P4 June 2014 Q2 Burung Co

Please do not push for an immediate answer! We try to always answer within 24 hours, but we do not sit at the computer for 24 hours a day (especially since I am on vacation at the moment and have spent half of the last 24 hours flying!!). I assume that you are asking about the capital allowances (tax allowable depreciation). The question says that in the first year it is 50%, so the allowance is 50% x 16M = 8M, and therefore the tax saving is 20% x 8M = 1.6M In subsequent years it is 25% reducing balance. The balance after the first year is 16M - 8M = 8M. Therefore the allowance is 25% x 8M = 2M, and therefore the tax saving is 20% x 2M = 0.4M. The balance is now 8M - 2M = 6M, So the allowance is 25% x 6M = 1.5M and therefore the tax saving is 20% x 1.5M = 0.3M (The free lectures will help you - and if needed the Paper F9 lectures on investment appraisal with tax, because this is revision from Paper F9).

Hi John, Just doing some reading of old exam questions as final prep for Friday. I am just curious (and bear in mind it is 10pm and I am a tiny bit brain fried so may be missing something obvious), but why is the TAD not added back after the tax liability is calculated? Many thanks, Ross

TAD is only added back if it had first been subtracted in arriving at the cash flows. If in the cash flows you had subtracted TAD to get the taxable profit and then calculated the tax, you would then add back the TAD because it is not a cash flow. However the examiners answer has not done that. TAD has not been subtracted in arriving at the cash flows (the tax payable has been calculated as separate workings) and therefore there is nothing to add back in the cash flows.

Thanks John. Your explanation makes perfect sense after a nice sleep. I will just use the normal ‘deduct and then add back’ method should it arise as that is what I am comfortable with.

OK, but be careful of one thing. As I explain in my lectures, the current examiner often these days writes the following in the exam question "an amount equal to the TAD is needed each year to maintain the non-current assets". If this appears in the question then although TAD is not a cash flow there is a cash outflow of the same amount. So then do everything as normal but do not add back the TAD.