# ACCA F9 Relevant Cash Flows for DCF Taxation (example 3)

• says

If you are certain that you have got it correct, then no.

However it is safer to show workings because if you are doing it correctly you will still get most of the marks even if you make a silly mistake. If you have no workings and make a silly mistake then you get no marks at all for the bit of the question.

1. says

Hey John,
My question is off-the example! Assume that there is no scrap value, so we have to multiply the balancing charge i.e, figures less no scrap value = figures multiply by corporate tax?

• says

Yes – the rule stays the same. If there is no scrap value then it is the same as the scrap value being zero (the same as in Paper F6 for ‘special’ items).

(However, it is a balancing allowance not a balancing charge – there is only a charge if the scrap is more than the tax written down value.)

2. says

ok if there is no scrap value = then 0, ok I understand. BUT suppose after getting \$750 C.A what will be the next procedure to calculate the C.A for the next year( if we have another year)? Do I have to multiply 30% will \$7500?

• says

The question says that the capital allowances are 25% reducing balance.
So the first capital allowance is 25% x 10,000 = 2,500. The tax saving is therefore 2500 x 30% = 750.

The second capital allowance is 25% x (10000 – 2500) = 25% x 7500 (the reducing balance) = 1875 and the saving will be 30% x 1875 = 562.5, and so on.

• says

ok I already have figured this confusion out by your next lecture to this one.

Many Thanks

3. says

Respected Sir John

I did not find error in your OT notes regarding this question , is this video very old? seems you already rectified your error in your notes.

4. says

Sir, Your lectures are excellent I owe you a lot ..
But with regard to TAX SAVINGS ON DEPRECIATION Pl clarify me with foll.. IF STRAIGHT LINE METHOD is followed with SCRAP VALUE at end is a) = asset value @beginning of last yr b)> asset value c)< asset value [ treatment in the operating & terminal flow heads]
I would appreciate if you could explain these scenarios with example…

• says

I am not exactly sure what you mean.
I will give an example but if you mean something different then ask again

Suppose that the cost is 100,000, it lasts 4 years, with scrap value of 10,000

With straight line depreciation for tax purposes, it will mean dep’n of 90,000/4 = 22,500 per year. If tax is 30% then the tax saving will be 30% x 22500 = 6750 per year for 4 years.
There would be no balancing charge or allowance at the end because the total tax depreciation will be equal to the fall in value.
(It is unusual for the examiner to have straight line depreciation – it is almost always reducing balance. Also, if it is straight line, then there will almost certainly be no scrap value.)

• says

Sir what happens to PROFIT / LOSS on sale of an asset and its TAX implications.

In the above ex: at end of 4th yr asset value is NIL but sold for 10,000

• says

At end of 4th year the asset value is not NIL !!

4 years depreciation at 22500 per year reduces its value to 10,000.
There is no profit or loss on sale.

(And profit or loss itself is not what is relevant – it is the balancing charge or allowance that is relevant (from Paper F6). Here, as I explained, there is no balancing charge or allowance.)

• says

Ya got it.. ..Thanks sir
You are THE BEST !! —

5. says

Sir, I was solvong a question on June 08 diet question 4- SC co. I observed that the capital allowance was deducted from the operating casflow and also added back in the capital cashflow. I do not understand why it is. Pls help

• says

You can deal with the tax in two different ways – they both give the same end result.

Here they have worked out the taxable profit by subtracting the capital allowances, then worked out the tax, and then added back the capital allowances because they are not a cash flow.

The other (easier) way, is to calculated the tax on the flows before capital allowances, and separately calculate the tax saved on the capital allowances.

The end result is the same either way.

6. says

I dont know why. But I am used to of wrongly calculating Capital Allowance in Reducing Balance method as =[(Cost – Scrap Value) x 25%(e.g)] .. Is there any way capital allowance is calculated with this, other than if asked by the question?? Thanks

• says

It is never calculated this way!!

Reducing balance (as in financial accounts) is a percentage (usually 25%) of the written down value, with the first year being a percentage of cost.

7. says

I have always had issues regarding the timing of CFs. And, in this question, it says “It is considering the purchase of a new machine on 1 January 2003 at a cost of \$10,000.”
So, how come we consider that the machine was bought in Year 0 instead of Year1? Shouldn’t we consider that the machine was bought in January Year 1 and the first operating cash inflow was incurred in the end of Year 1? Then the results would be different. Please explain. I wish there were more lectures on timing because I am still kind of confused with it.

However, Thanks to you, I understood the Tax part very well

• says

The reason timing of flows is important is because of discounting.
If you buy a machine on the first day of a year, and get the first income at the end of the year, then there is virtually 12 months between the flows and one years interest needs accounting for by discounting, the fact that both flows might be in the same calendar year is not relevant.

So it is not ‘year 0′ or ‘year 1′. It is time 0 and time 1 – the are points in time that are one year apart from each other.

• says

Thanks alot for the explanation. Now I got it

8. says

Thank you sir. actually i am student of cima and now i listen full lecture .great work sir thank you a lot..

9. says

capital allowance is 25% p.a 100000*25%=25000?but why take 20000 instead of 25000?

• says

You are watching a little introductory example to explain how we deal with tax in F9 – just showing the different layout from F6.
Capital allowances are based on the cost – not on the profits!

If you watch the full lecture and see how I work through example 3 you will see what I mean.

(Because the introductory example was just to explain the tax layout, the 20000 was an invented figure because we did not know the cost of the machine. Again, capital allowances are calculated on the cost, not on the profit)

10. says

11. says

Hi Mr John,

Thank you, very clear indeed. Just quick question with regards to calculating the capital allowances in the last year (year of disposal). I remember from my F6 studies that in the last year, when calculating the balancing allowance/charge, what we do is that we deduct the lower of cost or sales proceed from the remaining balance, does this apply to F9? Or do we only deduct the sales proceed /no deduction at all if there is no scarp, but we don’t deduct the cost (if) it happens to be lower from the sales proceed? Hope it is clear.
Thanks, Maha

• says

In F9 you subtract the proceeds from the tax written down value and the difference is either a balancing allowance of a balancing charge.

• says

It is more simplified then – Thanks Mr John for the prompt responses from your side, much appreciated.

Maha

12. says

Why are operating cash flows assumed to be equal to profit before depreciation? The tutor had mentioned that there would be diffrerences such as late paid receivables aso., these were not taken into account. Thanks!

• says

In F9 we only adjust the profit directly by the depreciation.

However, receivables etc are effectively taken into account by the way we deal with working capital. We need to deal with this separately the way we do because receivables etc do not affect the tax liability.

13. says

yes, he is a great lecture,10 times better than the one i had at university before. Thank you very much open tuition.

14. says

Sorry about making comment above. The tutor did mention it at the end of lecture. He is brilliant !

15. says

The answer of example 3(page 48) included in the lecture note seems to be wrong, since the discounted cash flow from year 3 is cash out \$1239.

16. says

I found it is really easy to understand.
The format will be applied to get mark in the exam.
Thanks