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Thank you tutor, it is very clear. If we use after-tax cost of debt, it will double the effect of tax shield, one at discount rate and one when we add back tax saving to NPV of base case
Why is pre-tax cost of debt used to discount tax shield, but not after-tax cost of debt?
Thank you very much!
@tayyabom said:
oh Ok, I remember now. Thanks.There were two issues here:
1) Capitalization of research costs, they had just got permission from regulatory authority to test/prototype the turbines and they had a dead end with some development. Commercial production had not been started yet.
I mentioned the criteria of IAS 38, and mentioned something that since the testing under harsh conditions is not completed yet and they have doubts about the commercial production they shouldn’t capitalize the testing expenses.
2) They were supplying the energy back to govt and this part was about recognition of revenue, the question was whether to recognize it?
I mentioned that, if a contract exists as per IFRS 15 and company expects receipt of payment then they should recognize the revenue immediately at the time of delivery. Because when energy is transmitted to the national grid, risks and rewards are immediately transferred.
I treated the same like you, not capitalize the testing expenses. About the sale of energy, I think there is something wrong to recognize as revenue, as the turbines are in research phase. If the research fails, where to get energy to sell to government. I treated as other income in P&L. I had little time to read the question carefully, but it also can refer to government grant if there are conditions attached. I think the sale of energy could be treated as a deduction from research costs or other income.