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Hello dear tutor…
in December 2014-Q4a examiner said:
According to IAS 36 we must use pre-tax rate and pre-tax cashflows for calculating value in use(VIU).
It also said that:”for some issues in calculation of pre-tax rate,some companies attempt to use post-tax rate(ie WACC) and post-tax cashflows for calculating VIU…My questions are as follows:
1)do those companies which use post-tax rate and cashflows in calculation of VIU breach IAS 36 requirements?
2)Is it correct to say:
For calculating VIU we must use pre-tax rate and cashflows BUT if it is not possible to find pre-tax cashflow,then we are allowed to use post tax rate and cashflows?3)is there any requirement for use of pre-tax rate and cashflows in calculation of VIU or companies can choose each one (pre-tax rate or post-tax rate)they want?
Thanks alot
Hi,
That’s the issue that is being discussed as a weakness in the current standard and its application. Companies should use pre-tax rate but use WACC which is a pst-tax rate.
The reasoning behind the rates being pre-tax is that tax can distort figures if it is different yea on year or if we have entities in different countries paying different rates of tax.
Thanks
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