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Hi ACCA friends,
If the questions states that “Full Capital allowance is available for first year and no allowance in year of disposal” how should I calculate the related cash flows? What are the implications of this statement in terms of timing and amounts of cash flows?
thanks in advance.
My understanding of this would be that(as long as you don’t contradict the question in terms of information it provides)you are free to make your own assumptions as long as you state them clearly and apply them consistently.In other words in this case you could either assume capital allowance is claimed instantly in year zero or during year 1.In first case cash flow effect of allowance will occur in year one- the amount of allowance times appropriate tax rate times appropriate discount factor will give cash saving.In second case this will occur in year two.Just continue this until final year using appropriate figures but don’t claim allowance in last year.
As I write this I am doubting myself in my response.I
would if asked this particular question use the year zero method- assuming capital allowance is claimed immediately.Normally I would use year one response unless question made it clear not to do so.Sorry for the confused response.Hopefully, someone else can confirm matters for you regarding this question.Thanks for your answer mrjonbain.
The matter is still very confusing. In BPP revision Kit 2014 the question 50 contains such a statement “Full Capital allowance is available for first year and no allowance in year of disposal”. But when I analyse the ideal answer proposed in the kit it seems as the calculations doesn’t consider at all the above statement.
In fact, the tax allowances cash flows are distributed over 5 years, rather than 4 years which is the life span of asset, with 25% reducing balance and the cash flows are considered also in the year of disposal.
I would be very grateful if you could please explain it. Thanks once again.
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