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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Kappa Co has opening net assets of $500m and closing net assets of $540m. Profit for the year is $78m, after a $20m impairment of goodwill. Capital employed (equity plus non-current debt) was $900m at the start and $1,000m at the end of the year. Profit before interest and tax is $114m. Using closing capital employed, what is return on capital employed, and what is the main interpretive effect of the impairment?

ROCE is 11.4%, being $114m divided by closing capital employed of $1,000m. The goodwill impairment is charged within profit, so it lowers the ratio in the year, while the lower asset base slightly eases the denominator in future periods.

  1. A11.4%; the impairment lowers ROCE and reduces the denominator, so the ratio is partly offsetCorrect
  2. B11.4%; the impairment has no effect on ROCE because it is non-cash
  3. C7.8%; the impairment increases ROCE through lower assets
  4. D12.0%; the impairment is excluded from profit before interest and tax

Explanation

ROCE = 114/1,000 = 11.4%. The impairment reduces profit before interest and tax, so ROCE falls, but it also reduces the asset base, so later-period ROCE improves. The non-cash argument is wrong because impairment is charged in profit and so reduces the numerator.

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