Guys please i need help there is contradiction between the 2 pics. I need to know what will increase and what will decrease future ROA
Shweser < says that impairment increase future ROA & upward revaluation decrease future ROA
The question in the other pic < says that impairment decrease future ROA & upward revaluation increase future ROA
There is conflict between both of them. Could anyone explain which one is right ?
Thinking logically,
Impairment = reduce Asset
whilst ROA = Return/Asset → ROA INCREASE future ROA because return INCREASED and asset REDUCED
The upper picture is true whilst the Step 1 statement of the lower one can be wrong.
For deeper inside, in Step 3, the question seems to be unclear, because all question should be based on “ceteris paribus” basis. Which means if you account for expection (Upward revaluation leads to more revenue and income in the future), the question can be unclear and there is no correct question anymore! That is why the upper picture says “Derecognizing an Asset may increase, decrease, or not affect ROA in future periods”
If you derecognize an asset, you remove it from the books so in ROA both the numerator (return) and denominator (asset) are reduced and without more information, you don’t know if ROA will increase, decrease, or stay the same.
If you derecognize an asset with the same ROA as the company as a whole, ROA would be unchanged.
If you derecognize an asset with greater ROA than the company as a whole, ROA would go down.
If you derecognize an asset with lower ROA than the company as a whole, ROA would go up.
Other things equal… hypothetically speaking if a company has 1 dollar in assets it will generate 1% return of each dollar asset it has. Again, this is hypothetical.
Once you impair an asset, you reduce both the asset value and the return percentage that it represented.
If you dont recognize an asset, the result is also the same. That asset who used to generate a return, is no longer in existence.
Now, if you value the asset upward, you will get a higher asset amount, which by itself will result in lower ROA, but considering that the upward revaluation will also generate a proportional increase in results, ROA will be higher.
