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Hi sir, I notice that in recent exam questions, there will be a statement stating that the “tax allowable depreciation is expected to be equivalent to the amount of investment needed to maintain the current level of operations”.
This has confused me as I read this as the TAD will be at the same amount as the working capital needed. However, in the answers they seem to totally ignore any TAD in both the calculation of tax or adding it back to the net value. Appreciate if you could explain the meaning of this sentence. Thank you very much.
I will answer you, but in future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
The TAD is not ignored – it is subtracted in order to get the taxable profit on which the tax is calculated.
However, it is not added back as we do in Paper PM (old F9) even though it is not a cash flow. The reason is that although the TAD itself is not a cash flow, there is an equal amount needed to maintain the level of operations, which is a cash flow. It would be pointless to add back the TAD and then subtract exactly the same amount to maintain the level of operations.
I explain this, with examples, in my free lectures – I do suggest that you watch them.
Thank you sir for the prompt reply, and sorry for posting in the wrong forum.
Whatever you explained is what I understood from the sentence as well. However, based on the Sample Mar/Jun 2018 questions & answers in the official ACCA website, the first question on Chikepe Co included this said statement in the question and totally ignored any TAD in the tax calculation in the answer given!
Im so confused!
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