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Dear Sir / Madam,
Technical Article on EVA Part I and II has narrated EVA Calculation at threadbare. However I find there is no consistency as far as treatment to adjustment. For example in December 2007 ACCA P5 paper which has got EVA Calculations for 8 marks has following adjustment
1) Other Non Cash Expenses amounted to 12 Million per Year in both 2006 and 2007
Treatment as per ACCA Technical Article
1) Add to Profit in both years
2) Add to Capital employed in Both YearsHowever in solved example – this amount has NOT been added to Capital Employed.
Opentution Video Lecture also has omitted to add Non Cash Expenses to Capital Employed. ( Example 5 narrated in Video) What students are expected to do as by omitting or adding answer would be different and in that case , would it be acceptable to Exam Marker.
Kindly help me to understand this.
Deepak
ACCA December 2012 -P5 Paper
Dear Sir / Madam,
In continuation of same -Kindly peruse the EVA Problem in December 2012. There has NOT been consistency in according treatment in EVA Calculation.
ACCA Solution has rightly added back Accounting Depreciation to Profits and deducted Economic Depreciation from Profits. But literature on EVA clearly states that adjust value of Capital employed to reflect Economic Depreciation and NOT Accounting Depreciation. This has NOT been done to Capital figure in ACCA Solution.
Kindly explain whether we should be following ACCA solution without any adjustment as far as adjustment to Capital is concerned!
Hi deepmaharaj,
As far as I understand, Accounting Depreciation has to be substituted with Economic Depreciation. Where we are given Economic Depreciation, we therefore add back Accounting Depreciation to profits and deduct Economic Depreciation from profits i.e. make a substitute.
For example: Profit: 50; Acc. Dep.: 20; Econ.Dep.: 15;
adjusted profit will be: 50+20-15=55 because Econ. Dep. is here lower then Acc. Dep. and is therefore considered to be a better reflection of actual cash flow.Dear Sir
I am talking about adjustment of Economic Depreciation to Capital ( not to profit). Could kindly throw some light on that.
I, personally, don’t think that capital needs adjustment for depreciation. It would be very complex and unrealistic for exams to substitute the amount of accumulated depreciation with the economic depreciation equivalent. You would have to know the PV of cash flows from your PPE items, and what if there is more then one item? I recon the lecturer mentioned that no way we are going to estimate Economic Depreciation in the exams. If we are given the figure we apply it to profits, because it relates to one year only.
The real EVA covers about 160 adjustments! Be glad it is simplified in P5.
I don’t think I’ve seen a P5 question that required Economic depreciation to be substituted for book depreciation in the SOFP – if for no other reason that the effect over the years sine the asset was bought could be cumulative, so you couldn’t do it without more information.
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