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Hello, I need help in understanding solution of P5 June 2014, task 1, point iii (EVA calculation). I use Kaplan publishing for preparation. In this book is written, that for NOPAT calculation needs to be added back: development and advertising costs, operating lease, accounting depreciation, interest paid net of tax. Why all these ignored in official answer? and why lost tax relief on interest is deducted whereas interest net of tax is not added back? And I would add back all marketing costs as (for EVA calculation) they are considered to be investments for the future, aren’t they?
May be I’m using wrong book for preparation or my understanding is wrong?
Thank you very much in advance for any help!
Regards
EvgeniiaThe ACCA model answer is:
Operating profit 10,852,970
Add back: Marketing capitalised 3,819,000
Less
Tax paid 2,100,000
Lost tax relief on interest 200,250
–––––––––––
NOPAT 12,371,720So they added back the 50% of marketing cost that relates to long-term brand building – the other 50% would be properly treated as an expense. There is no information about operating leases to make any adjustment. There is no information about the economic depreciation to replace the book depreciation with so it assumed that these are the same.
Interest is not added back because they have taken the operating profit (that’s before interest), but the tax charge deducted will include an allowance for interest, so the tax before interest woul be greater by the tax relief on the interest.Thank you for answer.
Why do you say, that there is no information about operating lease? Cafes rent their property with a 5-year lease paying 2.875.000 $ per year and Juicey paid 358,800 $ p.a. for operating lease.Sorry missed that. The porblem with capitalising any lease is that you have to know what to put into the SOFP and here we don’t. You can’t just add lease payments back to income and add noting back to the SOFP.
In EVA questions the operating/finance lease problem has been confined to machinery and not land and buildings.
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