Page 18 - CIMA MCS Workbook August 2018 - Day 2 Suggested Solution

CIMA NOVEMBER 2018 – OPERATIONAL CASE STUDY

If tax was calculated upon this profit before tax, it would result in the two businesses having different
tax charges and liabilities even though they may be identical in every other way. For this reason, tax
authorities do not allow accounting depreciation to be treated as a tax-deductible expense, and
instead a more standardised system must be adopted in the form of tax depreciation. In the corporate
tax computation, accounting depreciation is added back as a non-deductible expense to increase the
taxable profit.
Tax depreciation.

In order that all businesses account for depreciation in the same way, Celtland’s tax regime has
specified that the use of a 25% reducing balance basis for plant and machinery (including vehicles
used for business purposes) in order to calculate the tax written down value (TWDV).

When the asset is first acquired the TWDV would be the same as the initial investment and this is
reduced by 25% with the amount calculated allowed as a tax-deductible expense in the corporate tax
computation to reduce the taxable profit. This approach requires no estimate of estimated economic
life or future residual value.
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 upon the age of
the assets of GymFIT this could help to explain why the company aid 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 Celtland certain other expenses are disallowable against tax. The tax charge in the statement of
profit or loss may include adjustment for any over- or under-provision of the tax charge of previous
years.

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
An impairment loss is a non-cash charge (a bit like an additional accounting depreciation charge in a
particular year) which is calculated against our estimates of the carrying amount 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 Celtland would be contributing 20 % 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 receive funding that has come
from public finances. This may even be illegal, so for this reason donations to political parties are not
allowable for tax purposes.

74 KAPLAN PUBLISHING