Page 14 - CIMA OCS Workbook May 2019 - Day 1 Tasks

SUGGESTED SOLUTIONS

In addition, the basis of applying depreciation needs to be decided upon – should it be calculated
using the straight-line or reducing balance basis?

There are similar considerations relating to amortisation charges to write off intangible assets in
accordance with IAS 38 Intangible assets.

For that reason, depreciation and amortisation charges are not allowed as tax-deductible
expenses. Therefore, any depreciation or amortisation charges in the statement of profit or loss
must be added to profit before tax to increase the profit chargeable to tax.
However, the government does allow a standard tax deduction against profit chargeable to tax
for capital expenditure which is normally subject to depreciation or amortisation in the financial
statements. This deduction is normally referred to as ‘tax depreciation’ and will reduce the
amount of profit chargeable to tax. The current rate of tax depreciation on relevant expenditure
is 25% on a reducing balance basis, which may be higher (or lower) than the depreciation or
amortisation rates being applied by VitaMine.
Entertaining – ethical issues

In terms of the ethical implications of entertaining clients and customers, VitaMine should
ensure that it does not compromise its reputation for quality products and as a good employer.
A possible risk of making entertaining clients and customers is that it may be perceived by others
to be a bribe or inducement to solicit business on an unfair or unethical basis. Even if this was
not actually the intention, the impression it creates in the mind of others can be very difficult to
overcome.
Spending an excessive (rather than modest) amount on entertaining could compromise the
objectivity of the business. Why would a company incur such expenditure other than to advance
its own agenda in terms of promoting the business to others who may be in a position to place
business with VitaMine? Similarly, the integrity of the directors who approved the expenditure
(along with the reputation of the company) could also be called into question.
The directors of VitaMine Adventure would need to think very carefully about their motivation
for incurring such expenditure and, importantly, the perception that it may create in the mind of
others.
Thanks

Finance Officer.

KAPLAN PUBLISHING 67