Assuming that higher asset values indicate a 'better' company and therefore a higher return ratio, failing to realize the mathematical impact on the denominator.
Practice the full ACCA FR — Financial Reporting Practice Exam 3
32 questions · hints · full answers · grading
More questions from this exam
Q01SECTION A
Nexus Innovations, a tech startup, is preparing its first set of financial statements ...EasyQ02SECTION A
CyberShield Inc. sells a software license bundled with 12 months of mandatory technica...MediumQ03SECTION A
Titanium Forge Co, a heavy manufacturing firm, revalued its main factory building for ...EasyQ04SECTION A
AgriTech Solutions is developing a new automated irrigation system. Under IAS 38 Intan...MediumQ05SECTION A
Skyward Aviation entered into a 5-year lease for a maintenance hangar. The annual leas...Hard