Page 20 - CIMA OCS August 2018 Day 2 Suggested Solutions

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

This will then continue each year until the asset is disposed of at which point a balancing allowance or
charge is made to bring the TWDV back in line with the actual value of the asset on disposal. This
means that where the company has used the straight line method of depreciation the company will
report a significantly lower accounting profit than taxable profit in the earlier years of ownership of an
asset but much higher accounting profit in the later years of ownership. Depending on the age of the
assets of Thomas Fine Teas this could explain why we paid a different amount of tax than you were
expecting last year.
Other taxation adjustments.

The above however, may not explain all of the difference between accounting and taxable profits as
in Deeland certain other expenses are disallowable against tax.

Amortisation.
Amortisation is the depreciation of intangible assets. As the value of these is so subjective, then the
fairest treatment of this is to simply disallow this expense for all businesses.
Impairment charges
The impairment loss is a non-cash charge which is calculated against our estimates of the carrying
value of the asset. As the value of these are subjective and can be manipulated with accounting
estimates, the fairest treatment to keep all businesses equal is to disallow impairment charges.
Entertaining expenses.

Entertaining expenses are disallowed as this should be a cost to the business. If this was allowed then
the taxpayers of Deeland would be contributing 30 % of the cost of an individual being entertained
which may not bring any future sales to the business or economy.
Donations to political parties.

It would be wrong if any political party but especially those in power to receive funding that has come
from the public finances. This may even be illegal, so for this reason donations to political parties are
not allowable for tax purposes.

Taxes paid to other public bodies.
If taxes paid to other bodied were an allowable expense then this would result in the company being
able to effectively claim back 30% of the tax paid by reducing its corporate tax profits.
There is no point in one part of the government charging a business tax only for another part of the
government to give it back.
Conclusion

If you adjust the accounting profit from last year for the depreciation and tax depreciation allowance
and then for any other non-allowable expenses you should then arrive at the taxable profit that the
auditor used to calculate last year’s tax of D$6,900,000. So if calculated correctly then we have paid
the correct amount of tax last year.

76 KAPLAN PUBLISHING