Papertest

Q: If the carrying value of an asset is R54m, its value in use R50m and its fair value less costs to sell R30m, what would you expect to see in the balance sheet, income statement and cash flow statement with respect to this asset?

A: . Impair to the higher of value in use and fair value less costs to sell (recoverable amount). Thus, one would not reflect the asset in the balance sheet at 50m as this is its recoverable amount of R50m. In the income statement we would see an impairment charge of 4m (54m – 50m) and no change in the cash flow statement.

Q:If business A revalues its owner occupied properties and business B carries its owner occupied properties at depreciated cost what adjustments would you have to make to the return on equity ratios of these business in order to make a sensible comparison between them?

A: One would have to remove the revalued amount (equity adjustment) in company A’s book and reverse the excess depreciation processed as a result of this revaluation. Company A’s profit would thus increase and the assets value (and equity would decrease.

A: Goodwill is no longer amortised therefore equity (i.e. the denominator) will now be higher. The previous amortisation of goodwill in the income statement is excluded from headline earnings (the numerator used to calculate ROE) and the denominator increased (equity) therefore a resultant lower ratio

A: It gives an indication as to how the market views the company. A low P/E indicates a relatively high perceived risk or low perceived expected returns

A: Depreciation – useful life and residual value

Impairment – future cash flows/discount rates

Bad debts

Investment properties – fair value (if revaluing)

PPE – fair values (if revaluing)

Revenue - % completion

A: B/S : Asset written down to R60000

I/S : An impairment of R40000

Cash flow: No effect

A: B/S: Assets: Carrying value of buildings decreased

Equity: decreased revaluation reserve...