hello, i saw someone's post regarding FYA and you have replied. the following is what i forward to you so that i can ask question about your comment as i don't really understand what you really mean. the accounting period u are referring to is year 1 or year 0. i saw something like "the last day of the accounting period and the end of accounting period" but i dont really understand which year you are refering to. lets say, if cash flows occurred at the start of year 1, this means tat we should slot the figure in year 0 column. as it is assumed to occur at the end of previous year. so i would express in years rather than in accounting period. hope to see your advice on this matter. thank you.
Question: how to account for FYA(first year allowance) in an NPV calculation.should it be slotted in year 0 or year 1 if the tax is paid
-in the same year as the cash flows and
-if the tax is paid in arrears
Reply: Strictly it depends on when the asset is bought. If it is bought on the last day of an accounting period, then the allowance is calculated immediately and so the tax effect will be either immediate (if no delay) or at time 1 (if one year delay).
If, however, the asset is bought on the first day of an accounting period, then the tax effect is calculated at the end of the accounting period (i.e. 1 year later) and so the tax effect is at time 1 (if no delay) or at time 2 (if one year delay).
However the examiner does not usually give the date and is then flexible about what assumption you make.
Question: how to account for FYA(first year allowance) in an NPV calculation.should it be slotted in year 0 or year 1 if the tax is paid
-in the same year as the cash flows and
-if the tax is paid in arrears
Reply: Strictly it depends on when the asset is bought. If it is bought on the last day of an accounting period, then the allowance is calculated immediately and so the tax effect will be either immediate (if no delay) or at time 1 (if one year delay).
If, however, the asset is bought on the first day of an accounting period, then the tax effect is calculated at the end of the accounting period (i.e. 1 year later) and so the tax effect is at time 1 (if no delay) or at time 2 (if one year delay).
However the examiner does not usually give the date and is then flexible about what assumption you make.
