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- This topic has 7 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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- August 29, 2021 at 3:00 pm #633389
Sorry to ask you again but now I have watched your lecture on lease vs buy but still got one problem!

This is regarding Asop Co (Dec 2009)

You said in your lecture that this is the rule only if tax is in arrears then:

1) If first cashflow is on first day of accounting period then the first tax effect will be on Time 2

2) If first cashflow is on last day of accounting period then the first tax effect will be on Time 1So my question is that since in the question “license fee of $104,000 is payable at the end of the first year” which makes it the case [2] because first cashflows is on the last day of accounting period so why not the first tax-saving on license fee was on Time 1?

Thanks for your kind consideration π

August 29, 2021 at 8:04 pm #633417I did not say that at all in the lecture!!

If tax is 1 year in arrears then the tax flow occurs one year after the end of the accounting period.

Therefore whether the first cash flow is on the first day of an accounting period (time 0) or on the last day of an accounting period (time 1), then the tax cash flow will be one year after the end of the accounting period, which is at time 2.

Maybe you are confusing it with the fact that in this example then when we buy, the outflow is on the last day of an accounting period. In that case the tax flow is again one year after the end of the accounting period, which is time 2.

Do watch the lecture again (and the lectures on investment appraisal with tax) π

August 30, 2021 at 4:36 pm #633550Yes, you are right that I’m confusing the fact that since the machine was bought on last day of accounting period (in lease & buy) so the first tax-saving would be at Time 1 because the cash flow was on the last day of the accounting period. So I thought that since the License Fee is payable on the last day of accounting period same rule is going to apply but why not the first tax-saving on license fee was on Time 1?

In your lecture investment appraisal with tax what you stated I have completely understood that if tax is one year in arrears then the tax flow occurs one year after the end of the accounting period which is at time 2 [since this is not a normal NPV question rather it is a lease vs buy so this is not going to apply here – so no problem here :)]

But the question, ASOP Co is a lease vs buy question where you stated the rule at the end of the lecture which is going to apply if the tax is paid one year later (i.e. in arrears).

Since you mentioned a different rule for lease & buy questions when tax is in arrears which are:

1) If first cashflow is on first day of accounting period then the first tax effect will be on Time 2

2) If first cashflow is on last day of accounting period then the first tax effect will be on Time 1So if any cashflow is on the first day of the accounting period then its tax-saving cashflow will be on Time 2; Otherwise, if any cashflow is on the last day of the accounting period then its tax-saving cashflow will be on Time 1 (which is the case in ASOP Co).

I still don’t understand your explanation and I don’t know what you are referring to when you say that you didn’t say!)

August 30, 2021 at 7:39 pm #633562I am sorry but I do not understand your problem.

Please read what I wrote again (and have you watched the lectures on investment appraisal with tax?)

August 30, 2021 at 8:10 pm #633567Since the license fee of $104,000 is payable at the end of the first year (i.e. last day on 31 Dec) which means that the first cashflows of the license fee is on the last day of the accounting period therefore the first tax effect would be at Time 1 (rather than Time 2 as mentioned in the answer)

There is a rule that you wrote at the end of the lease n buy which I already mentioned to you in my earlier response many times!

If we take the tax-saving on license fee & put it at time 2 because the tax paid is in arrears (which you said earlier which would be a case in normal NPV question) then what is the point of having a rule which looks at the first cashflows and then we have to see the timing of tax & tax-savings?

August 31, 2021 at 8:12 am #633600There is only one rule. It is the same rule as in Paper TX (was F6), as in my lectures on both investment appraisal with tax and lease and buy, and as I have written in each of my earlier replies.

Tax is calculated at the end of the accounting period (whether the income or expenditure is on the first day or the last day of the period, the tax is calculated at the end of the period). If tax is payable one year in arrears then the tax cash flow occurs one year after the end of the accounting period.

August 31, 2021 at 4:26 pm #633660I’m confused with the fact that in Chap 9 example 3 where we buy the machine, the outflow is on the last day of accounting period so the tax is calculated immediately at Time 0. In this case, the tax flow is one year after the end of the accounting period, which is Time 1;

Therefore in ASOP Co the License fee was also payable at the end of the year (i.e. last day – just like the machine was bought on last day) the outflow is on the last day of accounting period so the tax is calculated immediately at Time 0. In this case, the tax flow is one year after the end of the accounting period, which is Time 1.

What you said about Tax effect in the lecture on Investment Appraisal with Tax is different than what you said in the Lease & Buy lecture where you give us a rule specifically used for lease n buy questions only..

August 31, 2021 at 6:40 pm #633691ASOP specifically says that the license fee is payable at the end of the first year. It is not paid at the end of the current year!!!!

Read what I have written previously,

If it is paid at the end of the first year then it is paid at time 1. The tax is calculated at the end of the year and so it is calculated at time 1. The tax cash flow is one year later and so is at time 2.

Nothing I say about tax in the lease and buy lecture is any different at all from what I say in the lecture on investment appraisal with tax.

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