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- This topic has 24 replies, 9 voices, and was last updated 7 years ago by Ken Garrett.
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- May 18, 2015 at 10:06 am #246805
sir,
i am having problem understanding which method of EVA calculation should i use. the one in our kaplan text book or the one the examiner is using in answers..and that is quite confusing.kindly help .May 18, 2015 at 11:00 am #246810I don’t know what approach Kaplan uses so it’s hard for me to comment.
Both should come to the same answer. Probably they differ on where they start. You can either start with profit after tax and work back to NOPAT (eg adjusting for interest) or you can start with profit before interest and work forward to NOPAT.
Learn one way and stick to it.
May 19, 2015 at 6:57 pm #247233Dear sir
the examiner is using the method of deducting the tax benefit whereas in kaplan text book the interest is add back as net of tax.kindly clarify the examiners method.thankyouMay 20, 2015 at 9:28 am #247337Op profit = 1000, interest = 200, tax rate = 25%
Profit after tax = 1000 – 200 – 0.25(1000 – 200) = 600
Kaplan method for NOPAT = 600 + 200 x 0.75 = 750
Examiner method = 1000 – 1000 x 25% = 750
May 21, 2015 at 9:27 am #247551Hi Mr Gromit
Question 3 Stillwater/ Dec.12 answers EVA using the opening CE while it uses the closing CE (for regulated service only) to calculate ROCE.
Can you please let us know why there is a difference, is it possible to use the closing or opening CE in both calculations ?
Also, I am trying to reconcile the 2ways of calculating the NOPAT but fail to do it right as follows:
1) NOPAT = PAT + net interest = 35.5+23 x0.75 = 52.75
2) = PBIT x (1-t) = 68 x 0.75 = 51Can you help on this.
Many thanks
Hanhvn
May 21, 2015 at 12:03 pm #247612EVA must use opening CE: that’s how it is defined. Ordinary ROCE using financial statements would usually use the profit for the period and the capital employed on the balance sheet ads at the date of the FS – ie closing CE.
They won’t reconcile in this case because unusually the tax is not 25% of PBT – ie 25% x 45 = 11.25, not 9 or 9.5.
May 21, 2015 at 2:08 pm #247660AnonymousInactive- Topics: 0
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read the eva part 1article and try to solve to examiner example it will clarify you all the confusion you might have
May 22, 2015 at 2:20 am #247811Many thanks Mr Gromit.
Many thanks Glorysuper.
May 22, 2015 at 11:09 am #247916Dear Mr. Gromit,
I have a question relating to calculating NOPAT in Q3 Dec 2012. Could you please explain why the answer does not deduct R&D expense from operating profit though 2012 is the first year of the project?
Thank you so much!
May 22, 2015 at 6:57 pm #247987The R&D has not been calitalised so it must have been written off. For EVA and expensed R&D has to be added back to P&L as it’s supposed to be treated as an investmenr., and that is what’s done in the answer
May 23, 2015 at 4:24 am #248033Dear sir,
R&D brings benefit over 5 years. 2012 is the first year. Why dont we deduct amortisation of year 2012 which is 12/5 = $2.4m?
Thank you!May 23, 2015 at 8:39 am #2480571 “….a new project that will be developed over 5 years…” ie they will be spending on if for 5 years. You have no information about how long the benefit will last.
Besides
2 Economic depreciation not book depreciation is to be used in EVA.
May 23, 2015 at 10:15 am #248110Thanks Mr. Gromit for your clarification!
May 23, 2015 at 8:31 pm #248227Hi
With regards to question Metis from June 2012, it starts with net profit and loss before tax and interest, then it deducts the tax from the figure to get to NOPAT, but does not take account of the interest.
However with Dec 2014 question 1, the EVA calculation starts with operating profit less tax and less tax benefit of interest.
Why are these done differently?
Also the tax figures seem different for example in Metis the tax is calculated on the net profit and loss ( x 30%) whereas Dec 2014 qu1 the tax is the figure in the financial statements.
Thank you
JemmaMay 23, 2015 at 9:56 pm #248238Op profit = 1000, interest = 200, tax rate = 25%
Profit after tax = 1000 – 200 – 0.25(1000 – 200) = 600
Dec 2014 methos for NOPAT = 600 + 200 x 0.75 = 750
Metis approach for NOPAT= 1000 – 1000 x 25% = 750
NOPAT is before interest but after tax. That figure does not appear in an income statement so has to be constructed either by working forward from operating profit or back from profit after interest and tax..
May 24, 2015 at 10:40 am #248344Thank you…. I have looked at other EVA calculations, I am slightly confused however with Dec 2014, the examiners answer is:
Operating profit $2907
less tax charge ($ 663) this is the figure in the statement
less interest tax benefit ($81)NOPAT $2163
With this question I can understand working from PAT but not from Operating profit, is it because they use the tax figure from the statement which includes the interest as well? and could we use operating profit – 28% for tax?
Thanks
JemmaMay 24, 2015 at 11:39 am #248383You can start from:
Operating profit and work forwards:
2907 – 663 – 291 x 28% = 2163
You have to take off the 291 x 28% because that is by how mush the tax xharge has been lowered because of interest. We need NOPAT which is before interest and after tax ie as though there were no interest.
Or
Start from net income after interest and tax and work back:
1953 + 291 x (100% -28%) = 2163.
You add back post tax interest figure because that is by how much the net interest after tax figure (has both interest and tax relief in it) differs from NOPAT.
May 30, 2015 at 1:20 am #250401Why is that in some questions non cash expenses are added back to capital employed whereas in some they are not
May 30, 2015 at 7:54 am #250417The capital needed for EVA is the opening capital employed. If you are doing EVA for 2014 you have to add back to profit any 2014 non-cash expenses. However, you do not add this back to get OPENING capital employed.
If you were given information about 2013 non-cash expenses, these would have to be added back to give opening capital employed for 2014.
May 30, 2015 at 9:05 am #250449thank you
June 2, 2015 at 2:22 pm #251926Dear Gromit,
I have question about Question #3, exam December 2012.
Why there was no adjustment to capital employed as to economic depreciation?
I ACCA technical article about EVA is written, that we should Adjust value of non-current
assets (and capital employed) to reflect economic depreciation not accounting depreciation.Thank you!
EvgeniiaMarch 5, 2017 at 4:19 pm #375738Dear Sir, well understood why R&D costs are added up on adjusted profit. but why is there no adjustment of capital employed ? if i understand well, we either consider as costs or asset -> here asset, then should we consider R&D investment as adjusted capital employed ?
thank you for your help.March 5, 2017 at 4:51 pm #375742The capital employed in EVA must be the opening capital employed. R&D during the year will not affect that.
March 5, 2017 at 5:00 pm #375745thanks for your answer but still a bit unclear – should we translate into accounting terms (although the intention is to measure economic terms) – if we do not debit expenses, then we debit asset which would impact CE – isn’t ? Can we just ignore R&D investment on B/S despite we consider this will generate future benefits ?
March 6, 2017 at 2:33 pm #375972If there had been historical R&D, rhis would need to be added back to give an adjusted opening capital employed. R&D in the current year will not affect the opening capital employed.
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