Discounted cash flow techniques (part 3) – ACCA (AFM) lectures
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Hello sir, can I please ask why we did not consider the tax impact of the maintenance costs?
See my reply to the previous question (immediately below).
Thank you, I had missed it.
Since it’s mentioned in the question that an amount equal to the amount of the tax allowable depreciation is required each year for the maintenance of non-current assets.
While you mentioned that the trick to tackle this is to when you compute the tax allowable depreciation for the purpose of arriving at the Taxable profit in order to figure out the tax expense on the profit, so don’t add back the same after figuring out the tax expense.
However, excluding maintenance expenses when calculating taxable profit can lead to discrepancies in our NPV and cash flow projections. Maintenance expenditure is tax allowable, and it should be kept alongside depreciation before the taxable profit.
For instance, if we were to incorporate maintenance expenses of 1,000 Euro annually in addition to depreciation, it would result in taxable losses, thereby reducing our tax liability. Neglecting these maintenance expenses before arriving at taxable profit inflates the taxable profit figure, consequently leading to higher tax payments.
So why you have not account for the maintenance expenses even it’s cashlfows in your table before arriving the taxable profit?
You make a perfectly valid point. However the current examiner never treats it as being tax allowable which is why I show it the way I do in my lectures.
Thank you so much for the response.
Just to re-ensure that in case in exam it’s being mentioned that an amount equal to the amount of the tax allowable depreciation is required each year for the maintenance of non-current assets. So in such case we wouldn’t subtract the maintenance expense to arrive at taxable profit and neither we will add back the tax depreciation after arriving at the taxable cashflows.
However, now do have one more curiosity ? What if in exam it’s being mentioned that an amount of XXX (any amount but different to that of depreciation) is required each year for the maintenance of non-current assets. So in such case we would still follow the same treatment as carried out by you?
Furthermore, would take this moment to appreciate your energy for replying to our’s queries.
Your stating of the ‘rule’ is correct.
If he had different amount then he would have to make it clear about the tax position.
HI there,
Thank you for the lectures and notes.
I just had one doubt and that is, in the question its mentioned that “An amount equal to the amount of the tax allowable depreciation is required each year for the maintenance of non-current assets” so for calculating the tax it will be required to deduct the depreciation as well as the maintenance of the same amount from the revenue, that is an amount of 2,000 (1000 for dep, and 1000 for the maintenance). However, as depreciation is non cash it will be returned back. Although, the net effect is same as mentioned but it will definitely affect the tax calculated.
Please explain if i am wrong.
Thank u in advance for clarifying the query.
Strictly you are correct (the maintenance will be tax allowable). However the examiner includes this in almost every exam and always deals with it the way that I do in my lecture.
Then why do we do the wrong. Whats the motive and justification
U are correct.
sir , thank you for the effort. one question why we counted royalties in the both? isn’t it already calculated, implied in the totals and implied in cash? it looks now as received twice?
implied in tax*^
Hey, I’m not the tutor. But, from what I understood, the first calculation in Euros where we were subtracting the royalties, was from the project’s POV, and the second was from James’ POV. The project would be paying out the royalties to James Plc and thus it would be a cash-out flow from their accounts as an expense and the royalties would be paid to James Plc and thus they would record a cash in flow in their books. Hope this helps. All the Best!!