[harjunraj]

Did anyone else receive a “Book your December exam…” email from ACCA? Just wondering if this is a generic email or targeted.

[harjunraj]

Apologies, John. I somehow missed your initial reply as I was scrolling through. This makes perfect sense, thanks a lot for your response!

[harjunraj]

Hi John,

I’m facing a similar issue and hope to clarify Talal’s issue above with an example. I believe the main issue here is the different methods used for treating the tax allowable depreciation:
i) deduct TAD from the operating cash flow to identify taxable profit, calculate tax payable based on taxable profits and finally add back the TAD
ii) calculate tax payable based on operating cash flows, add the tax relief portion from TAD

Please allow me to illustrate the above with a worked example, let’s assume a 2 year project (ignore initial investment outlay):
Operating cash flow = $100 in years 1 and 2
TAD = $120 in year 1, $50 in year 2
Tax = 30%

Using method 1:
We would have a $20 loss in year 1, which is carried forward to Year 2 and hence the tax payable for year 1 would be 0. Net cash flow in Year 1 (after adding TAD) = $100.

In year 2, we would have a taxable profit of $50, offset with the $20 loss from year one would give us a tax payable of $9. Net cash flow in Year 2 (after adding TAD) = $91

This gives us a total cash flow of $191 over 2 years.

Using method 2:
In year 1, we would have operating cash flows $100, less tax payable $30, add tax relief $36 = $106

In year 2, we would have operating cash flows $100, less tax payable $30, add tax relief $15 = $85

This method also gives us a total cash flow of $191 over 2 years.

However, the cash flow for the individual years (Year 1 and Year 2) differ between the 2 methods and hence, when discounted would give us different NPVs.

Could you advise which is the preferred method for this exam?

Thank you!

[Author]

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