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If a business capitalises a huge expense than it has to pay more taxes in that period because more profit will be earned. Than in the subsequent years depreciation charged will reduce the amount of taxes payables as depreciation is a tax deductable expense.
So if a business claims a huge expense as period cost than profits will be decreased in that period whereas if it capitalises it, profits will be decreased in small amount in subsequent years due to depreciation.
My question is ..whether a business treats a huge expense as period cost or capitalises it, the tax payable in the long term (over the periods till depreciation is charged or the business is getting benefits) will be equal in both cases or not ?
thanx in advanceI will answer your question, but it is of no relevance whatsoever to Paper F3 – tax is not in the syllabus for Paper F3 and you are not expected to know about tax allowable depreciation (capital allowances).
Also, for financial accounting, there is no choice about whether to capitalise an item or charge it as an expense – IAS 16 dictates how it is treated.
In the long-term the tax payable will be the same (unless of course the tax rates change over the period). However the rules for tax depreciation are not the same as those for financial accounting depreciation as you will find out when you study Paper F6.
Please only ask questions in this forum about topics that are relevant to Paper F3 !
Thank you sir i’ll remember not to post questions irrelevant to the paper 🙂
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