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Sir it would help a lot if you could pleeease help with this section
The parts that ive grasped is that the lease payments are tax deductible and in tax world we get the benefit only when cash is paid..
But im finding it realllly difficult to understand whats given in the study text.
CV-tax base and the fact that lease rental is lower than combined depreciation and finance costs…I dont get the concept please help me understand ….
“As tax relief is granted on a cash basis when lease payments and set up costs are paid the tax base is zero giving rise to temporary difference. This results in deferred tax asset and additional credit to tax in profit or loss. The tax deductions is based on lease rental and set up costs which is lower than combined depreciation expense and finance cost, the future tax saving on additional accounting deduction is recognized now in order to apply accruals concept’’
EG
Lease term 2 years
Rental 25/ year
PVMLP is 40Over the term of the lease P&L charge will be 50 (2×25)
Comprises depreciation of 40(straight line) and finance cost of 10 (amortised cost)
Amortised cost gives you a high finance cost in early years and a low finance cost in later years.
So, in early years, P&L charge will be higher than lease rentals.
For exam, just remember………… always a deferred tax asset!
What I understand is that, the lease payments are deductible under both IFRS as well as Tax laws, so since theyve been deducted in reaching the CV, the tax base is also zero as it’s deducted over there also and as same rules apply.
However under IFRS, other than Lease payments, the depreciation (from ROU) as well as come other costs thatve been accounted for in effective rate (transaction costs) these are not allowed for to be deducted under tax law so now the difference between (ROU-lease liab) and tax base is due to them, and both of them are realized and dealt with on cash basis at perhaps the end of the lease term or in its later years? hence a deferred tax asset?
In many (but not all) tax systems, lease payments will be the same as tax allowances, so, as you say, there is only a problem if there is an obscure tax rule for transaction costs etc.
For the exam, it is important that you arrive at the exam WITH NO TAX KNOWLEDGE AT ALL, and the examiner will tell you what the ‘pretend’ tax rules are. To be honest he will probably just give you the TD and you have to multiply by the tax rate and say ‘DT asset’. Very few marks in all likelihood!
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